For the business that was won last quarter, and maybe just make some comments on how that ramp-up is progressing more broadly?
Yeah, I think we're really excited about the U.S. surety build-out. This has obviously historically been Trisura's most profitable line. It's the heritage of the business in the Canadian landscape. We've spent four years building up a U.S. surety presence. You've seen us do some small acquisitions in the space, and so it's nice to get some of that momentum now coming through on the top line. I'll nuance a little bit the characterization of our Q3 there. It wasn't sort of a single contract win. This was a new distribution relationship that we got in the U.S., and so we saw sort of an expectation for annual capacity coming in. A big chunk of that, because we got that partway through the year, campe in all the way in Q3.
So we don't think, again, every quarter is going to have that type of growth, but you should expect kind of a new base level for the business. U.S. surety for us is, I think, exciting for a couple of reasons. One, that market is about a $6 billion market versus Canada at $700 million-$800 million. So we don't have to move the needle in that market for it to be very significant for Trisura. And what's nice about the build-up or the structure for us is we're running this all out of our sort of head office Toronto function. So the same people, the same standards, the same approaches that have built the very successful surety platform in Canada, it's dictating at least the approaches to our U.S. presence.
So people should feel very comfortable about the types of risks that we're putting on, the types of expectations we have for profitability, for performance. So I think it's a really exciting part of that surety platform. I might add, even outside of that U.S. platform, we do think there are continued opportunities for growth in Canadian surety. One of the initiatives we haven't talked a lot about, but one of the initiatives that we're expecting to be exciting probably in the next year or two is we're starting to enter that larger contractor space. So if you think about Trisura, we've got about a 12% market share in the Canadian surety industry. We're about a fourth-ranked player, which is good for a company of our size, but parts of the market we just don't access or play in a lot.
That contractor space, the larger contractor market, that's an area we just haven't played in historically. We haven't had a large enough balance sheet. We haven't had probably the right people. We've made some investments now in getting some of those right people onto our team with an expectation that we can start to play in that larger space. Surety for us, it really drove the start of Trisura way back in 2005, 2006, and I think we'll take the baton a little bit here in growth initiatives for the vehicle going forward.
So if we tie all that together, inclusive of the U.S. expansion, what level of premium growth would you hope to achieve or think is realistic to expect for surety in 2025?
Yeah, I think surety is the most mature line of business. It's our highest sort of market share in Canada. So if I put together Canadian and U.S. platforms, usually you'd expect the surety industry to be growing low to mid single digits. I think we're probably expecting mid-teens growth in that platform for next year, which is a very healthy level of growth. The nuance will really be, okay, what's the success or what's the momentum that we have in that U.S. platform? So if that overachieves, obviously you've got kind of growth off a smaller base, or if you have a little bit of a delay in licensing, for example, of our states as we build out on that acquisition, that might slow things a little bit.
But I'm extremely happy and extremely proud of the team for having put together this platform in the last four years to now be a player in that market. I would expect the end of 2024, U.S. surety will be between a 30th and 35th-ranked surety writer in the U.S. from nothing sort of four years ago.
So the other area you're expanding into is U.S. corporate insurance. Similar to surety, this is one of your core lines. It's been an anchor of the Canadian franchise for nearly two decades. Can you just update us on maybe the status of those efforts and when you'd expect to start seeing a bit of a more meaningful pickup in premium production?
Yeah, so to level set for anyone who doesn't follow us as closely, U.S. corporate insurance we launched just last year. So I would qualify this build-out very similarly to our U.S. surety build-out. You're not really expecting much in the first couple of years. So we launched U.S. surety in 2021. In 2024, we started to see some contribution. I think a similar layout or similar expectation for build-out of that U.S. corporate insurance is what we price in to our own forecast. So again, this year I'd expect to see a little bit more in top line from that business. We've got now state licenses. We've got filed rates. We've got sort of a team being built up in that U.S.
You're not expecting a lot in terms of premium, maybe $10 million-$15 million of premium coming from that platform in 2025, but with the expectation that as you build up that presence, year three, year four, you're starting to see really significant step-ups in contribution.
Yeah. And so I guess how profitable would the U.S. surety and the corporate insurance platforms be on a standalone basis? And I recognize that corporate insurance isn't quite as mature as the U.S. surety build-out, but when would you expect those initiatives to start producing a more meaningful contribution from an underwriting income standpoint?
