AMSF AMERISAFE Inc

Amerisafe Inc.’s (AMSF) first quarter operating earnings per share of 35 cents lagged behind the Zacks Consensus Estimate of 39 cents and 45 cents reported in the prior-year quarter.

Operating income decreased 25.2% year over year to $6.5 million. Including net realized gains of $0.1 million against $2.6 million in the year-ago period, net income for the reported quarter was $6.6 million or 35 cents per share, compared with $11.3 million or 58 cents in the prior-year quarter.

Results worsened primarily due to dramatically lower underwriting profits and realized gain on investments and higher-than-expected expenses, which further deteriorated the combined ratio and weakened the return on average equity (ROE). However, higher premiums earned and flattish investment income supported the top line growth.

The accident years 2006, 2007 and 2008 primarily contributed to favourable development, reducing loss and loss adjustment expenses (LAE) by $2.1 million. However, current accident year loss ratio deteriorated to 77.0% from 72.5% in the year-ago quarter.

Amerisafe’s total revenue for the quarter was $67.0 million, up 4.0% from $64.4 million in the prior-year quarter, also exceeding the Zacks Consensus Estimate of $61.0 million. Gross premiums written for the quarter were $71.4 million, up 17.0% year over year.

The growth was driven by low negative payroll audits and related premium adjustments for policies written in previous periods. These adjustments reduced premiums written by $0.1 million in the reported quarter compared to $8.9 million in the year-ago quarter.

However, net premiums earned jumped 9.1% from the year-ago quarter to $60.1 million. Net investment income, which represented 9.8% of total revenue, was $6.5 million for the reported quarter, while flat from the prior-year quarter.

On the other hand, insurance loss and loss adjusted expenses (LAE) increased 17.6% year over year to $44.2 million (or about 74% of net premiums earned) from $37.6 million (or about 68% of net premiums earned) in the prior-year quarter.

As a result, total expenses increased 17.2% year over year to $59.5 million, while underwriting expense ratio increased to 24.2% from 22.7% in the year-ago quarter due to higher underwriting and operating costs.

Further, net combined ratio for the reported quarter deteriorated to 98.3% from 91.5% in the prior-year quarter. Consequently, ROE for the quarter plummeted to 8.1% from 14.7% in the prior-year quarter. Operating ROE also dipped to 8.0% from 11.5% in the year-ago quarter. However, book value per share came in at $18.05 as on March 31, 2011, up 9.5% from $16.49 at the end of prior-year quarter, primarily due to lower share count.

As on March 31, 2011, Amerisafe held cash and investments of $824.3 million as compared with $826.5 million at the end of 2010. The fair value of the portfolio was $843.8 million compared with $846.6 million at the end of 2010. Total shareholders’ equity was recorded at $330.6 million, up from $325.2 million at the end of 2010.

Share Repurchase Update

During the reported quarter, Amerisafe repurchased stock worth approximately $2.9 million. Since the beginning of its repurchase plan, the company repurchased a total of 867,670 shares for $15.0 million.

Expanding its existing program, the board of Amerisafe had sanctioned another $25 million share buyback program, effective October 1, 2010, which is scheduled to expire by December 11, 2011. At the end of March 2011, the company had about $20.4 million left under the current authorization.

Amerisafe is expected to face an uncertain environment for the next few quarters as the economic fragility continues to hurt payrolls and underwriting results. However, though the pricing environment is somewhat improving now, it fails to drive adequate growth due to challenging industry trends and robust price competition fueled by excess capacity and muted demand.

Nevertheless, improved book value, prudent capital management, expanded share repurchase plan and a strong financial strength rating augur a decent mid- to long-term growth. Hence, we maintain a Neutral rating on the stock, with a Zacks #3 Rank, over the short term.

 
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