Trisura Group Ltd

TSX:TSU

Earnings Call Transcript 2024-Q3

[Operator]

Good morning. Welcome to Trisura Group Ltd.'s Third 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 continued its track record of performance in Q3. Insurance revenue grew 11%, and we posted a 19% operating return on equity. Growth, strong earnings and increased investment income lifted book value to almost $750 million, a 24% increase over Q3 2023.

In Trisura Specialty, we saw particular strength in our Surety practice, the benefit of new distribution relationships in the U.S. and an exciting proof point of the potential of this platform. We continue to invest in the expansion of our recently acquired treasury-listed companies and anticipate the benefit of these investments to grow in the coming years.

Canadian Fronting grew as a more mature platform, and continued growth of existing relationships drove top line. We observed slower although continued growth in Warranty as expanded programs and an improving auto environment sustained premiums. As highlighted last quarter, Corporate Insurance is experiencing balancing market conditions in Canada, and we remain committed to responsibly growing our existing book. We are excited about the potential of US Corporate Insurance expansion to accelerate growth.

Growth in Specialty was complemented by consistently profitable underwriting with a loss ratio of just below 19%, in line with expectations and impacted slightly by changes in discount rates in the quarter.

We continue to experience a slightly higher expense ratio as a result of start-up costs associated with U.S. practices and proportionally more premiums generated through Fronting structures. Underwriting discipline drove a strong combined ratio of 85.6%, albeit higher than a striking comparative year. The combination of growing and profitable underwriting and enhanced investment income, which grew 45%, supported a 3% increase in operating net income and a 25% operating return on equity.

US Programs insurance revenue grew 7% to $546 million due to maturation of existing programs and pre. Premiums declined slightly as the impact of nonrenewing a few programs early in the year was fully experienced in the quarter. Excluding the impact of nonrenewals, our core portfolio continued to grow in excess of 20%. Combined with a healthy pipeline of opportunities and continued momentum in the excess and surplus and programs markets, we expect a return to quarterly growth later next year.

Admitted capabilities continue to grow, and we generated $126 million in admitted insurance revenue in the quarter. Operating loss ratio on Fronting operational ratio rose to 75% and 87%, respectively. A slightly higher loss ratio and a higher program retention drove the increase. We observed some impact from discounting on the loss ratio in the quarter but also normal quarterly claims volatility. We reiterate our target of a low 80s Fronting operational ratio in the medium term, but I should note that as we increase retention, Fronting operational ratio may increase despite consistent expectations for profitability.

Growth and an increase in investment income contributed to a 12% increase in operating net income and supported a 15% operating ROE. We have seen healthy pricing trends across most lines and continue to expect hardening trends in certain lines to balance, although not reverse, in the 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. We have navigated reinsurance renewals consistently this year, and our pipeline of programs under consideration continues to grow.

Consolidated net investment income grew 20% as a result of a larger portfolio. We maintain a more defensive and higher-quality portfolio than almost any time in our history. We have continued to extend duration, redeploying short-duration securities and cash into longer-duration instruments. We expect relatively consistent levels of investment income for the coming quarters as operating cash normalizes, offset by growth in the underlying portfolio.

We are encouraged to see strong growth in US Surety with $36 million in premium written in the quarter as our relationships expanded. We continue the process of expanding licenses and rate filings for both US Surety and US Corporate Insurance. We remain committed to specialized underwriting as well as conservative reserving, and we are planning for growth. And with a capital base approaching $750 million 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 financial results.

[David Scotland, executive]

Thanks, David. I'll now provide a walk-through of financial results for the quarter. Consolidated ROE on a rolling 12-month basis was 16.7% at Q3 2024, which improved over the prior year due to improved profitability from US Programs and demonstrates a return to our mid-teen target despite the impact of the runoff program in 2023. Operating ROE was 19%, exceeding our mid-teens target.

Insurance revenue was $807 million for the quarter and $2.3 billion year-to-date, reflecting growth of 10% and 14%, respectively, over the prior year. The operating combined ratio of Trisura Specialty was strong at 85% for the quarter and 85% for the year-to-date period. This is greater than the prior year as a result of an exceptionally low loss ratio in 2023 and higher expense ratio in 2024 with a higher expense ratio being driven by start-up costs associated with US Corporate Insurance and a shift in the business mix towards Fronting.

For US Programs, the Fronting operational ratio adjusted for core operations was 87% for the quarter and 85% for the year-to-date period as a result of a higher operating loss ratio in Q3; an increase in retained business for the year-to-date period, which generated a higher OR; as well as continued investment in internal infrastructure.

