For the 12 months ending August 30 2021, Bridgeport’s Small and Mid-Cap Equity Fund has generated a net rate of return over 34%. While contributions to this performance have been broad based, one investment in particular stands out: Trisura Group (Ticker: TSU.TO). Trisura’s shares have generated a 107% return on investment since our original purchase in the summer of 2020 and the position is now our second largest holding in the Small & Mid-Cap Equity Fund.
Trisura is a specialty insurance company with operations in Canada and the US, which was spun out of Brookfield Asset Management (another Bridgeport investment) in 2017. We suspect that Brookfield wishes they had held on to a larger stake in the company as the shares have appreciated by over 600% since the spinoff.
Trisura operates in risk solutions, surety, corporate insurance, reinsurance and is quickly growing in several niche segments of the insurance market. Trisura underwrites and insures non-standard commercial risks for enterprises that larger, more traditional insurance companies don’t care to service. Specialty insurers, like Trisura, are therefore able to command attractive pricing and their niche expertise allows them to more effectively manage risk. Examples of niche insurance areas include directors & officers liability insurance and surety insurance. Trisura is the 4th largest surety insurer in Canada, and the majority of Trisura’s surety business comes from underwriting surety bonds on government and infrastructure projects. Its focus on smaller projects and its expertise in structuring contracts allows it to compete effectively in this area.
Trisura is not the only specialty insurance operator in the market, however one aspect of their business that attracted us was their launch of an insurance fronting model in the U.S. Fronting arrangements allow Trisura to underwrite policies and then pass on the risk to larger re-insurance companies for a fixed fee, while it retains only a small portion (5%-10%) of the insurance exposure on its own balance sheet. This model is beneficial as it allows Trisura to expand its insurance business at a quicker pace as the reinsurers are taking on most of the risk, while increasing its return on capital as a result of the fee income collected.
Despite the Fronting division having only been established relatively recently in February 2018, it accounted for approximately 70% of Trisura’s total gross premiums written in 2020. The company’s strong operating performance has continued into 2021 with overall gross written premiums up 79% in Q2 2021 on a year-over-year basis. Profitability has also been better than expected, driven by favourable pricing conditions which are expected to continue (industry-wide) over the next few years.
We believe that Trisura can continue to grow at a strong pace given favorable industry dynamics, including the lack of competing fronting carriers, excess reinsurance capacity, improved pricing conditions and a significant runway for growth in the U.S. As the business expands, we also expect increasing awareness amongst institutional investors could drive further upside in the share price.