Trisura Group Ltd

TSX:TSU

Earnings Call Analysis

Trisura Group's Momentum and 2023 Performance

In 2023, Trisura Group achieved impressive milestones indicative of its strategic growth trajectory. The company demonstrated resilience with 38% insurance revenue growth and an improved U.S. presence, despite some headwinds including higher reinsurance costs due to resolved U.S. program runoffs. Canada continued as an earnings driver with an 81% year-end combined ratio, contributing to a 20% operating return on equity alongside a strong investment income that led to a 105% spike. With an eye to the future and a sturdy balance sheet, the company is poised for profitability, defensive reserving, and is on track to reach a $1 billion equity value by 2027.

Steady Performance Amidst Challenges

Despite a higher loss ratio and additional reinsurance costs in 2023, the overall performance of the business remained approximately the same as in 2022. This stability was underpinned by growth across the company's services, which helped offset these adversities. The Canadian operations maintained their combined ratio at an efficient 81%, echoing the prior year's strong performance driven by a similarly low loss ratio of 16%. While resembling the stability of the past year, the U.S. fronting operational ratio rose to 110%, with a normalized 90% after excluding run-off programs, due to escalated loss ratios and reinsurance expenses.

Solid Investment and Operational Results

The company's net investment income surged by 71% in a single quarter and more than doubled over the full year, thanks to the increased size of the investment portfolio and beneficial higher risk-adjusted yields. This contributed to a robust total net gain from investments, despite being offset by unrealized losses and foreign exchange fluctuations throughout the year. Notably, significant unrealized gains were recorded in the last quarter, balancing earlier losses and contributing to a year-end net income of $67 million. Operating net income, which provides a view into the core operations by excluding nonrecurring items, reached $110 million year-to-date, bolstered by strategic underwriting and the aforementioned growth in net investment income.

Enhanced Shareholder Returns and Strengthened Capital Position

The earnings per share (EPS) indicators reflected positive trends. Diluted EPS for the fourth quarter stood at $0.23, elevating to $1.42 over the full year. Operating EPS, which compensates for non-core activities, demonstrated impressive growth of 8% and 25% quarter-over-quarter and year-over-year respectively, culminating in figures of $0.54 and $2.34 per share. The consolidated return on equity (ROE) remained healthy at 12% for the rolling 12-month period ending in Q4, with an operating ROE consistent with last year at 20%. Equity also surged to nearly $620 million by the end of December 2023, benefiting from positive income streams, investment gains, and an equity offering, raising the book value per share to $13.02. A decrease in the debt-to-capital ratio to 10.8% emphasized the sturdy capital foundation and regulatory competence.

Strategic Acquisitions and Expansion Goals

There are ambitious plans for the U.S. surety practice. While the acquisition of a treasury-listed surety platform is not expected to rapidly amplify operations within the current year, it's forecasted to realign the trajectory substantially in the medium term. The goal is to match the scale of the Canadian operations in 3 to 4 years while the U.S. surety group already reported a promising $25 million in written premiums in 2023. In tandem with the U.S. corporate insurance segment, which is emulating the growth path of the surety practice, the company is poised for substantial U.S. expansion, with the potential to mirror Canadian success within 4 to 5 years.

Canadian Fronting Practice Exceeds Expectations

The fronting business in Canada has outperformed projections, both in growth and profitability. Differing from its U.S. counterpart, the Canadian fronting involves fully backstopped transactions, providing non-Canadian reinsurers market access. This fortuitous synergy between infrastructure, scale, and unmet reinsurance demand has not only led to significant new business but also elevated Trisura's market relevance to Canadian brokers. The positive ripple effect of this growth has also enhanced the company's performance in other primary lines, painting a picture of a rapidly expanding entity with a firm foothold in the North American insurance landscape.

Earnings Call Transcript 2023-Q4

[Operator]

Good Morning. Welcome to Trisura Group Ltd.'s Fourth Quarter and Annual 2023 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 laws. 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 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. 2023 operational results gave us a lot to be excited about. Although there is a focus on reinsurance and the U.S. runoff through the year, we continued to show growth, profitable underwriting and an increase in investment income. This drove enhanced operating earnings, particularly from predictable sources. We continue to make meaningful progress towards our goal of being a North American specialty insurer of scale and reiterate our target of growing to $1 billion in equity value by the end of 2027.