Operating insurance service result in Trisura Specialty for the quarter was lower than the prior year as a result of a higher loss ratio, though this is in comparison to an exceptionally low loss ratio in 2023 as well as higher costs associated with the start-up of US Corporate Insurance.

Operating insurance service result was greater for the year-to-date period as a result of growth in the business and continued strong underwriting profitability. Operating insurance service results for US Programs for the quarter and year-to-date period was greater than the prior year primarily as a result of growth in the business.

Net investment income for the quarter of $16 million increased by 20% over the prior year and 40% year-to-date as a result of an increase in the size of the investment portfolio but also benefited from higher risk-adjusted yields. Net gains from investments were particularly strong with $11 million for the quarter and $24 million for the year-to-date period primarily as a result of unrealized gains on equity and fixed income investments held under fair value through profit and loss under IFRS 9.

Other operating expense, excluding the impact of share-based compensation, which is mitigated through a hedging program, increased by 10% for the quarter and 21% for the year-to-date period, reflecting growth in the business. Our effective tax rate for the quarter was 24% and 25% for the year-to-date period, reflecting the composition of taxable income between Canada and the U.S.

Overall, net income for the group was $36 million for the quarter and $100 million year-to-date. Operating net income, which adjusts for certain items to reflect income from core operations and excludes the impact of nonrecurring items, was $33 million for the quarter and $98 million year-to-date, which was greater than the prior year for both periods as a result of growth in the business, continued strong underwriting performance in Canada, growing profitable business in US Programs and growth in net investment income.

Earnings per share was $0.74 in the quarter and $2.05 for the year-to-date period, which is greater than the prior year as a result of growth in the business, higher net gains, higher net investment income and the impact of the runoff in 2023. Operating EPS, which reflects core operations and excludes the impact of nonrecurring items and unrealized gains, was $0.68 for the quarter and $2.01 year-to-date, reflecting growth of 1.5% and 11.7%, respectively, over the prior year. Compared to the prior year, growth is muted as a result of an exceptionally low loss ratio at Trisura Specialty in 2023, particularly in Q3, as well as the impact of a higher number of shares outstanding in 2024.

EPS contributed to a 24% increase in book value per share over the prior year, resulting in a book value per share of $15.64 at September 30, 2024. Book value per share also increased as a result of unrealized gains on the investment portfolio and foreign exchange gains. Equity at September 30 was $747 million and is greater than the prior year-end as a result of positive net income for the period as well as unrealized gains in the investment portfolio and an increase in value of the U.S. dollar.

As at September 30, debt-to-capital ratio was 11.6%, which is greater than December 31, 2023, as a result of some additional borrowing from the revolving credit facility in the period. The company remains well capitalized, and we expect to have sufficient capital to meet our regulatory capital requirements.

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

[David Clare, executive]

Thank you. Operator, we'll now take questions.

[Operator]

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

[Nikolaus Priebe, analyst]

So starting to see great traction in US Surety. Can you talk a little bit about the build-out of US Corporate Insurance lines, why that initiative has been a little bit slower to ramp and maybe what needs to be done in order to see that business start becoming more productive from a premium standpoint next year?

[David Clare, executive]

Yes. Thanks, Nik. And I would like to say, first off, we are incredibly excited to see the momentum in US Surety. I think that's the result of quite a few years of investment and shows some of the potential of that platform.

On US Corporate Insurance, I would say we're at a very similar spot to where we were in US Surety back in 2021. This is a practice that is going through the process of ramping up or acquiring its regulatory licenses and infrastructure to operate the business. So our US Corporate Insurance practice right now is building out both its people and its processes to be able to go to market. That includes things like filing rate and forms across all states in the U.S. for a number of products that we want to write. So a bit of the difference here between US Surety and US Corporate Insurance is a few more products and a few more licenses and rate filings that we need to get through before we see that contribution to premiums.

Now that being said, we think the opportunity is pretty significant here in US Corporate Insurance and would expect to start to see some of that premium coming online later next year. We'll definitely keep you updated as we see progress there. But I don't think any surprise that, that process or that initiative is a little bit slower to ramp up at this stage.

[Nikolaus Priebe, analyst]

Okay. And will you eventually need to push capital down to the US Corporate Insurance vehicle like you did with US Surety? And if so, is that something that could be funded internally?

[David Clare, executive]

Yes. I wouldn't expect a separate or a distinct capital need for US Corporate Insurance. I would expect anything that we build out for that practice would be internally funded either through capital available on our balance sheets that already exist in the U.S. or some of our levers that we can pull across the organization.

