All right. Well, it's my pleasure to introduce our next speaker, David Clare, President and CEO of Trisura Group. David, welcome.
Thanks for having us, Phil.
Thank you. So listen, I think Trisura is undergoing an interesting evolution as it matures, but still remains a growth story, and you've got ROEs in the mid-to-upper teens. So maybe kind of start off with a quick introduction of the business and talk about some of the growth, goals and kind of roadmap to get there.
Yeah, I think, the first thing to understand about Trisura, in case you haven't, come across us before, we're a unique specialty, P&C company. So we generally focus very much on, specialty commercial risks. Those niche lines for us mean that we're not in, the lines of business that most P&C companies you'd be familiar with are in. So personal auto, personal home, we don't write those lines of business. We're not a life insurance company. We're very much focused on niche specialty risks. And what that means, as you sort of referenced there, is generally we expect, a little bit better than average, combined ratios, than the industry. So we're targeting 85% combined ratios.
Generally, that also means we expect from ourselves a little bit higher ROEs, so return on equity, target for the business is usually a bit higher than the industry. And so we think it's a unique and compelling piece of the industry. It's a really tough place to build a business. A lot of people want to be in these lines of business, and our track record and our history is definitively only in those spaces.
Right. And what do you think sets Trisura apart from the peers?
I mean, I think that focus we're referencing, that unique ability to gain access to and exposure to high-performing specialty lines, that's a differentiator. And then I would say, beyond that, the size of our entity, which I sometimes talk about as a disadvantage, is an attractive differentiator. Because today, if you think about Trisura and all the distance we've traveled over the past seven, eight years as a public company, we're only just starting to become an entity that I would start to describe as scaled. And so, the potential to continue growing the entity, the potential to keep building this entity in a way that doesn't have to move the market, but in a way that can be really material for Trisura, that opportunity is as big as it's ever been.
Excellent. Will you talk about some of the key developments over the past year and again, how the company's evolving?
I think the big one, we've been talking about a lot lately is the launch of our surety business into the U.S., and just to level set for everyone, surety in general, you should think about as a business that's exposed or structured by supporting contractors, and most of those contractors are performing work to support infrastructure construction. We've got a leading franchise in the Canadian marketplace. We're about the fourth-largest surety player here in Canada, and we've spent the last five years or so building out a similar practice in the U.S., so we're a much smaller version, much smaller market participant in the U.S., but we've had a really exciting trajectory of growth there.
One of the big milestones we achieved last year was we closed our acquisition, so we got ourselves a really important license, a really important separate balance sheet for our surety business in the U.S. And you've really seen a sea change in trajectory of that U.S. business since we've taken that on. So one of the items we talk about a lot in terms of the future of Trisura is we want to be referenced as and known as a scaled North American specialty player, and to do that, we need businesses beyond Canada. We need U.S. versions of the businesses that we write.
So when you sit today and you look at our business in the first half of the year, over 40% of our surety premiums came from the U.S., and they're now writing at rates or profitability that's comparable to our Canadian business. That's been made possible by the acquisition that we made last year, by the investments we've made over the past four and five years in that part of the business. So really exciting sort of demonstration of a project that's been going on for a long time is now contributing in a real way to the bottom line, and I think sort of an interesting precursor to what we're trying to do in other parts of the business. If you think about corporate insurance, another part of our business, it writes E&O, D&O, fidelity, GL products for small businesses.
We have a franchise in Canada of that business.
Mm-hmm.
We've very recently launched a U.S. version of that business, and I would hope and expect that the type of roadmap we've created with that U.S. surety practice starts to be informative for our corporate insurance expansion.
All right. Will you just talk about strategic priorities, and I'll call it execution milestones for the year ahead?
Yeah. I think I'll hit a lot of the same points we talked about here. From our perspective, what's anchoring us in everything that we do is, how do we get to be a scaled player? How do we enhance profitability, ROE profiles? A big part of that in the near term is gonna be continuing to scale that U.S. surety practice. So today, we're operating a business in the U.S. without everything we need from an infrastructure perspective. So we're not fully licensed in all fifty states in the U.S. Getting those licenses, especially in really large, significant states like California, Texas, Illinois, Florida, that's gonna start to give us a broader offering in that U.S. market and start to contribute a lot more to our ability to source and originate business with our broker partners.