Continued expansion of primary lines into the U.S. provides an opportunity to build on the success of our Canadian franchise, bolstered by the recent regulatory approval to move forward with our U.S. surety acquisition. This will provide a broader base of infrastructure and greater relevance with distribution partners for our team. Canadian fronting sustained momentum and contributed materially to earnings, while U.S. fronting demonstrated balanced growth as favorable market conditions sustained. We continue to expand and enhance our infrastructure in 2023 and have substantially resolved the runoff of the U.S. program, which drove higher reinsurance costs through this year. We feel optimistic that the organization is on stronger footing following the experience, having demonstrated our resilience in the last year.

We do not expect a significant impact from the program in 2024. Our team maintained their focus on the culture, underwriting and specialized expertise that have made us preferred partners for our distribution networks for years. We continue to invest in our future, yielding a more robust operational platform, more diversified earnings and demonstrating the benefits of scale. Specialty P&C operations delivered strong performance in 2023 with 38% growth in insurance revenue following very strong growth from 2019 to 2022.

In the context of this momentum, expansion of our capital base and uncertain operating environment, we are proud to have generated a 20% operating return on equity, although acknowledge a lower 12% reported return on equity, which was impacted by runoff costs. In Canada, we achieved a full year combined ratio of 81% and 86% in the quarter. Coupled with investment income, we saw a striking 29% operating return on equity. The expansion of fronting, broadened touch points of distribution partners supporting growth in established lines.

The integration of our sovereign surety acquisition as well as an evolving U.S. presence resulted in strong growth of a North American wide surety practice. We saw some balancing of corporate insurance markets that benefited from strong annual growth and profitable underwriting. Our fronting platform in Canada generated comparable earnings contribution to surety and corporate insurance, striking after only 3 years in the business. Our warranty line returned to growth in the year despite headwinds in global automobile markets and higher interest rates.

We continue to make progress in growing our U.S. surety platform, adding to our presence through our partnership with an established U.S. surety player and expanding teams in Connecticut, Denver, Philadelphia and Chicago. Coupled with the anticipated closing of our treasury-listed acquisition, we anticipate replicating the success and size of our Canadian entity over the next few years. In our U.S. operations, momentum in excess and surplus markets continued and insurance revenue grew 42% for the year and 25% in the quarter.

Loss ratio was higher in the quarter as a result of performance of a couple of programs, including previously nonrenewed programs where Trisura had a higher retention. We increased the conservatism of our provisioning for reinsurance assets, which impacted profitability, but is not expected to reoccur. This is a concept introduced under IFRS 17 and applies to both Canada and the U.S. In the quarter, this had a mid-single-digit $1 million impact on the U.S.

This, coupled with the cleanup of 2 programs put into runoff in 2021 and 2022 drove a higher loss ratio but establishes a clear starting point for 2024. The platform generated a 14% operating return on equity despite these impacts. Although on a net basis, we saw a higher-than-usual loss ratio. And on a gross basis, our programs performed in line with expectations, with a mid- to high 60s gross loss ratio for the year as expected and in line with our ongoing expectation for a low 80s to high 70s fronting operational ratio through 2024.

Interest rate volatility presented opportunities for a growing portfolio focused on investment-grade bonds to enhance risk-adjusted returns. We benefited from a short duration posture and reduced allocations to equities and preferred shares, locking in attractive and capital-efficient positions for years to come. Growth in our portfolio and opportunistic deployment was impactful this year, producing a 105% increase in net investment income, while unrealized gains supported our capital position.

As we look to 2024 and beyond, we remain steadfast in our focus on profitable growth in specialty P&C markets. We continue to expand our reach in Canada and the U.S. -- and the U.S., supported by a history of disciplined underwriting, growing investment returns and enhanced risk management infrastructure. With the continued development of fronting, integration of a U.S. surety practice and U.S. corporate insurance as well as ongoing expansion of our core lines, we have ample and attractive opportunities to grow.

Our platforms have demonstrated the benefit of combined North American presence, acting as complementary sources of revenue and best practices for one another. Our group's increasingly share opportunities and partners have recognized our broader offering. As we gain market share in one geography, our presence and capabilities elsewhere offer opportunities to generate new business, amplifying the trend is significant growth in our capital base, reaching almost $620 million at the end of the year, delivering scale and significance in a way we have not experienced before. 2023 was a rebuilding year as we moved beyond the write-down in Q4 of 2022, but momentum was maintained.