Yeah, so this year I would expect U.S. surety should be a mid- to low-80s combined ratio. So you're starting to see that contribution at the level that you would maybe not totally see in the Canadian side. You might be a bit better in Canada with some more operational leverage, but you are profitable in that U.S. surety business now, and you should start to see some kick-in of contribution. That's important to note because for the last three years, U.S. surety has not been profitable, right? You're building up, investing in people. You're not scaled on a top line basis. That's where you are right now in U.S. surety or U.S. corporate insurance. So U.S. corporate insurance, that entity is not yet profitable. This is an investment. This is a build-up in infrastructure. So you shouldn't expect contribution from an NUI perspective from that vehicle.
It will be a drag this year and next. Probably towards the end of next year, we'd hope to see some approaching a break-even. But we think in the long term, again, as we're planning this for the next five years, the next decade, these are the seeds of a platform that becomes a North American player in both of these lines.
Yeah. So we've spoken about the expansion of surety and corporate insurance lines into the U.S. on a primary basis. Have you contemplated taking the warranty business to the U.S. as well?
It's always something that we've talked about. I mean, the warranty space is very, very fragmented. We are a player in that market across most provinces in Canada. The U.S. is a huge market in that warranty space. One of the things we talk about, we do a five-year planning exercise, and something that came up this year was whether or not there was an opportunity to step into that U.S. warranty space. I think we would need a partner to do it. I'd want to have some tie-in with an operator with either familiarity in the space or expertise operating that. Again, that's not out of the realm of possibility. If we found someone that we wanted to either invest alongside or acquire who had presence in that space, that would be a very natural next step for us.
You're not going to see anything in the next 12 months, certainly, but if you talk about the next five years, I think figuring out how we play in that space across North America, aligning with that goal of becoming a North American specialty insurer, it will be a topic of discussion.
Okay, very good. Maybe we can shift gears. We'll talk a little bit about the U.S. programs business. I'll start with a bit of an open-ended question, but what are you seeing in the fronting space in general in terms of the competitive environment, the reinsurance capacity, and the MGA appetite to partner with U.S.?
Yeah, this has been a really interesting space to follow. If you turn back the clock, we started diligencing this model back in 2016, and at the time, there were very, very few participants in the space. Probably, I'd say generously, there were two to three really focused players in the space. And so we came into a market that looked much different than it does today. If you fast forward to where we are today, there's probably 20 different players who are trying to access the market who stepped into that space in the last few years. What's really interesting recently is that that pace in the last probably 18 months, two years of new company formation has really slowed. So you're not seeing those new entrants chasing into the space, and many of the entities who have entered haven't really hit that scale level. We were fortunate.
We started the business model and the presence a few years before others. We reached a good level of scale, a good level of diversification. And so that means we've got probably a little bit more flexibility on how we navigate going forward. The market in the last few years has seen a really, really strong expansion of the MGA space in the U.S. and a really long, strong tailwind of E&S pricing. So both of those are secular tailwinds that we expect to continue. They sort of benefit that U.S. programs market. I think if I'm taking a step back, the competitive landscape in the near term, it's going to end up focusing on those larger players with balance sheets, right?
If you think about the best players in the market, the leaders in the space, State National would be that group, right, a subsidiary of Markel. They're people with big balance sheets and big diversification. Of the players in that market, we are probably one of three that has that diversified balance sheet, that larger presence, and I think we're seeing some coalescing of opportunities and submissions around those vehicles. So competitively, there's a bit of an advantage to groups like ours that have larger balance sheets, more diversified platforms. The E&S space has been one that's been in the news a lot. There's a lot of focus on the transition from admitted lines, premiums into the E&S space. And for anyone who's less familiar with that market, admitted lines are more standard lines.
Lines of business that have regulatory oversight on the rates that they file, regulatory oversight on the forms and policy language. E&S, you have freedom of rate and form. So you charge what you think is appropriate. Your forms are generally not prescribed. There's been, in the last five or six years, a huge migration of premium out of the admitted space into the E&S space, and that's benefited both our group as well as MGAs as well as players who focus on the E&S market. One of the big questions I think now and going forward is what's the permanence of that shift? Is there now a more permanent level of premium being written through this part of the market?
We certainly believe, given the trends we see in regulation, given the trends we see in complexity of risk, there's going to be a higher level of premium being written through that space, which is helpful for groups and industries like ours. I think in the long term, these models that are highly reinsured, and we use a lot of reinsurance in that U.S. programs model, they are still a relatively small part of this market. So you think about U.S. MGAs, it's about a $100 billion marketplace. There's probably $15 million of premium being written through models like ours, sorry, $100 billion in size, $15 billion through models like ours. This space has about a 15% market share. We have about $1.5 billion of that. So you've got about a 10% market share.
