Argosy Investors recently released its Q3 2020 Investor Letter, a copy of which you can download here. Year-to-date performance was 15.5% in select accounts. The S&P 500 by comparison returned 5.5%. You should check out Argosy Investors’ top 5 stock picks for investors to buy right now, which could be the biggest winners of this year.
In the said letter, Argosy Investors highlighted a few stocks and Trean Insurance Group Inc. (NASDAQ:TIG) is one of them. Trean Insurance Group Inc. (NASDAQ:TIG) is an insurance company. In the last three months, Trean Insurance Group Inc. (NASDAQ:TIG) stock lost 8.1% and on October 15th it had a closing price of $14.26. Here is what Argosy Investors said:
“Trean Insurance Group (TIG) is a newly public company, having gone public earlier this year, but its history dates back to the mid-1990’s. They provide workers’ compensation insurance policies, many to smaller businesses and high-hazard industries where the market is less competitive. Their average premium per policy was $19,103 during 2019. Because of its focus in the small-to-medium workers’ compensation market, Trean bears similarities to the very successful Amerisafe Insurance Company (AMSF), which trades at over 2.6x book value.
Another component of their business that makes sense to us is that Trean writes business through agencies, or what they call Program Partners, and they require these partners to retain high percentages of the policies they underwrite. This practice helps align the interests of Trean and its partners. As part of their partnership, Trean offers various fee-based services such as claims administration, reinsurance brokerage, and others.
Like Trisura, Trean retains a low percentage of the risk it underwrites. Trean retained 21% of its gross premiums while they ceded 29% to their Program Partners and 50% to reinsurance partners. As the company states, their heavy use of reinsurance allows them to earn profits from underwriting profits on retained risk, reinsurance commission overrides, management fee income, and brokerage commissions.
In any event, Trean trades at 3x book value and 25x earnings, a premium price to be sure. I feel comfortable owning this business at this price because I believe they have built-in growth from retaining additional premiums as well as from acquiring some of their Program Partners. I believe that the additional capital Trean raised in its IPO will enable Trean to increase earnings fairly quickly to $50 million, which would represent 15x earnings. It is dangerous to assume high growth rates in financial fields, so I won’t do that, but I do think that Trean may be capable of continuing its historical growth into the future for at least a few years.”
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