The U.S. printing team was successful in defending our book, but we're less aggressive in building new business, greater scale in underwriting the company by a larger investment portfolio and the addition of talent positions us well for the next phase. 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, albeit slower than prior years. With a strong capital base and greater scale, we feel optimistic for the years ahead. With that, I'd like to turn it 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 our financial results for the quarter and year-to-date periods. As a reminder, the 2023 results reflect the implementation of IFRS 17, the new accounting standard for insurance contracts, which has been applied retroactively and as a result, our 2022 results have been restated to reflect the new standard. 2023 also reflects the implementation of IFRS 9, the new accounting standard for financial instruments, which have not been restated retroactively. .

The new standards have led to a number of changes in the presentation of both the income statement and the balance sheet. Insurance revenue was CAD 755 million for the quarter and CAD 2.8 billion year-to-date, reflecting growth of 27% and 38%, respectively, over the prior year. Insurance service expense, which consists of amortization of insurance acquisition cash flows such as commissions, claims expense and other operating costs increased in the quarter and year-to-date periods, primarily as a result of growth in the business, leading to an increase in volume of claims and commission expense.

Net expense from reinsurance contracts, which includes both premium paid to reinsurers as well as recoveries from reinsurers decreased in the quarter as Q4 2022 included the impact of the 2022 write-down on reinsurance recoverables, which under the new accounting standard is reflected as part of net expense from reinsurance contracts. Net expense from reinsurance contracts for the full year increased as a result of growth in the business, which led to more reinsurance ceded, particularly from fronting. Insurance service results in Canada for the quarter and year-to-date periods was greater than the prior year as a result of growth in the business and continued strong underwriting profitability.

Insurance service results in the U.S. for the quarter was greater than the prior year as a result of the impact of the Q4 2022 write-down of reinsurance recoverables, but was partially offset by higher loss ratio in Q4 2023. Insurance service results in the U.S. for the full year was greater than 2022, again as a result of the write-down. Excluding the impact of the write-down and of the 2023 runoff, insurance service results was lower for the quarter compared to the prior year as a result of a higher loss ratio in 2023, as discussed by David earlier.

For the full year, it was approximately the same in 2023 as 2022 as a result of growth in the business, which offset a higher loss ratio. For full year 2023, the combined ratio in Canada was 81%, which is approximately the same as the prior year, driven by a low loss ratio of 16% in both years. In 2023, the fronting operational ratio in the U.S. was 110% and without the impact of the run-off programs was 90% for the full year, which is greater than the prior year, primarily as a result of a higher loss ratio and additional reinsurance costs in 2023.

Net investment income increased by 71% in the quarter and more than doubled for the full year 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 CAD 8.1 million for the quarter, primarily as a result of unrealized gains on fixed income and equity investments held as fair value through profit and loss under IFRS 9. Net gains for the full year remains at loss as a result of unreal losses from earlier in the year as well as foreign exchange losses as a result of weakening of the U.S. dollar during the year.

The investment portfolio also saw significant unrealized gains in the quarter recorded through other comprehensive income, offsetting unrealized losses from earlier in the year. Other operating expense, which includes the impact of share-based compensation, which is mitigated through a hedging program increased by 52% in the quarter and 25% for the year-to-date period. This compares to an increase in net operating income for the year of 32%. Net income for the group was $11 million for the quarter and $67 million year-to-date.

Operating net income, which adjusts for certain items to reflect income from core operations and excludes the impact of nonrecurring such as the runoff business was $25 million for the quarter and $110 million year-to-date, which is greater than the prior year as a result of strong underwriting and growth in the business and higher net investment income. Diluted EPS was $0.23 per share in Q4 and $1.42 for the full year, which is higher than the prior year as a result of the 2022 write-down, growth in the business and higher net investment income.

Operating EPS, which reflects core operations and excludes the impact of nonrecurring items and unrealized losses -- unrealized gains or losses was $0.54 per share in the quarter and $2.34 per share for the year-to-date period, reflecting growth of 8% and 25%, respectively, over the prior periods. Consolidated ROE on a rolling 12-month basis was 12% at Q4 2023. Operating ROE was 20%, which is approximately the same as where it was last year.

Equity at December 31, 2023, was almost $620 million and is greater than the prior year as a result of positive net income in the period, unrealized gains on the investment portfolio and the impact of the equity offering. Book value per share was $13.02 at December 31, 2023, and is greater than December 31, 2022, as a result of profit generated from insurance and investment income in the period, unrealized gains on the investment portfolio as well as the equity raise.

