Amerisafe, Inc: Safety First
A workers’ comp insurer that seeks out not the safest but the most hazardous industries might seem counter-intuitive as a surefire way to profit. But Amerisafe, Inc. (Nasdaq: AMSF) is stringing together an earnings record that makes a strong case for believing it. All four analysts with ratings have the stock at a strong buy, and the company has routinely beat earnings estimates.
The big advantage in the hazardous industries targeted by Amerisafe – construction, trucking and logging are the biggest, and others include agriculture, oil and gas, maritime and sawmills – is that they pay much higher premiums for workers comp insurance, more than three times the average ($7.80 per $100 salary vs $2.30 per $100). Plus, companies in hazardous industries are likelier to fully implement safety measures.
Amerisafe zeroes in on these safety measures during the underwriting process. It conducts an onsite safety inspection in 94% of applications for new business, deploying its mobile Field Safety Professionals in 4-wheel drive pickup trucks and tying their bonuses to the loss ratios on business they underwrite. It makes a quote in only one out of four applications, and last year only ended up underwriting 8 out of 100.
The company, which has been in business 21 years and went public in 2005, is based in DeRidder, La., north and west of New Orleans near the Texas border. It has invested heavily in technology and sifts through numerous specific datapoints in each class of business it underwrites. This head start in experience shields Amerisafe from competition as it creates a significant barrier to entry in the niche business. In addition, it targets small and mid-sized companies – the average policyholder premium is only $40,000 – that aren’t interesting to the big insurers. As a result, competition is fragmented and Amerisafe often faces single-state operators or self-insurers in the 31 states it operates in.
What’s more, Amerisafe’s profit margins will increase as it leverages this technology investment through growth. The company estimates the market in its geographic footprint to be $16 billion – compared with its $332 million in gross premiums last year – so that there is plenty of room for growth. While its business is concentrated in the U.S. southeast, the company’s market share does not exceed 5% in any of the states it operates in. Moreover, the company has completed the paperwork to do business in 14 other states. Distribution is via a network of 2,400 independent agents (85% of policies underwritten) and a captive insurance agency.
Amerisafe takes an onsite approach on the claims side, too, making sure its adjusters are face-to-face with a claim within 48 hours. By so doing, the company can resolve the issue in a way to contain costs, get the worker back on site more quickly and reduce the chances of litigation.
The company’s net combined ratio – the loss ratio, net expense ratio, and net dividend ratio lumped together – was 92.5% in the first quarter ended March 31 (below 100% means a profit on underwriting), and it expects to hit 95% or better (i.e. lower) for the year as a whole. It expects gross premiums of $350 million to $360 million for the year ($90.5 million in the first quarter) and a return on equity above 16% (17.9% in the first quarter).
As the company grows it has been able to raise its prices and lower its expense ratio. Accident and health insurers price within 25% of their filed loss cover multiplier, which for Amerisafe averages 1.4 (140% of the loss cover each state establishes for each class of coverage). Since 2001, the company has been able to increase effective LCM (the actual price charged) from 1.14 to 1.53 in the first quarter of this year. The net expense ratio has declined almost 10 full percentage points in the same period, from 32.1% in 2001 to 22.6% in the first quarter.
Amerisafe earns 60% of its pretax income from investments, and had $665 million in invested assets at the end of 2006 in a conservative portfolio that was 55% invested in municipal bonds. Average length to maturity of fixed maturity securities was 2.9 years and nearly 90% of them were rated triple-A. Net investment income in the first quarter was $6.9 million, compared with $6.0 million in the year-ago period. Net income was $8.4 million, or $0.42 a share vs. $7.2 million, or $0.36 a share.
Analysts on average expect net income in the current quarter ending this month of $0.43 a share, compared with $0.36 a year earlier, and $1.78 for the full year, against $1.65 in 2006. The share price has been hovering above $18 recently and the current market cap is about $345 million. Analysts’ median target for the share price is $22, compared with a 52-week range of $9.30-$20.45.
The company has a conservative balance sheet. It has been working to reduce its reinsurance recoverables, which carry a certain credit risk, and recently announced a deal with Munich Re to commute $23.7 million in recoverables, bringing the total down to about $86 million, or just 44% of equity. The debt to capital ratio is a very low 16%.
Injuries are rarer in hazardous industries but more severe when they occur. Amerisafe has carved out a unique niche in this market and found a way to manage the risk to consistently produce a handsome profit. It has been popular with institutions, and 93 institutions hold 94% of the shares. Last week the company presented at the William Blair Growth Stock Conference. Amerisafe’s “safety first” strategy – in its underwriting, its investments, its balance sheet – appears to be a winning one for investors, even the risk averse.