All that says to me is as this space continues growing, continuing to participate in this market, there's a large component of business that we're not accessing, and so at the highest level, I think there's a lot of room for these entities to continue succeeding, and I think the ones that will be successful are those that are diversified, significant balance sheet platforms, which is what we've set up.
Yeah. Maybe we can bring it back to sort of what you're seeing on the ground, and you've had a few non-renewals that have impacted the top line in recent quarters, but I wanted to ask you just to talk about what you're seeing in terms of the submission pipeline and how you foresee the growth of existing programs unfolding next year, and perhaps when you'd expect to see the top line number sort of inflect positively.
Yeah, we got a lot of focus on this after Q3, and one thing we've talked very openly about is if a program is not meeting profitability hurdles or reaching scale. We're at the size level now and maturity level now that we're happy to move away from those. And so Q3, Q4, Q1 of next year, maybe Q2, we're expecting to have a little bit less premium coming through our U.S. programs model with the expectation that that core book of business, that ongoing book of business that we have, that will be a better profitability set of business than we've had historically. And so that approach for us, as we think about the future of the business, we think is very healthy.
Now, from a submissions perspective, from a pipeline perspective, we're seeing a good amount of submissions still disproportionately in that E&S space rather than the admitted space. We brought on a few new programs in the latter part of last year. We're starting to see those come online through next year. So at what stage you kind of lap those non-renewal cycles next year is probably towards the end of next year in terms of growth of that entity. But what I'm most focused on is, okay, how are we driving profitability? How are we driving book value growth? And I think we can see a platform that may be a little bit different from a top line perspective than we've seen historically in terms of growth, but better on a predictability of profitability standpoint.
That when you're sort of building insurance vehicles and focused on these spaces, the most consistent way to grow the entity is compounding that book value, and that's very much what we focus on.
Yeah. Maybe on the topic of profitability, you know, since the end of last quarter, there have been a few higher profile catastrophe events south of the border. Hurricane Milton made landfall early in the fourth quarter. The LA wildfires were a pretty highly publicized event in the first quarter. So can you just talk about your level of exposure to those two events?
Yeah. So generally, as a rule, we attempt to not have a lot of concentrated CAT exposure. So anytime you're writing property in the U.S., especially E&S property, there's going to be some component of weather-related risk or catastrophe-exposed risk. We usually try to structure around that such that there's not a direct impact in a material way to Trisura. So both of those events, certainly the LA wildfires are a horrific event. I think it'll be the largest fire loss in the U.S. history. Despite that size, Trisura is not a big writer in the U.S. homeowners space. We're not a writer of California homeowners. So we're not expecting that to be a material event for Trisura at all. Hurricane Milton obviously came in in the beginning of the fourth quarter.
Again, we're not a concentrated writer in that space, so you might see an immaterial impact from that on Q4 results for Trisura. But again, those aren't driving the results of the business. So it's certainly not something that people should think about driving the results of Trisura now or going forward.
Okay. I also wanted to ask about one of the broader themes sort of impacting the U.S. P&C space, which is reserve adequacy, and this is by no means a new trend, but there are certain U.S. insurers that have been strengthening reserves, particularly across casualty lines, so how are you generally feeling about the strength and adequacy of reserving, particularly in the U.S. programs business?
Yeah, I think our platform has had a very strong history. If you look at its entire history on a consolidated basis of very strong and conservative reserving, you look at the Canadian vehicle, and I know we'll talk specifically about the U.S., but Canada has had a 15-year track record of very strong and positive reserve development. That U.S. platform is a bit newer, so we're feeling out, I think, the approach and the trajectory of that reserve platform. I think what we would expect and what you saw a little bit in Q3 is those lines that we've moved away from, they've had worse performance than the core book of the business. And so what we usually do every quarter, and then with a deeper focus at year-end, is a reserve analysis. Q4, obviously, you have some third parties come in and validate that analysis.
I would expect from a reserve perspective, the same trends you see in the industry will touch our business. So casualty reserving, likely especially on exited lines, will have some strengthening around the edges. I think that core book of business we'd still have confidence in is performing how we expect. If we take a step back, one of the things that we are trying to do this year, and we've made some investments in new reserving teams in the U.S., new officers at the group company, is we'd like to have a consistent approach across Canada and the U.S. in terms of how we reserve. I think now that we're sort of seven years into that buildout in the U.S., it's a good time for us to refresh that.