At December 31, 2023, our debt-to-capital ratio was 10.8%, which was lower than the prior year-end 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 capital requirements. David, I'll now turn things back over to you.

[David Clare, executive]

Thanks, David. Operator, we'll take questions now.

[Operator]

Our first question will come from the line of Nik Priebe with CIBC Capital Markets. .

[Nikolaus Priebe, analyst]

Okay. I just want to ask a pair of questions on the expansion of Canadian lines into the U.S. on a primary basis. So after you complete the acquisition of the treasury-listed surety platform, can you just talk a little bit about how quickly you'd expect or hope that event to help accelerate the expansion of surety on a primary basis and support the pace of the ramp there? .

[David Clare, executive]

Yes. Thanks, Nik. We're not expecting to see a significant ramp-up this year from that acquisition, but we do expect it will impact the trajectory of that U.S. surety operation in the near to medium term. So our goal very openly is for that U.S. surety practice to be as large as our Canadian practice in the next 3 to 4 years. This practice has already had really good momentum .The U.S. surety group wrote about $25 million in 2023. And so we're anticipating with this treasury-listing as well as our established presence, this sets us up for a replication of our Canadian platform. This is really table stakes, getting this treasury listed acquisition closed and so continues on the narrative of building out that platform. It's not going to change a lot of momentum for us in 2024, but it will materially change the trajectory in the long term. .

[Nikolaus Priebe, analyst]

Okay. Yes, that's helpful. And then just on the U.S. corporate insurance segment as well. I think you had pointed out that they're expected to buying their first premiums this year. Can you just talk about some of the progress you've been making there and what your hope would be in terms of the pace of the ramp there as well?

[David Clare, executive]

Yes. So U.S. corporate insurance has been built out in a very similar way to our U.S. surety practice. So in the last year, we have been hiring resources in the U.S., filing rates, filing forms and establishing our offering in the U.S. That ramp-up this year will be quite slow. So I wouldn't expect it to be a significant impact. But we have the same goals for U.S. corporate insurance as we do for U.S. surety. The intention is for that practice likely in the next 4 to 5 years, is to be as significant as our Canadian practice. So the ramp-up is a little bit tougher to predict in the near term. But in the long term, that practice should look a lot like our Canadian practice.

Most of what we're doing today is a lot of the same things we did in 2021 with the U.S. Surety Practice. So establishing rates, filing forms, setting up our relationships with brokers and getting the entity, the infrastructure it needs to really lean into this market in the next couple of years.

[Operator]

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

[Jeff Fenwick, analyst]

I just wanted to start my questions off with the Canadian fronting unit. I mean that's an area that has surpassed, I guess, my expectations for growth. And I think you've mentioned it's been a bit better than you might have been expecting also. Can you just give us a bit of color about why it's been able to be so successful? Is it -- was it just some identified gaps in the market? Is it that the reinsurance partners just have a better cost of capital, it can price a bit more aggressively in the market? Or what have been the dynamics that have helped that unit grow so much? .

[David Clare, executive]

Yes. Appreciate the question, Jeff. And it's a good narrative to highlight that Canadian fronting practice has grown ahead of our expectations. And more importantly, it's contributed better profitability maybe than we anticipated at this stage. The nuance of Canadian fronting is a bit different than U.S. fronting. I mean what we do in Canada is more often fully fronting transactions and provides access to the Canadian market to reinsurers outside of Canada. So Trisura has been somewhat uniquely positioned to take advantage of that opportunity.

We have the infrastructure and scale to provide the right platform and partnership for these reinsurers. But it's typically in lines we don't compete in. So this sets us up uniquely in the market to provide this access. And frankly, the demand from these reinsurers has been significant, probably more significant than we anticipated it would be in these Canadian markets. So it is a slightly different structure than the U.S., much more of that fully fronted model and driven by reinsurance demand for our Canadian business.

And it's also provided us with a little bit more relevance to our Canadian brokers. As Trisura has grown in this space, we become more relevant partners for the Canadian brokers that originate this business, which has actually helped us grow our other primary lines. So it's a confluence of events that's driven us, I'll say, better-than-expected growth. but a piece of the business that we anticipate being a significant contributor going forward. .

