Insurance Premium Retention And Claims Handling Will Drive Future Performance Amid Challenges

Key Takeaways

• Strong business gains and premium retention are driving AMERISAFE's future revenue growth through excellent customer relationships and growth momentum.
  
• Investments stabilizing and proactive claims handling are expected to enhance profitability by reducing loss costs and improving expense ratios.
  
• Competition, declining rates, and expense increases may hinder revenue growth, while tariffs and rate decreases could impact margins and financial stability.

Catalysts

An insurance holding company, underwrites workers’ compensation insurance in the United States.

• AMERISAFE is experiencing strong new business gains and premium retention, with gross written premiums growing by 4.6% and premium retention at 93.1%. This is likely to positively impact future revenues as the company capitalizes on its growth momentum and strong customer relationships.
  
• The company has seen favorable development in prior accident years, primarily from 2020 and 2021, due to proactive claims handling, which is expected to positively influence net margins and earnings through reduced loss costs.
  
• Investments in the business to support top-line growth are expected to stabilize, which may lead to lower expense ratios in coming quarters, enhancing future profitability and improving the net margins.
  
• Premium growth, driven by consistent new business and strong retention despite a competitive market and declining rates, is expected to continue, bolstering future revenue streams as economic conditions stabilize.
  
• AMERISAFE's investment portfolio's yield on new investments exceeding portfolio roll-off is enhancing the tax-equivalent book yield, which should contribute positively to net investment income growth and overall earnings.

AMERISAFE Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming AMERISAFE's revenue will grow by 3.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 17.9% today to 10.8% in 3 years time.
• Analysts expect earnings to reach $36.4 million (and earnings per share of $1.88) by about May 2028, down from $55.4 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.2x on those 2028 earnings, up from 17.1x today. This future PE is greater than the current PE for the US Insurance industry at 14.1x.
• Analysts expect the number of shares outstanding to decline by 0.45% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

AMERISAFE Future Earnings Per Share Growth

Risks

• The strong competition and declining workers' compensation rates may hinder future revenue growth, as these factors can squeeze AMERISAFE's profit margins in a turbulent market.
  
• Potential impacts of tariffs on medical equipment and pharmaceuticals could raise operational costs, affecting net margins due to increased medical expenses.
  
• The increase in total underwriting and other expenses to support top-line growth resulted in an elevated expense ratio, which if persistent, might pressure future earnings.
  
• Lower valuations across equity holdings leading to net unrealized losses highlight risks in the investment portfolio impacting earnings volatility and financial stability.
  
• Continued rate decreases in the workers' compensation industry could affect premium growth and revenue, especially if the economic environment leads to project delays and unemployment.

Valuation

• The analysts have a consensus price target of $57.667 for AMERISAFE based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $65.0, and the most bearish reporting a price target of just $54.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $338.3 million, earnings will come to $36.4 million, and it would be trading on a PE ratio of 34.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $49.84, the analyst price target of $57.67 is 13.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.