Trisura Group Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2023

There are 7 speakers on the call.

Operator

Good morning. Welcome to Treysura Group Limited's Third Quarter 2023 Earnings Conference Call. On the call today are David Cleare, Chief Executive Officer and David Scotland, Chief Financial Officer. David Cleare will begin by providing a business and strategic update followed by David Scotland, who will discuss financial results for the quarter. Following formal comments, lines will be open for analyst questions.

Operator

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.

Operator

For further information on these risks and their potential impacts, Please see Treasurer's filings with securities regulators. You will then hear an automated message advising your hand is raised. Please be advised today's conference is being recorded. Thank you. I'll now turn the call over to David Clear.

Speaker 1

Thank you. Good morning, everyone, and welcome. Treasurer's 3rd quarter was strong. Insurance revenue grew 33% and we reported 20% operating return on equity. Momentum continues as we scale an increasingly diversified specialty insurance platform.

Speaker 1

Results were particularly striking in Canada with 30% growth in insurance revenue supported by a below 80% combined ratio. Our U. S. Fronting business produced $510,000,000 of insurance revenue, an increase of 34% over the prior year. In Canada, we saw top line growth across all lines.

Speaker 1

Fronting and surety led the way. Fronting driven by a more mature platform and the growth in surety supported by market share gains and contribution from our Sovereign acquisition and U. S. Expansion as well as continued momentum in core lines. Corporate Insurance continue to benefit from expansion of distribution partnerships and stable pricing.

Speaker 1

With the launch of Corporate and the U. S. Market. We're excited to see the potential of a North American wide platform. Importantly, disciplined underwriting drove a 10% loss ratio, improved from a strong comparative year and below long term averages as we benefited from increased diversification and nuanced risk selection.

Speaker 1

Our expense ratio improved slightly in the quarter due to lower commission rates in the period and remains in line with expectations. The Canadian platform generated a 75% combined ratio in the quarter, which together with an increased scale and enhanced investment income supported a 30% operating return on equity. U. S. Frontend generated $510,000,000 in insurance revenue in the quarter, Growing 34% over Q3 2022 despite the cancellation of the program associated with the Q4 2022 write down.

Speaker 1

Maturation of existing programs and favorable pricing trends drove top line. We have grown our admitted capabilities and saw $76,000,000 and admitted revenue in the quarter. However, market conditions continue to drive opportunities to access and surplus lines. U. S.

Speaker 1

Fronting generated $21,000,000 in fees, a 14% increase and recorded $43,000,000 of deferred fee income indicative of future fronting fees to be earned. Operating results in the quarter were strong and demonstrate progress made on improved profitability in our U. S. Platform. Loss ratio was 70% in the quarter, excluding the impact of runoff and decreased due to lower claims activity as well as an increase in yields used to discount claims reserves.

Speaker 1

Frontier operational ratio was 86%, excluding the impact of runoff, higher than we target as a result of evolution of business mix and retention, seasonality and slightly higher reinsurance costs. We continue to expect Frontion operational ratio in the low 80s to high 70s in 2024. Growth, profitable underwriting and a significant increase in investment income, which rose almost 200%, contributed to a 52% increase in operating net income in the U. S. This supported a 15% operating return on equity despite capital contributions through the last 12 months.

Speaker 1

A combination of higher interest rates, growth, profitability and our August 2023 capital raise resulted in 105% increase in investment income, more than doubling our prior year. On an annualized basis, Investment income is expected to reach almost $55,000,000 Importantly, our portfolio is more conservatively positioned than ever before with a lower equity allocation, shorter duration and higher allocation to investment grade bonds. We are excited about the enhanced risk adjusted yields we are capturing for years to come. Increased investment income alongside growing profitability from Canadian and U. S.

Speaker 1

Renton Operations are contributing to a higher proportion of earnings from more predictable sources. Combining that with an established track record Industry leading underwriting results gives us confidence in our goal of $1,000,000,000 in book value by the end of 2027. We continue navigating the approval process for the Treasury Listed Surety Company announced last quarter. This is an important step in our journey to become a more significant player in the U. S.

Speaker 1

Market and builds on established momentum in that business. We exceeded $18,000,000 in U. S. Surety premiums year to date. During the quarter, We raised $53,000,000 in equity capital with the majority of proceeds bookmarked to capitalize our growing U.