I think if we, if we talk about U.S. surety as one part of that expansion, I think in Canada, we can also look at some of the benchmarks or milestones that we'd like to achieve in expanding our established Canadian practice. So again, we're the fourth-largest surety company in Canada. We'd like to see that expand into some larger parts of the market. We've historically been small- and mid-cap sized, focused bonding company. I think you're gonna see us try to move into that larger bonding space, and we've been making investments to do that. If I take a step back, I've talked a lot about surety in some of the key benchmarks over the next, year or so.
I think looking across the business, that continued trajectory of focus around profitable growth between that 10% and 15% range and ROEs above that 15% range, it's gonna anchor everything that we do.
Excellent. Listen, I think we'll talk about the specialty lines platform. So, that platform has kind of been referred to the crown jewel. And over the past few years, it's really delivered exceptional performance. What's the outlook for the platform over the next 12 months- 24 months?
Yeah, I think what we call the specialty platform is the core component of the business, right? It's where we have most of our people, it's where most of our capital is, most of our profitability. And that piece of the business encompasses that surety operation that we talked about, it encompasses that corporate insurance operation. It has warranty, which is an important product for us. These lines of business have candidly been growing a lot faster than other pieces of our business, and they're the most profitable components of Trisura. So surety, this year we're expecting it to grow in the mid-20% range. Corporate insurance, mid to high single digits. You've got a warranty practice that's now been growing in excess of 35%.
All of these lines of business are really attractive from a profitability perspective, and putting up numbers that candidly we're very excited about. If we think about that trajectory over the next 12 months- 24 months, we see a lot of room to keep running in this space. I think our opportunity in expanding our U.S. and Canadian surety operations still remains in its early innings, and I think that opportunity in corporate insurance hasn't really even scratched the surface yet in the U.S., so a lot of what we're doing today is investing in the rails of the infrastructure that will carry this practice forward, and again, hopefully far beyond the next two years.
Okay. Maybe just want to kind of revisit that point a little bit, and I think you touched on it, right? So you've seen this kind of, we'll call it, divergence in segments over the past year. And again, recent trends being like highest growth aligning with some of the highest margin. So again, let's just kind of walk through some of the growth trends in that one-year outlook across some of the major business lines. And maybe for context, what I'll call it, past trend as being and kind of how the more normalized midterm look looks like.
Yeah, so, so again, we'll kind of walk through it on a business line perspective. Surety, which has historically been our most mature business line, highest market share position, that line of business generally grows for us in the past mid- to high single digits. That's growing a lot faster than that now, right? Because we are launching a U.S. practice, we're expanding our offering, I'll say, in the Canadian market. So a really exciting trajectory of growth for that business. I think this year, again, as I said, sort of expecting mid-20s growth for that business, maybe a little bit better than that. In the long term, I think you would continue to expect that business to grow in the mid-teens as it continues to expand.
I think corporate insurance and that next line of business, and I'll exclude, let's say, U.S. expansion from this. Corporate insurance has been growing mid to high single digits, and that's in a transitioning market, right? We've talked a lot, and there's been a lot of questions at this conference and others around pricing cycles, market trends. Corporate insurance is able to navigate this market fairly well and is able to achieve pretty attractive growth in this market with very strong profitability, so again, I would see that mid to high single digits growth in that corporate insurance line as very achievable, and warranty has been one where we have seen outsized growth, especially this year. Part of that is a little bit of market share gains we've made.
So we've launched some new programs, taken some business from some competitors. Part of it is just really strong success in our operating partners. So groups that we've worked with have had success in launching new warranty programs. I wouldn't expect that 35%-40% growth rate to be in perpetuity, but I think it's a line of business, again, we can expect in the near term to be growing at a high teens rate.
Okay. If we dig in a little bit on kind of the surety operations, particularly in the U.S., can you talk about, like, what type of clients you're focusing on in the U.S., and does that differ from the Canadian business?