[Nikolaus Priebe, analyst]

Got it. And I don't know if you'd know this offhand, but how much of an earnings drag is the build-out of US Surety and Corporate Insurance lines currently contributing in the quarter? Do you know, roughly speaking?

[David Clare, executive]

Yes. I could give you a rough estimate, although this wouldn't be perfectly accurate. There's probably a couple of points of drag on a combined ratio basis from both those initiatives through the year. We can maybe connect off-line to see if there's more accurate figures we can give you. But my sense right now is a couple of points.

[Operator]

Our next question comes from Doug Young with Desjardins Capital Markets.

[Doug Young, analyst]

Just maybe, Dave, back to the Surety expansion in the U.S., the $36 million gross written premiums. Obviously, I think that's ahead of schedule. I think you're $60 million year-to-date. Can you flesh out a little bit more what drove that? And I think you've mentioned in the past, when that business gets to $45 million to $60 million of premiums that you would hope the combined ratio would be approaching 100%, that we're there yet, but just hoping to get a little bit of context around that. Are we there yet? Are we getting close to that? Because it seems like you're building scale faster than maybe you anticipated.

[David Clare, executive]

Yes. So on the first question, Doug, we were successful, maybe differently this quarter than some other quarters, in bringing on some larger distribution relationships that, that brought on an increase in the premium in the quarter. So this is really a combination of 3 years of building out our presence in the U.S. market as well as some, I'll say, unique wins on relationships in that U.S. space that drove a higher premium production in the quarter. So both of those we're very happy to see.

I think we've been very open as we've talked about this. This quarter is probably a little bit higher for US Surety production than we'd expect in the -- in every quarter, but I think shows some of the momentum that we can have in the platform.

On the second point around combined ratio and breakeven, we're getting a lot closer to that. I would say that from a contribution perspective that you're exactly right, that premium level that we're hitting is exactly the range that we wanted to see to be moving through that break-even target. And so as we see that crested or approached now from a premium perspective, I'd expect that earnings profile as we earn through the next year to start being a little bit more contributory.

[Doug Young, analyst]

Is that about a year ahead of plan? Or are you about on plan?

[David Clare, executive]

No. I would say very openly that is ahead of plan. We were probably hoping to be at somewhere like this level next year or towards the end of next year.

[Doug Young, analyst]

Okay. And then Canadian Risk Solutions look good. I think you talked a bit about the auto side. Can you maybe flesh out a little bit what you're seeing in that market? Is it just the auto sales turning around? Are you seeing any claims pressure, the competitive environment there? If you can maybe talk a bit about that.

[David Clare, executive]

Yes. We had some wins in earlier quarters in that Risk Solutions Warranty practice, which has driven a few more programs, a bit of an expansion of market share. That's come at the same time that we've seen some increase or normalization in auto purchasing activity. So both of those are positive sort of trends that are driving a little bit better earnings in that platform as well as some better base in premium.

We haven't seen any material change in claims from that practice. So I would say, really just being driven by growth and normalized operations there. I would say, we're still not seeing normal levels of auto sales, but it's a lot better than it has been in recent years.

[Doug Young, analyst]

Okay. And then just can you flesh out a little bit more detail on the exited lines in the U.S., the $5.2 million claims pressure, maybe just for everyone on the call, like what it's related to and what we should be expecting from this? Is this kind of an unusual item? Maybe a little bit more detail on that.

[David Clare, executive]

Yes. So we've talked very openly in the last few years about stepping away from our nonrenewing programs that we just don't feel are in our risk appetite anymore as well as some smaller programs that maybe didn't reach scale. This would be in that first category of programs that are no longer within our risk appetite. And so what you see here in claims from exited programs is a couple of examples of programs that were nonrenewed last year that had some exposure

[Audio Gap]

We really don't feel it's indicative of the ongoing or predictive earnings of the business. So that's really the rationale here that we've got to peel it out or to separate it out for our investors is -- this is very clearly a business that we're no longer in. You can see potentially why we're no longer in it with the claims experience that we've had this quarter.

And that exited line business, I would not expect to be something that we see every quarter, right? Given the short tail of these programs, you don't have a long runoff process. But what we wanted to do this quarter is be able to segment what -- in between what we saw as kind of ongoing business and business we are no longer in.

[Doug Young, analyst]

Okay. And then just lastly, David -- the other David, you mentioned, I think, around US Fronting like further investments in infrastructure is one of the reasons expense ratio or core ratio is a little bit higher. Can you kind of flesh out what you're investing in, in the US Fronting side? Is this more technology? Is this more interaction with the MGAs, the reinsurance or oversight? Maybe a little more detail would be helpful.