Speaker 1

S. Surety presence. I'd like to thank our partners for the continued confidence. We We have never taken the decision to raise equity lightly and look forward to deploying our new capital efficiently on your behalf. We observed healthy albeit stabilizing pricing trends across most lines in the quarter and continue to expect hardening trends in certain lines to balance, although not reverse next year.

Speaker 1

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. As we did in the first half of the year, we provided an update on the Runoff Program in advance of quarterly reporting. Accelerated policy cancellations have reduced the exposure of this Program and in conjunction with the strong U. S. Dollar resulted in a slightly higher impact to reported earnings.

Speaker 1

We believe a conservative posture on protection Through runoff resulting in a short term income hit is a logical trade off and look forward to the program being substantially run off by year end. Treasurer's momentum continues, and we remain committed to disciplined underwriting and structuring standards as well as conservative reserving. The market remains uncertain, Although it is our hope that volatility will provide opportunities to win business and strengthen our reputation, and we feel confident we can navigate changes in economic outlook. We continue to plan for growth and with a strong capital base and greater scale, feel optimistic for the years ahead. Our equity base is just shy of $600,000,000 a a healthy increase from year end and a high watermark for Tresura.

Speaker 1

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

Speaker 2

Thanks, David. I'll now provide a walk through of financial results for the quarter 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 has not been restated retroactively.

Speaker 2

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 $730,000,000 for the quarter $2,000,000,000 year to date, reflecting growth of 33% 43%, 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 year to date periods, primarily as a result of growth in the business, leading to an increase in volume of claims and commissions expense. Net expense from reinsurance contracts, which includes both premium paid to reinsurers as well as recoveries from reinsurers increased in the quarter year to date periods as a result of growth in the business, which has led to more reinsurance ceded, particularly from Frontier. Insurance service results in Canada for the quarter year to date periods was greater than the prior year as a result of growth in the business and a low loss ratio.

Speaker 2

Insurance Service result in the U. S. For the quarter end and year to date periods was lower than the prior year as a result of the impact of losses generated from the Runoff Program. Excluding the impact of the run on program, insurance service result was greater than the prior year as a result of growth in the business. For year to date 2023, the combined ratio in Canada was 79%, which is lower than the prior year primarily because of a lower loss ratio.

Speaker 2

In 2023, the Frontline operational ratio in the U. S. Was 101% and without the impact of the run off program was 83.9% for the year to date period, which is greater than the prior year, primarily as a result with some additional reinsurance costs. Net investment income more than doubled in both Q3 year to date 2023 as a result of an increase in the size of the investment portfolio, but also benefiting from higher risk adjusted yields. Net loss from investments was $8,700,000 for the quarter and $17,800,000 year to date, primarily as a result of unrealized losses on investments held at fair value through profit and loss under IFRS 9 as well as foreign exchange movements.

Speaker 2

Other operating expense, excluding the impact of share based compensation, which is mitigated through a hedging program, increased by 18% for the quarter and 19% for the year to date period. Net income for the group was $14,800,000 for the quarter $55,600,000 year to date. Operating net income, which adjusts for certain items to reflect income from core operations and excludes the impact of non recurring items, including the runoff business, with $31,000,000 for the quarter $84,000,000 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 and higher net investment income. Diluted EPS was $0.31 a share in Q3 and $1.18 for the year to date periods, which was lower than the prior year as a result losses associated with the Runoff program as well as unrealized losses on the investment portfolio.

Speaker 2

Operating EPS, which reflects core operations and excludes the impact of non recurring items and unrealized losses was $0.67 a share for the quarter and $1.80 for the year to date period, reflecting growth of 45% 30% respectively over the prior periods. Consolidated ROE on a rolling 12 month basis was 2.8% at Q3 2023, while operating ROE was about 20%, which is higher than the prior year. Equity at September 30, 2023 Was up almost $600,000,000 and is greater than the prior year as a result of positive net income in the period as well as the impact of the equity offering in the quarter. Book value per share was $12.58 at September 30, 2023 and is greater than December 31, 2022 as a result of profit generated from insurance and investment income in the period as well as the impact of the equity raise. As of September 30, 2023, the debt to capital ratio and we expect to have sufficient capital to meet our regulatory and capital requirements.