It's a great question. A lot of times when you're expanding into new business, the fear is, are you going to be doing things that you're not familiar with? I think level setting, first and foremost. Surety underwriting at its core is a version of a credit underwrite, and so those skills are very transferable. If you've got an ability and a model that you've applied and navigated in one market, it's not unreasonable to expect to have some similarities in that new market. What we are doing to supplement that, obviously, is hiring people with local expertise, and therefore targeting business that looks a lot like our Canadian business. So, just to level set with everyone, our Canadian business historically has been small and mid-sized contractor-focused.
Those are the types of contractors today that we're working with for the most part in the U.S. And the underwriting split of business, they look relatively similar north and south of the border. What's really attractive for us is we've got now about a twenty-year track record of professional operations in the surety business in Canada. We're using a lot of those lessons, a lot of the professionals, to build this business now in the U.S. And this is very much a broker-focused business, very much a service-oriented business, and very much a technical specialist business. And we feel we have the skills and track record of building one of those practices in Canada, and we're excited to do it in the U.S.
All right. Can you talk a little bit about the operating conditions for surety on both sides of the border?
So surety is an interesting one. I mean, a lot of people have asked about the trends in hard and soft markets. Surety tends to be outside of those trends, right? The market itself, the loss ratios in that space have been relatively attractive for the last few years. Our results have reflected that, and I would say that this market continues to be very competitive. This is a space where a lot of people want to grow. It's where a lot of people want to be. Candidly, if you can build a practice in this space, it's a very valuable one because it takes a long time. This is an operating environment, both in Canada and the U.S., that we fight tooth and nail for every day, and our team has proven a pretty good capability of winning in.
So it's not a space I would say. I would apply the same insurance cycle trends as other parts of the business, but one that we think is very attractive, and we're able to navigate well nonetheless.
Okay. And what leading economic indicators, I guess, should investors focus on to really help gauge the direction of this business?
Yeah, surety is a procyclical business, so economic activity is obviously something at the highest level is gonna dictate some level of trajectory of the business. If you start to drill down more in this, most of the business in the surety space is related to infrastructure construction. And so if you start to see governments committing in a material way to infrastructure construction or making investments in infrastructure, that is generally a part of government spend that benefits and requires surety bonding. So any time that there's a change in government, any time that there's an infrastructure deficit, aging infrastructure in a jurisdiction, population growth changes, urbanization, those types of things will drive demand for surety products.
We've seen a lot of comments out of this new government in Canada about infrastructure spend, and so we're excited to see hopefully that's those dollars be put to work.
All right. I guess kind of staying with the U.S. theme then, can you talk a little bit about, U.S. corporate insurance expansion and, and again, how that's progressing?
Yeah, it's, it's interesting. We think, the roadmap that we've set out from a U.S. surety perspective is a good precedent for our U.S. corporate insurance. So today, we're really about a year in to that build-out process. You're likely a few years of, I'll call it, investment in that U.S. corporate insurance practice before you see an inflection point of contribution to the overall business. We think the opportunity of that U.S. corporate insurance practice and the lines of business that we write is really meaningfully significant in the U.S. from a size standpoint. And so what you'll likely see us do over the next couple of years is continue to build out policy language, rates, licenses, forms, and continue to launch and hire people that we think can build the business.
It's interesting at this stage that U.S. corporate insurance is very much sort of in the build phase, but what you can see very quickly from the precedent that we have with our U.S. surety expansion is after a period of incubation in these lines of business, the trajectory of the business can really meaningfully change. And that's what I would expect to see probably in two to four years in that U.S. corporate insurance practice, and it's one we're really excited to be investing in today.
Okay. I want to spend a few minutes and talk about U.S. programs, right? Which I think used to be known as U.S. fronting. And maybe before we get into that, just again, for more, I'll call growth generalists who are joining us today, maybe give us a quick overview of kind of what the fronting business is and how that differs from some of the primary business.
Yeah. It's an interesting business. All of this at the end of the day is versions of insurance. And when we talk about our U.S. programs business, effectively the model is partnering with distribution agents, program administrators, or MGAs, so managing general agents, to originate specialized premium. We are partnering with reinsurers to provide capacity to those MGAs or distribution agents. And so really, what you're doing is acting as a conduit to take premiums from one group of professionals in the market, provide that group of professionals with your licenses, with your monitoring capabilities, with your support, and then reinsuring usually a majority of the underwriting risk to a panel of reinsurers. And so the economics of this model are a bit different than the economics, let's say, of a traditional insurance company.