[Jeff Fenwick, analyst]

I guess the follow-on then is, is it an instance here where they are -- you're effectively taking share from the existing market, I assume, rather than being an absence of capacity locally. And when you think about that, I mean, how much further could this business scale potentially? .

[David Clare, executive]

It's difficult to estimate. The Canadian market doesn't have the same statistics of the U.S. market on tracking originated premiums and foreign reinsurer participation. But you're right, in the interpretation here is that we are providing new capacity to the market. So this capacity we're providing obviously provides more opportunities for risk to be placed in other markets. That is a great narrative for our broker partners, for insurers to have more access to solutions. So it's difficult to say exactly how big that market is. We expect -- usually, we do this kind of a bottoms-up basis that the growth rates for Canadian fronting are likely the high teens to low 20s in the next year. So still significant momentum in that group. But I don't have a top-down estimate of that market at this stage. .

[Operator]

Our next question will come from the line of Tom MacKinnon with BMO Capital. .

[Tom MacKinnon, analyst]

The fronting operational ratio in the quarter, even excluding the runoff at 106% seemed to be higher. You flagged 2 things here, provisioning for nonperformance and reinsurance and cleanup of programs. I guess a question with the provisioning for nonperformance on reinsurance, it was -- you mentioned it's a concept under IFRS 17. It seems to be something that's bumped up in this quarter, but this is our fourth quarter of IFRS 17 here, was this not put in place beforehand? I understand IFRS 17 is a learning process. And maybe you can elaborate a little bit on the cleanup of other programs. And then what gives you confidence that this 106% fronting operational ratio in the quarter or 90% for the entire year is really going to get down to like your 80% kind of target as we go forward?

[David Clare, executive]

Thanks, Tom. Those are great questions. On the provisioning, this is a concept that has existed all the way through 2023, although in the fourth quarter and year-end, we did take the opportunity to be conservative in positioning our provisioning for the future. We have a fairly large base of reinsurance recoverables across our platform. This applies to both Canada and the U.S. And that balance is one that we think is prudent to be conservative. So I don't think anything specific here to point to at the year-end.

I will acknowledge there is a learning curve for IFRS 17, but we had versions of this in previous quarters and want to set ourselves up conservatively going into 2024. I think you've asked a very smart question, which is that 106%, how do we make sure that we have confidence that it gets back down to the ranges that we usually expect. So that low 80s to high 70s space. Very candidly, the gross loss ratios of our business are running the exact way that we expect them to.

So if I look at the gross loss ratios of our U.S. business, you're sort of running mid- to high 60s from a loss ratio standpoint. That translates very clearly to the types of fronting operational ratios that we expect. As you noted, there's a couple of programs here that we non-renewed in 2021 and 2022 that we elected to -- I don't want to say elected to, but decided to clean up effectively in this quarter, just set us up well for 2024.

So those types of postures are conservative provisioning posture, a cleanup of some older programs. That does set us up well for 2024. Combine that with the gross loss ratio performance of the book being right alongside our usual expectations. That's what gives us confidence that, that fronting operational ratio target in the low 80s to high 70s, it's still something we expect and require from that U.S. fronting business .

[Tom MacKinnon, analyst]

And that high 70s low to 80s that you talk about. That still includes any additional expenses as you kind of build out a surety platform in the U.S. and a corporate platform in the U.S. as well. Is that correct? .

[David Clare, executive]

It does, yes. And it's worth noting that most of those expenses today are borne by the Canadian reported segment. There are a few infrastructure investments we make in that U.S. platform as we use the same balance sheet and some of the same infrastructure. But we do expect those ratios to reflect the fully loaded cost of all of our ramp-up. .

Worth noting, Tom, one of the things we're particularly proud of this year is that 81% combined ratio in Canada reflects all of these costs of investing in the U.S. surety platform and the U.S. corporate insurance platform. So we are acknowledging that there are some investments being made and still strong profitability being demonstrated. .

[Operator]

[Operator Instructions] Our next question will come from the line of Jaeme Gloyn with National Bank Financial. .

[Jaeme Gloyn, analyst]

Just wanted to follow up on a couple of themes that Tom was getting into there. So first, on the provision for the reinsurance recoverable, you took a more conservative approach in Q4. Like how should I think about that in 2024? Like does the approach stay similarly conservative. And so therefore, there's no impact to the fronting operational ratio in 2024? Or is this more of a onetime [indiscernible] to be more conservative today for a more normalized approach to provisioning in 2024, where we see that move lower in terms of the contribution to fronting operational ratio.

