By: Steven Hoffmann, AIM Student at
Marquette University
Disclosure: The AIM Equity Fund
currently holds this position. This article was written by myself, and it
expresses my own opinions. I am not receiving compensation for it and I have no
business relationship with any company whose stock is mentioned in this
article.
Summary
·
Amerisafe, Inc.
(NASDAQ: AMSF)
is a holding company that markets and underwrites workers’ compensation
insurance through more than 3,300 independent agencies and its insurance
subsidiaries. AMSF focuses on providing this coverage to small to mid-sized
employers engaged in hazardous industries, principally construction, trucking,
manufacturing, oil and gas, agriculture, and maritime. Founded in 1985, AMSF is
headquartered in Deridder, LA.
·
On
October 25, the company's Board of Directors declared a regular quarterly cash
dividend of $0.18 per share, payable on December 29, 2016 to shareholders of
record as of December 15.
·
The
company's board declared a special dividend of $3.25 per share for shareholders
with the same record and payable date. This brings the total amount of special
dividends paid out in the last three years to $7.75 per share.
·
Book
value per share increased 11.7% from year-end to $26.51 at September 30, 2016.
Its statutory surplus rose to $395.2 million at September 30, 2016, up $23.8
million from year-end. In addition, so far this year, AMSF has paid $37 million
in dividends from the insurance companies up to the holding company, AMERISAFE,
Inc.
·
Since
2011, Amerisafe has grown after-tax profit (NOPAT) by 36% compounded annually
to $73 million in 2015 and to $85 million over the last twelve months; however,
at its current price, Amerisafe has a PEBV ratio of 0.9. This ratio means that
the market expects AMSF’s NOPAT to permanently decline by 10%. Ideally, rates
could offset a softening in the market.
Key
Points
Amerisafe has $25
million remaining under its current repurchase plan through the end of 2016. AMSF
has repurchased $22 million since 2010. Amerisafe made no share repurchases in
2015 or through the first six months of 2016. If Amerisafe were to repurchase
the remaining $25 million under its current authorization by the end of the
year, it would represent 2% of AMSF's current market cap. When combined with
Amerisafe's dividend, the potential buyback could provide investors just over a
3% yield.
The board declared a
special dividend of $3.25 per share for shareholders with the same record and
payable date as the quarterly dividend. This brings the total amount of special
dividends paid out in the last three years to $7.75 per share. Management
perceives AMSF to possess the company's continued ability to produce earnings
for our shareholders and that the workers' compensation market is strong
despite outside concern.
For 3Q16, premiums written were down
2.4% and audit and related premium adjustments declined $1.2 million. Voluntary
policy count by grew by 3.6% in the quarter; however, with a loss costs in most
states falling, premium for voluntary policies written was down 0.9%. New
business was down 7.3%, but renewal business was up 0.5%. AMSF’s effective loss
cost multiplier was 1.71 down from 1.77 a year ago and down slightly from 1.73
last quarter.
For the current accident year, losses
were at 67.9% loss in the LAE ratio. AMSF’s claims reported in calendar year
2016 were down 1.2% from 2015. As per prior accident years, AMSF experienced
favorable case development in the quarter which led to a reduction in losses
incurred of $10.5 million. As of 3Q16, the LAE ratio for the quarter was 56.2%
compared to 54.1% last third quarter. AMSF ended with a combined ratio of 80.3%
and a pre-tax underwriting profit of $20.8 million.
What has the stock done lately?
AMSF is up 10.50% QTD
and up 16.82% MTD. As for 3Q16 results, AMSF missed on revenue but beat on EPS.
This brings EPS beat to 7 of the last 8 quarters, but revenue misses to 7 of
the last 8 quarters.
This EPS beat history is due to Amerisafe's 18% ROIC is
well above the 9% average of the 11 Property & Casualty insurance companies
listed as peers in its most recent proxy statement. AMSF doesn’t have to chase
bad deals just to prop up the top line. Not only is AMSF profitably
underwriting insurance, it is doing so more effectively than its competition –
AMSF has the lowest combined ratio of its peer group, not only in 2015, but
also through the first six months of 2016.
Past Year Performance
For the past 12
months, AMSF is up 20.32%, but it is up 27.60% YTD. At its current price, AMSF
is both above the target price from the estimated target price of $60.43 from
the analyst who pitched it at $50.07 on October 9, 2015 – capturing much more
than the expected 21% upside in just over a year. In addition, the LTM revenue
is down 1.6%, net premiums are down 1.7% and the FY16 revenue is estimated to
be down 1.0% despite estimated EPS to be up by 3.6%; however, this is compared
to YoY EPS growth of more than 19% historically.
Source: FactSet
My Takeaway
Amerisafe’s performance since it was added to the AIM Small
Cap Portfolio last year has seen a solid impact generating nice returns. AMSF
trades at 2.4x last reported book value vs 2.0x for 2 year historical average
and 2.4x last reported book value vs 1.4x for comparable companies. In
addition, indicated dividend yield is 1.1% vs 3.1% for comps average and 3 of 9
board members in role less than one year.
Given this and some of the reasons
above, I believe that we should TRIM
some of our position in AMSF to realize the upside on the stock. In addition,
while there are some growth prospects in the name, I am optimistic of this name
right now so I would like to reallocate some funds to other parts of the
portfolio, but still HOLD this name to track its performance through the
next quarter and reevaluate its performance and growth potential.
Source: FactSet
