Since posting about Trean Insurance Group on the 17th of March, the stock price has increased some 37% (for now, it will fluctuate) in the face of the S&P 500’s decline. The reason being is that it was severely undervalued and probably a bit misunderstood.
The company recently had its earnings call, where the most important bit of information came out - the losses from its 3 programs have abated. This confirms that this was a “once-off-hit” that insurers (especially workers’ compensation) sometimes receive. Recall, that this company has never had an unprofitable quarter (although insurers can smooth their earnings somewhat).
Misunderstood
Trean Insurance Group provides specialty insurance, generating most of its revenues from workers’ compensation. The company seemed to have the most terrible stream of news since its IPO. It IPO’d at a high price of ~$15 per share in July 2020.
Bad news after bad news
The company’s insiders sold shares. The Founder of the company sold 20% of his holdings, leading to pressure on the share price. But he still has 80% of his original holdings so think where his incentive lies.
The Covid pandemic leads to worsening sentiment, adding further pressure on the share price.
The company was ‘hit’ by 3 large claims, from programs that were historically never problemed lines.
The CEO and Founder resigned to move to the chairman of the board.
From all this bad news, the underlying business prospects never actually changed. Instead, as we can see in the most recent Q4 filing, business prospects increased! The Founder raised revenue guidance! The company is expected to grow revenues by more than 20% in 2022, whilst the company still trades at an almost ~17% earnings yield. Unheard of kind of value.
Other insurers in this market have come under extreme selling pressure, as their assets (especially life insurers and pension fund providers) depend on the equity markets to provide their customers with “Unique” gimmicky products.
Extremely Undervalued
The market was worried that the increased claims would recur. But in the Q1 2022 earnings call it was noted that claims from those programs had stopped, and the company posted around $20M in net earnings! That’s a net earnings yield of around ~17% on its current market cap.
Further good news, management increased its guidance and now expects the company to grow by 23-30% in 2022. Recall this is a company already trading at a historical earnings yield of ~17%, and that revenue growth will trickle down to net earnings so Trean Insurance Group is trading easily at around 20% net future earnings yield. Disgustingly cheap with revenues still growing.