Sunday, December 11, 2016

A current AIM holding: Amerisafe, Inc. (AMSF) by Steve Hoffman. “Let's Hold on AMSF until 2017"

Amerisafe, Inc. (AMSF, $64.95): “Time to get Compensated for Amerisafe”
By: Steven Hoffmann, AIM Student at Marquette University

 Image result for amerisafe logo

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.

·         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

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