[David Clare, executive]

It's more of the latter. We would not expect this. This is -- in the quarter, we're not viewing this as something we'd see as recurring. I acknowledge we haven't backed the sort of our operational earnings. But this is an establishment of a conservative posture for 2024, which should not be something that you see moving around fronting operational ratio materially in the next year. So I wouldn't read this as every quarter, you're expecting some change in provisioning that really drives results. There's always going to be some level of provisioning, but -- but our goal is that we're establishing a conservative level, and that level is a lot more consistent going forward.

[Jaeme Gloyn, analyst]

Okay. And would you be able to share some of the factors that led you to take a more conservative approach this quarter on that provisioning? .

[David Clare, executive]

Yes. This is on a base of about $1.8 billion of reinsurance recoverables. So the mid-single million dollar impact is not a significant one across our book. We just like the posture of attempting to be conservative as we analyze the set of our book. There's a general component to this provision, which we think is a great concept to take. And that posture in Q4 likely reflects a little bit of a learning curve for us on IFRS 17.

And a strong review of the portfolio as of the end of the year. So I don't think anything from a trend perspective, you should take out of that. This is -- this has been our first year-end through IFRS 17. And allows us to frankly establish a clean starting point for the next year? .

[Jaeme Gloyn, analyst]

Okay. Understood on that. Shifting to the gross loss rate -- gross loss ratio in the high 60s for '23. Was it also high 60s in Q4 '23? That's the first clarification question. And then maybe just educate myself and the [ Street ] a little bit in terms of gross loss ratio versus net loss ratio. What are some of those typical adjustments that we would see? And how do we compare gross loss ratio to, let's say, other specialty insurance peers reporting standards? .

[David Clare, executive]

Yes. So gross loss ratio, your first question was comparable in the other quarters of the year compared to last year. So that is the base of performance for the group. You should think about bridging between gross loss ratio and our reported net ratio as frankly, the structures and some of the costs that we put on the business to navigate these fronting businesses. So if you think about this at a high level, mid- to high 60s gross loss ratio for the portfolio, translating to a target of high 70s to low 80s fronting operational ratio.

That reflects individual reinsurance structures, that reflects corporate [indiscernible] covers, reflect some of the cost of the business. And then it also reflects some of the changes or nuances of retention program to program. So there's a few puts and takes in there that drive the bridge between gross loss ratio and net loss ratio. But what gives us a lot of confidence in the next year is that gross loss ratio is performing right alongside the way we expect it. And that should drive a much more normalized experience for the entity as we've sort of transitioned through this 2023 year. Gross loss ratio, it's important to note. One of the critical factors for fronting companies is what the performance of your portfolio is for your reinsurance partners. And that gross loss ratio is what they experience, right? So that being in the mid- to high 60s that is a level of loss ratio that's very attractive to our partners.

[Jaeme Gloyn, analyst]

Okay. Understood. And last one, just on that bridging. You talked about the move from, let's say, 70% to 80% on the fronting operational ratio from loss ratio to fronting operational ratio. Structures, operating expenses, reinsurance costs, what gives you confidence that, that will be 10 percentage points in 2024? .

[David Clare, executive]

There's a couple of factors here. I mean, obviously, we budget in a fairly detailed way across the business. So we do a bottoms-up analysis of our operational expenses. We do a bottoms-up analysis of the expected loss ratios in the business. So I will acknowledge that as a forecasting exercise, but it's one that we've seen evolve in the last 5 years. So there's quite a lot of analytical rigor behind that. There are obviously movements quarter-to-quarter and realities of navigating that business is different from forecasting. But we feel that we've got a good starting point to make that assertion.

[Operator]

[Operator Instructions] We are showing no further questions in queue at this time. I'd like to turn the call back to David Clare for closing remarks.

[David Clare, executive]

Thanks very much, operator, and thanks, everyone, for joining. I think in closing, we would just highlight what we're seeing is, frankly, a very strong year in the Canadian enterprise. That has been supported by very strong increases in investment income and sets us up really well for 2024. I do want to thank the members of our team and our partners for supporting us this year. We had a lot of momentum this year and are very much looking forward to 2024. If there's any further questions, don't hesitate to reach out to us directly. And with that, we'll close the call.

[Operator]

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