Speaker 2

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

Speaker 1

Thanks, Dave. Operator, we will now take questions.

Operator

And wait for your name to be announced. To one question and one follow-up and rejoin the queue for any additional questions. Please stand by while we compile the Q and A roster. Our first question comes from the line of Jeff Fenwick with Cormark Securities.

Speaker 2

Hi, good morning, everyone.

Speaker 3

So Dave, just want to start maybe in the U. S. Mark it there. Obviously, there's been a lot of growth going on. Can you speak maybe just first of all just generally to the conditions you're seeing in the E and S markets Seth of the border, are there any changes in the momentum?

Speaker 3

What's going on there in terms of getting rates and the growth of volumes that you're seeing? And then, April, just one follow-up there on your positioning.

Speaker 1

Yes. I think we have been Continued or we have been observing continued momentum in the E and S space, I think impressively so. This year, that momentum is probably a little bit more specific by business line. So you're seeing certain business lines with Continued strong E and S pricing momentum. Some business lines are balancing, but in general, the market is still demonstrating very healthy rate trends.

Speaker 1

That's been benefiting us this year, especially in certain programs, and certainly something we expect to continue through the end of this year.

Speaker 3

And I guess in that context, maybe you could speak to the program mix you have there. I think there's a couple of programs that maybe dropped off from last year. What's the turnover been, I guess, in the programs there today and

Speaker 4

Yes, if you look at

Speaker 1

our program count this year, it's been relatively stable, although Increasing marginally, we're up to 71 programs now producing premium. That does include some turnover of programs that Have left us either because they didn't reach the scale that we expected them to or in the example of our Q4 experience programs that we no longer partner with. So it's, I think a much more mature book Dan, we've seen in years past, certainly a strong set of partners across a good range of programs. Our mix is evolving somewhat. We've talked about this for the past Couple of years, a little bit less property in the book than we've had in the years past.

Speaker 1

We target about a 70% casualty, 30% Property Mix and are seeing that very much play out in the evolution of the book today.

Speaker 3

Okay. Thank you. I'll requeue.

Operator

Our next question comes from the line of Nik Priebe with CIBC Capital Markets.

Speaker 4

Okay. Thanks for the question.

Speaker 5

Can I just ask you

Speaker 4

to expand a little bit on what drove the exceptionally low loss ratio in corporate insurance lines in the quarter? And just what your expectation would be for a through the cycle claims experience in that segment?

Speaker 1

Yes. Thanks, Nick. It's a good question. We do see from time to time these very strong quarters from many of our Canadian lines, you've seen it in lines like surety, you see it in lines like Corporate Insurance periodically, but Certainly, a low teens loss ratio in Corporate Insurance is not the run rate expectation. This is as a result of a very strong underwriting by the team, so something we should highlight and acknowledge in the Canadian group despite very strong growth for the past 4 or 5 years in that group.

Speaker 1

It's nice to see that growth has come alongside very principled underwriting discipline. It is generally across most of the lines we write in the corporate insurance space. So that includes financial lines, GL Lines, so things like E and O, D and O, general liability, Fidelity products. We tend to stay within those lines within niche products or partners. So we're not doing the commoditized Public Company Lines, we generally stay in the private company, charitable focus within the lines of business that we write in Corporate Insurance.

Speaker 1

The full cycle for a loss ratio in that business is likely closer to the low 30s. Although recently we've seen that business line produce better results than that, and it was a strong quarter. Certainly something we'd like to highlight, but I wouldn't straight line the loss ratio you've seen this quarter.

Speaker 4

Okay. That's good. And then is there any update you're able to give us just on the progress towards acquiring the treasury listed maturity platform just in terms of Maybe timing or any updates that may be relevant there?

Speaker 1

Yes, we continue to interact with and share information with the regulators with the intention of driving towards the close of this transaction. Usually, we see these transactions take anywhere between 4 6 months to achieve regulatory close. So based on the timing of our application and the back and forth we're seeing, I would hope to report something in early 2024 And we'll update if that timing changes.

Speaker 4

Okay. That's it for me. I'll requeue. Thanks.

Operator

Our next question comes from the line of Marcel MacLean with TD Securities.

Speaker 5

Great. Thanks. Good morning. I want to start on surety in Canada. It's been really strong for the past 4 quarters.

