On June 12, Prem Watsa made his initial buy into American Safety Insurance. Canada’s most esteemed guru bought 1,236,214 shares of ASI at an average price of $28.94 per share, resulting in a 1.39% impact to his portfolio. Watsa’s new holding represents 12.49% of American Safety’s shares outstanding.
Shares of American Safety Insurance jumped more than 20% within one trading day as Fairfax Financial (FFH) agreed to acquire the company for a total transaction amount of about $306 million.
Upon acquiring American Safety, Prem Watsa said:
We look forward to working with the talented professionals in the American Safety team. We expect to enhance our insurance operations in certain specialty lines of business with American Safety’s expertise.
About American Safety Insurance
American Safety Insurance is a specialty insurance company that provides customized insurance products and solutions to small- and medium-sized businesses in industries which they consider to be underserved by the standard insurance market. In the company’s 20 years, they have developed specialized insurance coverages and alternative risk transfer products not generally available to customers because of the unique and individual characteristics of the risks involved and the specific needs of the insureds.
American Safety is considered the specialty insurance and reinsurance underwriter. The company’s operating segments come from three main insurance divisions: excess and surplus, alternative risk transfer and assumed reinsurance. Most of its earned premium, $138.5 million, or 54.5% of the total 2012 earned premium, was generated from the excess and surplus division, while the alternative risk transfer and the assumed reinsurance division contributed $56.47 million and $58.9 million, respectively, to earned premium.
The year-to-date return for American Safety came in at 53.0%, which is significantly above the S&P 500’s return of 13.06%.
American Safety’s first quarter results reported:
· Net operating EPS of $0.44, a 15.8% increase from the first quarter 2012.
· Total revenue increased 3.3% to $72.3 million.
· The gross written premiums increased 10% to $81.2 million.
· Net earnings of $5.5 million, or $0.56 per share, compared to $4.1 million, or $0.39 per share, for the same period 2012.
During the first quarter, American Safety repurchased 100,000 shares for about $2.7 million.
In 2012, American Safety produced nearly $20.6 million in underwriting losses. In result, the cost to generate float was 3.2%, which is slightly lower than the 30-year Treasury yield of 3.3%.
As of the end of the first quarter, American Safety had approximately $927 million in total investments.
The analysis on the company reports:
· The price is sitting at a 10-year high.
· The P/S ratio is at a five-year high.
· The operating margin for American Safety has been expanding.
In the chart below, you can see the jump in share prices as the merger with Fairfax was announced.
The company’s P/S and P/B ratios:
The company’s price and P/E ratio:
The Peter Lynch Valuation Chart shows that American Safety appears to be overvalued:
American Safety has a market cap of $277.885 million; its shares were traded at around $29.00 with a P/E ratio of 22.27 and a P/S ratio of 0.99. The company had an annual average earnings growth of 21.8% over the past five years.
Prem Watsa is the only guru that owns a stake in American Safety.
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