Description

Quick Summary

Trisura Group (TSU CN) is an insurance company consisting of an Trisura Guarantee (TGI- AKA 643 CAN), a Canadian specialty insurance company mainly surety, warranty and corporate), Trisura Intl, a Bermuda based reinsurance company in run-off, and Trisura US, a US specialty insurance company spun in June 2017.  As a very small (0.3% of BAM mkt cap), Canadian listed, taxable spin from Brookfield Asset Management with a 1 for 170 ratio TSU faced significant selling pressure from BAM shareholders for whom it does not meet size/geographic/industry requirements.  There was also probably some selling due to the taxable nature of the spin as well as the fact that TSU will not pay dividends and BAM is a dividend stock.  These dynamics led to almost 60% of the float turning over in the week + after TSU traded regular-ways and has provided the opportunity to buy a growing, consistently profitable specialty insurer at an attractive price.  Furthermore, 2016 was a bad year for TSU due to some 1x factors and so the results should look more attractive as the business normalizes.  With downside protection at $18 and upside to $35, TSU is an attractive risk-reward at $23.

Capitalization and Valuation

TSU will be spun with 5.8mln shares for a CAD 131mln market at CAD 22.50.

Importantly, TSU only owns 60% of the Canadian insurer TGI. The minority interest is 40% economically (change of control, dividends etc) but could be lower if employees leave before fully vesting. Because of the management contract, the minority interest is listed as a Liability to Participating Interests and marked-to-market once a year.

Book value is ~$~109mln (1.2x). Net income was only 3mln in 2016 (40x) but that was hampered by losses from the reinsurance runoff, an abnormally large loss in the warranty business (1 $10mln incident led to 139% combined in 2016 vs. 87% in 2015), investment impairment losses (2.9mln) and excessive operating expenses as the company ramps up its business. At the company's target 85% combined ratio, and normalizing the losses from Reinsurance, and interest income, 2016 net income would be ~8mln (16x).  This level of earnings does not include future premium growth, any positive contribution from the US business or from the restart of the reinsurance business.

TGI is well capitalized with 272% MCT well above the 150% minimum threshold. Trisura Intl appears well capitalized as well with 52mln of shareholders equity supporting 160mln of assets and 108mln of liabilities.

Upside

Initial valuations are going to be based on an SOTP basis given the different business currently.  TGI is an attractive Canadian specialty insurer.  Founded in 2006, TGI has grown net premiums earned at a 40% CAGR and has generated underwriting profits in every year since 2008.

Since 2008, loss ratios have ranged from 16%-31% (weighted avg 24%).  Over that period, the expense ratio has ranged from 64%-74% (average 68%) but has also probably been inflated as the company has continued to build out its infrastructure in advance of growth.  Putting it together, TGI's combined ratios have ranged from 84% to 97% from 2009-16 (avg 91%) with 2016 being the worst year.  Given this consistent profitability during a period of significant growth, it appears that TSU is a solid underwriter and should be able to reach its target of an 85% combined ratio as they continue to leverage their fixed opex base.  The company should also see continued premium growth as its surety business benefits from significant Canadian infrastructure spending.  A specialty insurer with that track record could certainly trade at ~2.5x book value, similar to Intact Financial its main Canadian peer.

Alternatively, normalized earnings in the Canadian business appear to be ~12mln which would be wroth ~15.50 per TSU share at 12x EPS

If the international reinsurance business starts up again, it is possible that it could be profitable as it works to support the Canadian and US businesses.  A profitable reinsurer could trade at a slight premium to book so I will assume 1.1x.

The US business is a bit more speculative.  TSU's goal is to have the US business look similar to the Canadian business and provide program services for MGAs while ceding a significant portion of the risk to reinsurers.  TSU believes that there is a lack of supply of capital arrangements for MGAs focused on specialty insurance and an abundance of reinsurance capacity so they believe they can create an attractive, low risk fronting business.  If they pull this off, it seems reasonable to assume that this business could trade at 2x book below to peer SNC.

Combining this SOTP suggests TSU could trade at CAD 35 (see below).  The company also has a 2020 plan for ~200mln of revenue. At an 85% combined ratio, that suggests ~20mln of net income which would be worth CAD 34 per share at 10x.

It should also be noted that Partners Value Investments LP, the investment vehicle of BAM executives, acquired 6% of TSU at $21.85 in the open market post spin-off, bringing their ownership to 16% in total and suggesting that they thought it was undervalued at those levels.

Also, BAM valued TSU at CAD 25 for tax purposes for its distribution and the incoming CEO is getting his options struck at CAD 25.

Downside

Downside protection is provided by the fact that the US business is mainly cash and the Trisura Intl business reserves are well-seasoned as the business has been in run-off since 2008 and the company appears well capitalized. If we assume 0.75x book as a downside value for international and 0.9x book as downside value for the US cash, then together they cover CAD $13.

TGI appears to be an attractive specialty insurer that is well-capitalized with a long record of profitability.  At minimum, I would argue that it deserves a 1.25x book value multiple which would be worth another CAD 4.50 per share for TSU's 60% ownership.  Adding this to Intl and US suggests downside protection at $17.50.

Catalyst

Normalization of results

Launch of US business