And so I would expect that as we go through that exercise, there's opportunities for us to sharpen our pencil a little bit on the reserves, especially around exited lines, with the idea that in the long term, this just drives lower volatility, more predictability around the platform. So it's very topical in the U.S. I'm sure you've seen some of the releases from the big reinsurers around the space. But again, our platform on a consolidated basis is large enough and diversified enough that it shouldn't move things materially. I'd still expect growth in book value, lots of opportunities for the vehicle in the future.
Okay, very good. Another one of the more recent themes in the U.S. programs has been higher retention. So maybe you can talk a little bit about the impact of a higher retention ratio on underwriting income and whether it changes the capital intensity of that entity and whether you're able to cede some of that retained premium to your offshore subsidiary for the purpose of tax and capital optimization.
Yeah, so this is a great follow-on from the last question, which is, okay, as you've gotten more mature and gotten a better sense of the performance of programs, where do you want to lean in to retention? How do you drive efficiency of that return on capital calculation? And if you think about a program performance, you're usually targeting, from our perspective at the holding company, a level of return on equity at each subsidiary. And you can shift or trade off between fee income and underwriting income, between retention and ceding premiums. What you've got now is many programs that have been with us for four or five years. We've seen very strong performance from those programs. We've got now a bigger balance sheet. And so we've seen opportunities to increase that retention, say from 5% to 10% or from 10% to 15%.
So still a good mix of fee income and underwriting income, but maybe driving a little bit more towards that underwriting income side as you get more confidence in the underwriting, as you get more size and scale in the underwriting platform. That, I think, is a good mix change for us. You're seeing a lot more predictability of returns. You're seeing higher kind of underwriting income as you get more confidence in that sort of performance. What that means for us is we can more predictably report more traditional insurance metrics. So some things we started talking about a lot more is consolidated combined ratios. So if you put Canada and the U.S. together, we used to talk about fronting operational ratio in the U.S. and combined ratio in Canada. You can actually now have a meaningful combined ratio across the two because you've got retention.
That, I think, will be refreshing and a lot easier for investors to digest as we build that platform. We do have some structures in place today where we can cede premium from the U.S. vehicle to our Barbados entity. You've got some efficiencies there in terms of tax structuring, although I wouldn't qualify it as that material at this stage.
Okay. With the continued maturation of the U.S. and the Canadian fronting entities, growth has become a lot more manageable. So just in the context of the growth outlook for the next year or two, would you expect the entity to be largely self-funded now on a go-forward basis?
Yeah, we've got very definitively an ability to self-fund this platform in the near term. I think the usual caveat I provide is to the extent we find some opportunity inorganically that's very attractive and of a certain size, there would likely be a reason for us to tap markets for capital. What's different, I think, today versus previously, and if you turn back the clock for people who have been with us since 2018 or 2019, a lot of the growth that we had in those stages was from a very low base and was by necessity funded through equity capital raises. So you looked at 2019, 2020, 2021, even 2022, we had some form of capital raised every year. What you're looking at today is a platform now with CAD 750 million in balance sheet size and about a 10% debt to capital ratio.
That now with more manageable growth, with continued profitability, it just creates ongoing flexibility, right? So you've got a very strong ROE of that platform. You've got a low debt-to-capital ratio. You've really got much less need to be accessing external sources for capital for the business unless, again, you find some really exciting opportunity outside of what you're doing day to day. So now we're feeling, listen, just personally and transparently, it's a lot less stressful today from a capital perspective than it was when you were growing 40%-50% because we've got now all these levers to pull internally.
Yeah. And in the context of that enhanced capital flexibility, has there been any thought given to maybe being a little bit more aggressive on the buyback in light of where the shares have been? Or this might be putting the cart before the horse, but even have you given thought to sort of the inauguration of a dividend policy if the growth trajectory has moderated to a pace where it can be funded internally?
Yeah, I think the first sort of sense of that for people is we did introduce an NCIB recently. I will say very openly the impetus for that was much more around managing dilution around equity awards for our staff. So we haven't thought a lot about that return of capital beyond just managing normal course sort of good corporate hygiene. I think insurance companies, especially ones of a relative high level of profitability in the long term, generally do make sense as dividend payers. We're not at that stage yet. We're still finding a lot of opportunities to grow, finding exciting areas to put capital to use. But as you continue compounding this book value and as you continue growing, at some stage the vehicle will create a stream that could be considered for those types of capital returns. That's obviously a decision for our board.
But if I just look at the history of these types of insurance companies' evolution, our vehicle started with CAD 100 million of book value, right? You're looking at about CAD 750 million at the end of Q3 with continued capital generation. At some stage, you've got some opportunities to be a little bit more flexible with your capital choices.