[David Scotland, executive]

Yes. So that comment reflects a lot of sort of people and process investment. And a lot of it is stuff that's been going on over, I would say, the last 12 months. But we do highlight it just because when we see particularly year-to-date versus year-to-date of the prior year, we do have some additional costs in there largely on sort of the risk, finance, a lot of those kind of internal processes that have been built out over the last year. So that is what that is in reference to, actuarial to some extent as well.

[David Clare, executive]

Yes. I would say, just to add on to Dave, aside of some of those investments, we are seeing some systems investments, Doug. As the business is getting larger, you're investing in some systems to better manage and more efficiently manage the expected growth in the platform going forward. So it's a combination of both of those. We've had some systems purchased this year that are now being integrated. So that's part of the lift as well.

[Operator]

Our next question comes from Tom MacKinnon with BMO Capital.

[Tom MacKinnon, analyst]

Question just really about as you just build size here. As your total book value gets probably in past a threshold here in the U.S., $500 million or something, how would that be in U.S. dollars? Does that kind of help you in terms of being able to attract new distribution or be able to write bigger programs or be able -- how does that help you? Because generally, I think as you get bigger there, there's -- you might be recategorized. Maybe you can flesh that out for us.

[David Clare, executive]

Yes. Thanks, Tom. That's a good memory because you're absolutely right. We're now through that threshold of USD 500 million in capital, and the impact of that is we would expect to be moved up a size category from AM Best's perspective. That does, as you say, give us better access to some of the partners that we have across the U.S. It gives us a better differentiation from a competitive standpoint. There are not many entities in our space with balance sheets of that size and scale, and it gives counterparties more confidence to come work with us. So it is a significant milestone.

I think you'll recall a few years ago, we were very happy to be passing through the USD 250 million mark in equity. This is a big jump up to get to what would be a size 10. So all those items, we think, helps the platform both from a reputation perspective but also just from a categorization perspective.

As our balance sheet gets bigger, it also gives us more flexibility in how we consider structures across our programs business. So you can think about some of the retention trends we've seen where we have profitable programs, strong partnerships. You could see us considering what the right level of retention is with more flexibility. So all of this from a trend perspective is very, very positive for the entity.

As you know, scale matters a lot in the insurance industry, and we talked a lot about our targets and our intention to increase our book equity across the organization. So it's not only impactful in the US Programs space. It's helped us in Canada as well, right? As we think about our practice, we've got a very profitable business in our Canadian and our Trisura Specialty lines. This allows us to be more flexible as we talk about retention and structure in our business everywhere.

[Tom MacKinnon, analyst]

Okay. And just in terms of items that you've deemed to be nonoperating. We've had 2 quarters in a row now of items that are nonoperating that one could argue sort of normal course as being an insurer. I mean you always exit businesses, but you will have claims from those. That's happened in this quarter. And then you are always changing reinsurance structures and additional start-up costs, and that was a below-the-line item in the second quarter. So I agree that it's necessary to flag those things out. But just to -- going through the discussions you have internally as to why you make the decision that these are purely one-offs and you just put -- and you put them below the line.

[David Clare, executive]

Yes. I think it's a good question, Tom. And philosophically, what we're attempting to do is demonstrate to our investors what the core and predictive set of earnings are for this business. We've talked very openly if we speak about that first item that claims from exited line. We've talked very openly about the types of business lines we want to be in going forward and types of business lines we're exiting.

And my view, and certainly our management team's view, is that as we curate our portfolio for the types of businesses we'd expect to be in, in the long term, outsized claims experience from lines we are no longer in, especially lines that are no longer writing premium, we believe should be highlighted as a separate item. And that's very much the rationale here we have on our US Programs business. The short-tail nature of this really informs part of this posture. This was a program that ran out over 3 to 5 years. I can very much appreciate your comment. But given it's a property program, I would not expect you to have some ongoing set of degradation or experience that is comparable to this.

I would highlight reinsurance structure changes, which you're referencing in the second quarter. That's not something that I would characterize as common or something that happens all the time. Certainly, we renew our treaties every year, but the type of structure change we're referencing in Q2 was more an evolution of Trisura from a smaller entity to a larger participant in the spaces that we're talking about in that Canadian Fronting line. That shift is one that I wouldn't expect to be happening annually or even every few years. And very much, we thought that was appropriate to move through.