Speaker 5

I think you described Trinity as generally been more being more of a balanced market than a hard market right now. So can you just provide some color on exactly what's driving the growth? Is it more from the U. S. Expansion or from the acquisition?

Speaker 5

And the growth rate is much higher than those targets in the past. So how sustainable is this growth we're seeing there?

Speaker 1

Thanks for the question, Marcel. And I'll address the first part Off the hop, I would say surety is aligned unlike much of the commercial market that is not experiencing hard market pricing trends. So It's important to note that, that is a very competitive space and not one that we're seeing some of the rate trends that we're seeing in other parts of the business. That being said, as you note, we have seen healthy growth, and I would characterize that growth as coming from a few different sources. First and foremost, we have a strong Canadian franchise in the surety space, and that line Continues to demonstrate momentum in the Canadian space.

Speaker 1

Beyond that, we are now lapping about a full year of the acquisition of Sovereign's Surety Book. That has been a favorable Transaction for us, and I think we've kept a little bit more of that business than we're anticipating to. So a very nice Outcome from an acquisition standpoint and good addition to the premium base of our Canadian platform. As you note, in addition to that, we've been expanding our U. S.

Speaker 1

Presence. So the U. S. Platform is operating in the surety space, although operating without a treasury listing or the full infrastructure that we'd like it to. And despite that, they've been able to produce a really healthy amount of premium.

Speaker 1

So as I noted in my earlier comments, year to date, we've got about $18,000,000 of U. S. Surety premium, And we're expecting that to continue to grow. So there's a few items contributing to it. It's not any one piece of the business that's leading that, but Certainly a healthy quarter for growth.

Speaker 1

I would note, we do see quarters like this in surety where you have Single digit loss ratios, we saw that in Q1, but it's worth noting that the long term, we should continue to model this on the long term averages. Surety tends To be lumpy in its claims experience. And so you can see this and should continue to expect this to run at our long term averages.

Speaker 5

Okay. And then just on top line growth there. So is the outlook like I think you had a sort of maybe high single, low double digits Last time if I recall, is that sort of where you expect this business to trend back towards or could some of these You recently spoke about obviously we're getting we're lapping the acquisition, but the expansion of U. S. And so how

Speaker 4

do you expect that to

Speaker 5

sort of trend from here?

Speaker 1

Yes, I would say it's pretty safe to continue to expect this in high single digits, potentially low double digits, but It's a very mature business line, right. The success that we have in expanding the U. S. Will determine the incremental that we have, but As a base expectation that high single digits is fair.

Speaker 5

Okay. All right. That's it for me. Thanks.

Operator

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

Speaker 6

With respect to the Specialty Business in the U. S. I'm looking at the Fronting fees written as a percentage of the premiums exceeded. So if I look in 2020, it's like 5.7% 2021, 5.6% 2022, 5% sort of year to date 2023, it's 4.4%. So that number is coming down.

Speaker 6

Is that to say that The fees you're getting here as a percentage of the premium you're ceding is declining. How should we be thinking about that number going forward and what's driving this?

Speaker 1

Thanks, Tom. There's a couple of items driving this. First and foremost, it's worth noting that the fees we are getting from these programs are generally very consistent. You should expect around a 5% to 5.5% fee on these programs. But what you're seeing, especially in evolution recently, so 2022 year to date, 2023 does have an impact on or from both the Runoff Program as well as reinsurance purchases that we make outside of the system.

Speaker 1

So what you see is reinsurance purchases Generally accounted for through ceding commissions. They lower net premiums earned, which does impact The calculation of those ratios. So what you've seen certainly this year and last year is some of those reinsurance purchases that we use to protect The balance sheet have lowered that reported fee ratio. I would say on the front lines of the business, we continue to Require and expect that those fees range in the 5% to 5.5% level, but the reported metrics can be impacted by some of these outside items.

Speaker 6

But you're naturally going to need reinsurance coverage. So if you didn't have any reinsurance coverage, it would be 5 to 5.5 or But if you want to get your own reinsurance coverage, how should we be thinking of that What would that $5,000,000 to $5,500,000 be net of the reinsurance coverage that you would have to purchase?