Yeah. Okay. So we've got about five minutes left. I just want to see if there are any questions in the room. If not, I'll continue on with a few more. We've been in a hard or a firm market for the better part of the past six years or so. I was wondering if you could just talk about what impact a turn in the insurance cycle might have across your broader business.
Yeah, this is an interesting one for Trisura because generally our primary lines, if you think about a surety corporate insurance to a lesser extent warranty, as prices increase, right, they do better, right? So corporate insurance benefited a lot from the hard market in the last few years. Prices are increasing terms and conditions are tightening. Because we're a specialty player, generally you would expect that our business outperforms from a profitability standpoint through the cycle. So regardless of whether prices are up or prices are down, our profitability targets and our expectation for combined ratios should be on average better than the industry. I would say that what we're seeing today, the biggest impacts from a pricing trend environment is usually in things like corporate insurance. So corporate insurance was a very, very strong pricing cycle.
We're starting to see some balance, maybe some softness in certain lines like D&O in the corporate insurance space. Surety, really interestingly, it's been a very profitable line for the industry, very profitable line for us. It has been in a soft market for the last five years. It's very competitive. You're not seeing a lot of price changes. Where there's maybe some nuance in how Trisura lives or experiences pricing trends is around the reinsurance space. So if you think about our U.S. programs business or our Canadian fronting platform, we are huge consumers of reinsurance. And when reinsurance markets get hard, which is what they were for the last three years, those models get very difficult to operate. So in fact, the last couple of years was probably the hardest time to operate those highly reinsured models.
What we see now coming into 2025 is a bit of an unlocking in that reinsurance market. So we're seeing some price concessions on renewals. We're seeing a lot more capacity coming back to the market. And that's actually maybe counterintuitively a slight positive for those types of businesses because what they want and what they need is capacity and access to available reinsurance. So you've got a business model. And when we first structured Trisura, the idea was you would create something that in hard markets benefited through those primary lines, in soft markets benefited through those highly reinsured lines, so the U.S. programs and Canadian fronting. You've got now this change that's just starting to crest in that market from a pricing environment.
My hope is that you start to see some easier operating environment for those highly reinsured lines while the specialty lines continue their general outperformance on a profitability standpoint. So it's nuanced, I'll say. I think people used to think that these pricing markets hit or these pricing trends hit every part of the reinsurance market equally. They're very nuanced these days. Property is a different market than casualty. Surety is a different market than corporate insurance.
When you say the reinsurance market is becoming a little bit more favorable, where do you see the most benefit from that? Is it on ceding commissions in the U.S. programs business or are you referring more to your primary lines?
I would say where we see it most acutely right now is on some of the structures we have in our, let's say, U.S. programs with property exposure. So often what we do, and this is again to manage how much risk you're taking on volatile events, is we'll have a level of protection that's inherent in the program. We'll purchase more on top of that. When you're purchasing more protection on top of a program, generally you're funding that out of your own margin. And so if those prices come down, which we've seen in some instances 10% reductions in those prices, that's margin accretive in the business. And so when those markets unlock from a reinsurance perspective, it's just an easier environment.
There's better protection available at better prices, which for the most part, as an entity that purchases a lot of reinsurance, can fall to the bottom line. So that's where we're seeing it right now. I would say property protection is a lot more reasonably priced and available than it used to be. On the primary lines basis, I mean, we're seeing a growing platform. So in Canada, our platform is getting a lot larger. We're starting up North American treaties. The pricing on those has been pretty consistent even as we grow. So that's a great nuance, right? You're not spending more for your reinsurance as you get a larger platform. So that diversification is helping us again around the edges from a margin standpoint. So it's just you think about tailwinds for the industry and for players like us who are consumers of reinsurance.
If that market continues to rationalize, continues to become more available, there's just more opportunities and better margins for groups like ours.
Yeah. Okay. I see we're almost out of time. Maybe I'll just leave you with the last word. Any final thoughts you'd like to leave the audience with as we look ahead to 2025?
Yeah, I think from our perspective, I mean, we feel very fortunate that the entity is the largest it's ever been. It's the most conservatively capitalized it's ever been. And the opportunities that we think now that we've got this infrastructure set up to pursue sort of this North American buildout is exciting. I think if we just take a second and compare where we were in, say, 2019 or 2020 to where we are today, like our quarterly earnings now are eclipsing what we used to do on an annual basis. Our investment income in this environment is providing a real tangible benefit to the business, right? We've been investing and growing in a higher rate environment than historically has been the case. So the business is a lot more flexible and I think exciting than it used to be.
Okay. Very good. Well, thanks so much for joining us, David. Always appreciate your time and insight.
Yeah, thank you, Nick. Thanks for having us.