AMERISAFE, Inc. (AMSF) is currently considered expensive on a relative basis, trading at a forward 12-month price-to-earnings (P/E) ratio of 22X. This valuation is significantly higher than its five-year median of 20.21X and the Zacks Insurance – Accident and Health average of 13.36X. While a premium valuation often signifies strong market confidence in a company’s future, it’s crucial to determine if this price is justified.
Compared to other insurers like Employers Holdings, Inc. (EIG) and ProAssurance Corporation (PRA), which are cheaper at 13.30X and 19.72X respectively, AMERISAFE’s premium valuation demands closer examination. Let’s delve deeper into the factors contributing to its valuation and potential concerns.
Incorporated in 1985 and headquartered in DeRidder, LA, AMERISAFE boasts a market cap of $909.9 million. The company is well-positioned for growth, benefiting from rising investment income and a robust balance sheet. AMERISAFE’s extensive experience in hazardous industries and a high policy retention rate are key strengths. Cost-saving initiatives, such as lowering loss and loss adjustment expenses by 2.7% last year, are expected to bolster its bottom line.
The company’s business model benefits from the time lag between receiving premiums and settling claims, allowing for longer-term investments and enhanced returns compared to insurers with quicker claim payouts. This strategy contributed to a 15.1% increase in net investment income last year, reaching $31.3 million. Higher reinvestment rates continued in the first half of 2024.
A solid balance sheet, with no debt and $884.2 million in investments and cash as of June 30, 2024, supports initiatives to boost shareholder value. AMERISAFE raised its quarterly dividend by 8.8% in February 2024, maintaining a steady dividend payout since 2013. Additionally, the company repurchased $4.1 million worth of shares in the second quarter, leaving $6.3 million remaining in its buyback program as of June 30.
While these factors contribute to AMERISAFE’s premium valuation and reflect strong investor confidence in its growth and profitability, there are also uncertainties to consider. The company has experienced a continuous decline in net premiums earned over the past five years. If this trend persists, it could hinder AMERISAFE’s ability to enhance profits.
The Zacks Consensus Estimate for 2024 earnings is pegged at $2.40 per share, indicating a 17.5% year-over-year decline. The same for 2025 projects a further 12.5% fall. Additionally, AMERISAFE has faced a downward trend in free cash flow from 2018 to 2022, hinting at potential operational challenges. While 2023 witnessed a 12.2% increase in free cash flow, its sustainability is uncertain. A sharp 56.7% drop in free cash flow over the trailing 12 months raises concerns about the company’s long-term financial health.
Despite these headwinds, the company’s overall outlook remains positive. Leading brokers have raised AMERISAFE’s short-term price target by 12.47% from its recent closing price of $47.72, with the highest target set at $65, representing a potential upside of 36.21%.
Existing investors may choose to hold onto AMERISAFE stock, anticipating potential upward price movement. However, new investors might consider waiting for a better entry point. Currently, the stock has a Zacks Rank #3 (Hold) and appears overvalued, suggesting it might not be the ideal time to buy. Waiting for a more attractive valuation could present a better opportunity to invest.