Usually, you are ceding 85%-90% of your premium off to the reinsurance community, and in exchange for that, you are receiving a ceding commission, so usually a fee in the range of 5%. That's a market, that MGA market in the U.S. has grown really, really substantially over the last decade, and specifically in the last five years, that MGA market has expanded to above about 10% of the overall insurance market in the States. So that space for us, we're probably one of the larger, at a minimum, a top five player in that, in that structure of the market, so someone who's providing capacity to that MGA market through the forms that we do, and it's one that's had a lot of tailwinds of growth in the last few years.
All right. So I think within the U.S. programs, you've done some high-grading of the book and managing some exposures. So I guess the question here is, have you achieved, like, the intended goals in terms of profitability improvement from the decisions to exit some of those major U.S. programs?
Yeah, I think early indications would say yes. If you look at what we've seen from Q1 and Q2, low 80s combined ratios coming out of that business, loss ratio is sort of in the range that we're talking about. That's, that's what we're looking for in that business. And so the combination of that, ceding commission, that diversification of a relatively large, now mature book of business, we're starting to see the benefits of some of those actions. And we're very open about this. I think this business was a fairly new one for us. This was.. This is now probably in the sixth or seventh year of operation. We're happy to see it now getting to a phase where it's normalizing a bit in terms of its operation.
All right. Let me talk a little bit about maybe kind of top-line growth and profitability, I'll call, trajectory, and, and how does that evolve over the next, call it, twelve to eighteen months?
Yeah, it's interesting. This year, obviously, we've exited some programs last year, so your top-line growth is a bit obfuscated by that. But if you look through that and look at, okay, what's the core portfolio doing? What's the group of programs doing that we're continuing to write with? You are seeing pretty healthy growth, right? In the low teens level of growth. That in the next 12 months- 24 months, we sort of expect that level of growth to continue in this piece of the business, and our expectations and our requirements are that from a profitability perspective, they're still demonstrating that same level of combined ratio ROE that we've seen historically, right? So low 80s-ish combined ratio. You want to see an ROE in the mid- to high-teens in those businesses.
Okay. We'll shift gears a bit, and we'll talk about capital allocation, so I mean, how are you prioritizing capital allocation between organic growth, acquisitions, and I guess shareholder returns?
Yeah, I think first and foremost, we have a lot of space to continue running on the organic side. You saw us actually do this in Q2. We are fortunate to have a relatively flexible capital structure, in that our debt to capital is about 13%. So, we're able to fund a lot of our initiatives today internally, where two or three years ago, those initiatives would've had to have been funded externally. And so that means that a lot of the initiatives or growth aspirations we have today are being funded a lot more accretively than they have been historically. Q2 is a good example. We actually dropped about $40 million into our U.S. surety platform in the U.S. to increase its balance sheet size.
The reason this is important is that the types of bonds that you can write, the types of brokers you can work with, the position you have in the market, is often first and foremost dictated by your balance sheet size, and so for us to be able to increase this balance sheet size in the U.S. with internal capital, it's a real demonstration of a way that we think we can grow organically, using a lot more efficient cost of capital than we've had historically. Those types of initiatives will be the things we prioritize, so in the near term, building out that U.S. surety platform, supporting our expansion of our Canadian surety platform, building out U.S. corporate insurance. Those types of items I think are job one for us.
Candidly, we have a lot of great opportunities to deploy that. I think we have been relatively vocal both today and in the past that we've got appetite for a wide range of inorganic styles of expansion. I say expansion and not acquisition because I view this as a spectrum, right? We've enacted license acquisitions. We've taken team acquisitions, which can be a really attractive way for you to grow the business that are maybe somewhat separate from an overall corporate acquisition. We also have appetite for the latter version of that. If we could find something from a tuck-in basis that could add to our platform, we would very much adjudicate it if we thought it made sense, if it was strategic, and if it was accretive.
