By: Brendan
Hopkins, 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. (NYSE:AMSF) operates as an insurance holding
company focusing on providing workers’ compensation insurance for small to
mid-sized companies engaged in the hazardous industries of construction,
trucking, and agriculture. The company is headquartered in DeRidder, LA and
actively participates in workers’ compensation markets in 27 states.
• Softening Rate Environment
within the Workers’ Compensation market: Premiums written in 3rd quarter
are down 2.4% from previous quarter as management turns its attention to policy
count (up 3.6%).
• 3rd Quarter ROE was
14.2% (down 5% from 3Q15) and BVPS was $26.51 (up 11.7%).
• New business is down 7.3%, but
renewals are up 0.5%.
• AMSF reached both its 52-week
and all-time high on November 28 at $65.70 (52 week range: 46.88 – 65.70). A
special dividend of $3.25 and a regular quarterly dividend of $0.18 are both to
be paid on December 25th to the shareholders on record as of December
15th.
Key
points:
AMSF’s management has established
their main focus on discipline rather than chasing premiums. This discipline
has and will continue to be executed in risk selection, pricing, claims
handling, and managing costs. As the workers compensation market has softened (low
investment yields are preventing it from returning to a soft cycle) companies
are becoming increasingly competitive and are continuing to chase underwriting
profits in order to meet their ROE goals.
While competitors continue to search
for premium, AMSF’s management has taken a different approach and has turned their
attention to protecting the underwriting margins in order to return value to
shareholders. With premiums down 2.4% this past quarter, policy count has
really taken the top spot on managements to do list as it has grown 3.6% since
the second quarter.
For more than a year, AMSF has
felt the negative effects of this market softening but has outperformed their
peers because of their experienced management team and their ability to avoid unnecessary
risk. This past quarter, new business was down 7.3%, open claims fell 4.1% from
3Q15, and return on equity dipped just shy of 5% from last year. Beyond this
there was some good news with renewal business climbing 0.5% and their losses
and LAE ratio have both enjoyed favorable development over the past year,
allowing net income to actually increase even with a drop in revenues.
Currently the entire market of workers compensation is struggling, but with
infrastructure expenditures more than likely to occur, companies within this
market undoubtedly will benefit. AMSF is currently positioned to take advantage
of this increased activity because of their capable management and their exposure
to the specific markets that will be involved (construction & trucking),
allowing shareholders to reap the profits.
What
has the stock done lately?
On November 28, the stock reached
its all-time high of $65.70 and has been priced above $60 for the majority of
this month. In a 3-month scope, the stock has been relatively volatile dropping
as low as $53.60 just prior to reporting 3rd quarter earnings and a favorable
jump following the earnings report because of the company’s ability to exceed
expectations and present managements capabilities. To add to this, the board of
directors have approved a regular quarterly dividend of $0.18 and a special
dividend of $3.25 (special divs in past 3 yrs total $7.75/share) to be paid at
the end of December.
Past
Year Performance:
AMSF’s price has increased 21.4%
YTD and has floated above $60 for the better half of this year. The 52-week
range during this time was 46.88 – 65.70 and you can essentially describe the
shape of the 1yr price chart as a teeter-totter with a boulder placed on the
left side, just an upward slope the whole way with one large dip during the
month of November.
Source: FactSet
My
Takeaway
AMSF was originally added to the
AIM equity fund during a time in which the workers compensation market was
enjoying large premiums and performing exceptionally well. Currently this is
not the case, but Amerisafe has demonstrated that their management will stick
to their core principles and emphasize the importance of shareholder returns
through discipline. I am somewhat hesitant, as the BOD has announced a large
special dividend and the stock has reached an all-time high during a period
where there are large amounts of financial metrics underperforming.
I praise the company’s capital management and anticipate that the focus on infrastructure and expanding our economy will improve AMSF, but I am recommending that we strategically trim our position in our portfolio before the next earnings report.
I praise the company’s capital management and anticipate that the focus on infrastructure and expanding our economy will improve AMSF, but I am recommending that we strategically trim our position in our portfolio before the next earnings report.
Source: FactSet
