Wednesday, December 14, 2016

An AIM holding: Amerisafe. (AMSF) by Brendan Hopkins. "Another point of view on Amerisafe"

Amerisafe, Inc. (AMSF, $65.40): “Management Plays it Safe and Gets Praised”
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.


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. 

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

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