It's worth noting, Tom, we're not just simply backing out things that are negative. We backed out $1 million of positive impact in the quarter -- this quarter in Canada from a commission adjustment that went in our favor. So you're seeing us attempt to demonstrate to our investors and to our team that very much, there's a core set of earnings here that is predictive of the long-term potential of this platform, and we're going to try and be pretty strict in what comes into and out of that.

[Operator]

Our next question comes from Jaeme Gloyn with National Bank Financial.

[Jaeme Gloyn, analyst]

Just don't want to beat this to death here, but just wanted to make sure I understood the commentary correctly. The exited lines claims experience, that won't recur in Q4? Or should we expect to see some level of claims repeated in Q4 but maybe not beyond that? And then tied to that, are you able to give us a sense to what level of premiums written is tied to these exited lines?

[David Clare, executive]

Yes. So on the first question, Jaeme, it's tough for me to comment directly. I haven't seen anything from those exited lines in the part of Q4 that we've been through at this stage. And obviously, the exposure is declining in those lines. So at this stage, I certainly wouldn't expect to see something like that, but it's always tough to be definitive until you're through the quarter. The reason it's backed out is obviously because we don't believe it is recurring or should be expected to continue. So I know that's not a perfect answer for you, but that's certainly how I'd be viewing it from my side. I'm not anticipating some continued experience from this. This is not like a runoff program that you saw through 2023. This is a much more unique scenario.

From an exited line, perspective, certainly, no premium is being written or produced on those lines this year. If you talk about sort of nonrenewed programs, I think what you're probably getting at is what sort of level of growth in the portfolio, excluding those programs, and how much our top line has been nonrenewed. It's tough for me to give an exact number on that because it depends a little bit on the period that you're looking at. But the core portfolio that we have, if you look at the premium production of that entity that is ongoing program, that's grown at about 20%, which you can see catching up to the top line of years past when you look at a GPW figure that's about 7% down quarter-over-quarter despite having some nonrenewed programs in the business.

So we may be able to give you a bit more accurate estimate if we look into that a little bit off-line. But I would say, from my perspective, what's very encouraging to see is that core portfolio of programs we'd anticipate continuing on with us is continuing to grow very well. And that's something that I think is informing some of our views of where growth comes from the next year.

[Jaeme Gloyn, analyst]

Okay, okay. And then just making sure I heard correctly. I'm getting static on my end. It's probably just me, but you said that there was no premiums tied to those exited lines in 2024. And so that organic growth rate would start to flow through in Q1 '25, I guess, as we're lapping sort of apples-to-apples comparisons?

[David Clare, executive]

I apologize, Jaeme, you cut out, but it sounds like the first question was confirming that no premium was associated with those exited line programs in the quarter, and I can confirm that. I didn't catch your second question.

[Jaeme Gloyn, analyst]

Sorry, I was just -- I was confirming if it was in all of 2024 or just Q3. And I guess, when would we expect the organic growth to start lapping apples-to-apples comparison?

[David Clare, executive]

Okay. Great question. So there was some premium from nonrenewed programs in the first half of this year. So you saw that in Q1 and Q2. Q3 was the first quarter where -- that you had sort of core operating without any premium from those programs that have been nonrenewed. So that's why you see the more significant impact this quarter. And I would say you're probably going to see that lapping impact -- my estimate would probably be in the second half of next year. You've got a Q1 and Q2 in 2025 that's going to compare to some quarters that have that premium in 2024. But then I would expect that to be lapping better comparisons in the second half of next year.

[Jaeme Gloyn, analyst]

Yes. Understood. And then shifting to the Canadian Fronting business. Growth there, a little bit slower than what we've seen historically. Is there any sort of timing going on? Is there a shift in the marketplace demand for global reinsurers? Maybe just talk through a little bit more of what was going on in the quarter in the Canadian Fronting business.

[David Clare, executive]

I wouldn't say we saw anything trendsetting in the quarter. We've seen pretty strong growth in Q2 in Canadian Fronting. We saw a little bit comparatively different growth in Q3, but still very positive growth in both quarters and very strong on a year-to-date basis.

Trend-wise, we're still seeing good momentum with partners, good appetite from those partners to continue writing premium in the Canadian space. So I think this is a little bit just normal quarter volatility and a larger book of business in that fronting practice. Nothing that I would say is changing our trajectory in that group.

[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]

Thank you very much, operator, and thank you, everyone, for joining. We're conscious today is a busy day from a reporting perspective, so certainly don't hesitate to reach out to us if you have any further questions. Thank you.

[Operator]

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