Description

In summary, TSU is cheap on a SOTP basis. We believe this SOTP discount will close as the company more efficiently uses its excess capital and as the US business ramps over the next couple of years: the whole company’s EPS should improve making the security easier to value. $3.00 @ 15x = $45/share.

Background

Brookfield Asset Management (BAM/A CN) spun off Trisura Group (TSU CN), a small-cap insurance company in summer 2017. At C$30.00, TSU has a C$200mm market and has three segments: Trisura Canada, Trisura Int’l and Trisura US. TSU was written up by ThatDu04 at the time of the spin: https://valueinvestorsclub.com/idea/TRISURA_GROUP_LIMITED/2093503162

The Business

Trisura Canada

Trisura Canada writes specialty insurance (surety, risk solutions and corporate) which tends to be less competitive than other types of insurance. For this reason, Trisura Canada has historically had a fairly strong combined ratio (last seven years, old to new: 94.6%, 92.6%, 90.0%, 90.3%, 96.9%, 88.9%, 86.3% vs management’s target of 85-90%) and healthy ROEs. The surety business also generates additional fee income. Trisura Canada has a very favorable loss triangle (p. F-32 of Prospectus).

A simple 2019 operating model is below. 

Given the steady history and high ROE, we believe the Canada business should be valued at the high end of 14-16x net income. This is conservative relative to small-cap specialty insurers:

Trisura International

Trisura International is a reinsurer that has been in runoff since 2008. Current book value is ~C$20mm and it historically has not been a major contributor to the P&L either positively or negatively. Cumulative net loss over the last three years has been -100k. However, the segment is currently being repurposed as TSU considers using the reinsurance arm to support its US business. Our hope is they can earn a reasonable return on this capital versus it being in runoff historically. In the mean time we value it at 60-100% of BV in the SOTP and as zero value in our Fully Ramped EPS Model.

Trisura US

TSU is currently ramping its Trisura US fronting business. We believe the fronting business model is similar in many respects to SNC’s. SNC was bought by MKL in 2017 at 17.5x EPS and 2.7x BV. Prior to the announcement of the acquisition, SNC was trading at 15.5x EPS and 2.3x BV. While SNC was trading well above 2x book, we are valuing the US Trisura business at 100-150% of book (mostly cash at the moment) in our SOTP to be conservative. The business is roughly breakeven at the moment. As the company executes its US business plan and it can be valued on EPS, we believe the segment will achieve a valuation uplift.

Based on our conversations with management, we think the fully ramped Trisura US model could look like this:

Valuation

At $30, we believe there is a favorable risk/reward based upon the below SOTP. More importantly, we believe the market will begin to give greater value to this quality insurance company as net income at the US subsidiary ramps. While consensus EPS is $1.43 for 2019, we see a path to EPS of ~$3.00 in the next couple of years. $3.00 @ 15x = $45.

 Risks

- Poor underwriting/results

- Interest rate declines

- Inadequate reserves

Catalysts

- Favorable results

- Time arbitrage as US segment ramps

Catalyst

- Favorable results

- Time arbitrage as US segment ramps