Speaker 1

Yes. I think you're going to see an evolution of this as we balance the book from an exposure standpoint. So we talked a little bit earlier in the call about the mix of business between property and casualty. So the reduction that we've seen Some of those property exposed lines should reduce a little bit the requirement for some of these reinsurance purchases in the long term. That should drive you to closer to that average 5% level.

Speaker 1

But in the near term here, as we digest what was a difficult Reinsurance market this year and a runoff experience that has been depressed. So as you're thinking about it in the long term for your modeling purposes, The net level you should think about is likely around that 5% range, and that should be net of reinsurance purchases and any other nuances that impact it.

Speaker 6

And has that had any impact on the fronting operational level? I assume it would have had some, would

Speaker 1

It does, yes. And so you see certainly in this quarter as we renew our corporate cat cover, you do have some push up of that front end operational ratio based on those reinsurance costs that we purchased on our own balance sheet, that has impacted it this quarter and that's certainly something that we'd like To see come back down to the low 80s to high 70s and the expectation would be we see that through next year.

Speaker 6

Yes. So I mean it So to sum up, it seems to be a function of the cost of the reinsurance purchases And you're trying and also the mix of the business that you have. So, getting that fronting fees written as a percentage premium ceded Ratio up higher would consequently help that fronting operational ratio as well. Do I have that right?

Speaker 1

That's exactly right, Tom.

Speaker 6

Okay. Thanks for that.

Speaker 1

Thank you.

Operator

We have a follow-up question from the line of Jeff Fenwick with Cormark Securities.

Speaker 4

Yes, thanks. I just thought I'd lob one

Speaker 3

in about the investment portfolio. The investment income obviously has been a nice Tailwind this year on the higher rates. How are you tackling positioning here? We're maybe approaching an interesting inflection into the bond market. And How are you thinking about allocation as you go forward in terms of duration and mix?

Speaker 1

Thanks, Jeff. We appreciate the question. This has been A part of our operation that's been striking in terms of its increase in contribution. For context, in 2022, Interest and dividend income was about $25,000,000 And so looking forward, having this level now annualizing closer at Closer to $55,000,000 is a really material step up in expectation and contribution from the portfolio. To your question on positioning, we have generally only been allocating to investment grade fixed income in the last 12 months, and That has been a great environment for us to deploy capital.

Speaker 1

There's almost less incentive for us to go outside of that market today because of the returns We see in that investment grade market as well as the more efficient regulatory capital treatment we get and receive from that. I would say right now, you're right. There is Some interesting inflection points around duration and historically we've stayed very, very short duration in the investment portfolio, but we've seen a little bit of flattening in the curve, especially in the U. S, where there is more incentive and certainly more yield to be found longer in that Longer in the duration curve. So that term premium exists now, and it would be nice for us to start locking in some of these rates for a little bit longer period of time.

Speaker 1

So That's an active discussion that we're having internally, and you'll likely see us consider those longer duration positions in the next few quarters as we Hopefully, normalize the economic environment and get confidence that the market becomes a bit less volatile.

Speaker 3

Okay, thanks. And maybe I could sneak one more in here. As you're approaching the end of the runoff program this year, can

Speaker 1

you just provide us a bit of

Speaker 3

an update in terms of the mix around the reinsurance counterparty composition and how that's evolved since you've gone through this process?

Speaker 1

Yes. I think our reinsurance counterparty mix has stayed fairly consistent. We are, on a consolidated basis, probably high 70s at this stage of rated reinsurance counterparties. We've also continued to reduce captive exposure. So Both of those nuances and both of those postures, I think, is consistent with much of the messaging that we highlighted at the beginning of the year.

Speaker 1

We're very much focused on the quality of our reinsurance counterparties focused on that rated group and reducing the areas that we've had a bit of trouble with in the past, that being those captive exposures. So We'll continue to talk about that and highlight it because it's an area that I think is important for people to understand, but we're very happy with the progress That we've made this year.

Speaker 3

Okay. Thanks for the color.

Speaker 1

Thank you.

Operator

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

Speaker 1

Thanks very much, operator, and thank you to everyone for joining the call today. I would like to reiterate our appreciation for shareholders' continued support as well as the support for our recent equity raise. And to the extent we can share any more information, please don't hesitate to reach out. I think with that, operator, we'll close the call.

Operator

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

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