But I think what's most exciting for us in the near term is finding those unique, smaller, initiatives that maybe today don't change, or move the needle, or in the first 12 months don't move the needle, but very quickly, in three to four years, become a defining part of your business. Surety acquisition that we made last year is a great example. This was a very small, thinly licensed shell in the surety space in the U.S. We purchased it for a relatively nominal amount. Today, it's got $100 million of capital in it, and it's writing a huge amount of premium. Those types of acquisitions, despite not having, let's say, an immediate sticker shock value of movement, can be really accretive over the long term. And those types of things we'll do alongside adjudicating more traditional M&A.
Excellent. We'll talk a little bit about pricing conditions, and maybe you can kind of walk through kind of your outlook for pricing conditions across Trisura's footprint at this point.
Yeah. The first thing to understand about Trisura, if you take a step back to those comments we made right at the beginning, most of our business as a niche specialty commercial player is gonna operate a little bit outside of those traditional cycles, right? So we talked about surety. It's not gonna move in those same types of cycles as the overall market. Even our corporate insurance line, which does get moved around by overall cycles, is going to be less impacted overall versus, say, a commoditized line. So first and foremost, I'd like to level set with that. Warranty's another great example. This is much more of a structured product, so pricing cycles aren't gonna move that around. Now that being said, parts of our business will be moved by cycles.
And if you think about our Canadian fronting practice, you're seeing a lot more competition in those lines, but also a lot of great appetite for people to launch businesses in those lines. So you've sort of got an offsetting nuance in that business. One of the items that I think a lot of people don't appreciate about Trisura as it pertains to hard and soft markets is how a U.S. programs business, for example, would navigate that market. The first derivative thinking around this would be that U.S. programs from a top-line perspective might start to see pressure if you go into a soft market. It's worth noting today, the only real place we're seeing an impact from that market would be on the property side, which is about a third of our book in the U.S.
Casualty is still relatively firm in that U.S. market. But one of the really exciting things that happens if you're a company that relies on reinsurance and the market starts to soften, is that all of a sudden you have access to more partners, right? The reinsurance community has really strong returns over the last couple of years. For groups like us, we are very sensitive to the availability and costs of reinsurance. And so for the last couple of years, it's been a relatively difficult time to expand that business. You've seen us pull back on certain lines. You've seen us sort of shift around our portfolio. One of the things we're watching for here as we go through this transition in the market is, okay, what happens if the reinsurance community comes back in a real way to this market?
What happens to the availability of that reinsurance, the pricing of that reinsurance because we purchase a whole bunch of different types of it, and how does that impact Trisura, so it's tough as a specialty insurance company, and I'll acknowledge we're a small entity, to think about all those different factors as you're thinking about us. The one thing I like to remind people is that, as a heuristic, hard and soft markets aren't necessarily just bad and good for Trisura. They're gonna hit different parts of the business in different ways. That's a conscious design of this business to hopefully diversify our experience in those markets.
Excellent. Listen, the clock's winding down a little bit, so in terms of what I'll call closing thoughts, I mean, what do you see as the pathway for Trisura to regain its valuation premium? And, in your mind, you know, what time horizon do you think it'll take to get there?
Yeah, I mean, if I always struggle with these questions a little bit. If I'm looking at the results of the business and our track record of doing what we're saying we're going to do, where we're seeing the most growth, where we're seeing the most expansion, the most momentum in the business, are the pieces of the business that everyone should be most excited about. Our platform has had a pretty strong track record of developing and demonstrating very, very strong ROEs, despite some quarter-to-quarter volatility. I think the combination of growth in really well-established, profitable lines, the curation, I'll say, of pieces of the portfolio, and the continued outperformance of profitability and growth, I think all of that is starting to get recognized.
I think, if you continue to see that trajectory, we today are getting more calls than ever to talk about how this business is performing in the market, and we're very excited about how it is.
Excellent. Well, listen, David, I'd like to again thank you for your time, taking out, talking to ourselves, meeting with investors today. And again, on behalf of Scotiabank Global Banking and Markets, we'd like to thank the Trisura organization for your continued support.
Thanks very much, Phil. We always enjoy being invited.
All right. Thank you.