AMSF AMERISAFE Inc

Amerisafe Inc.’s (AMSF) third-quarter 2011 operating earnings per share of 33 cents came in higher than the Zacks Consensus Estimate of 29 cents and 26 cents reported in the prior-year quarter.

Operating income spiked 25.6% year over year to $6.2 million. Including net realized gains of $0.51 million against a loss of $0.56 million in the year-ago period, reported net income was $6.7 million or 36 cents per share, compared with $4.4 million or 23 cents in the prior-year quarter.

Results reflect higher premiums written and earned that shored up the top-line growth along with improved underwriting results that perked up the bottom line. These factors not only improved the combined ratio but also drove the cash and capital position, return on average equity (ROE) and book value per share. However, higher-than-expected underwriting, operating and tax expenses had partially dampened results.

The accident years 2003, 2006 and 2007 primarily contributed to favourable development, reducing loss and loss adjustment expenses (LAE) by $1.1 million. This also helped the current accident year loss ratio to improve to 78.2% from 95.5% in the year-ago quarter.

Amerisafe’s total revenue for the quarter was $71.7 million, up 18.5% from $60.5 million in the prior-year quarter, also exceeding the Zacks Consensus Estimate of $66.0 million. Gross premiums written for the quarter were $65.7 million, reflecting a 25.9% surge year over year.

The uptick was driven by payroll audits and related premium adjustments for policies written in previous periods. These adjustments increased premiums by $2.5 million in the reported quarter, while they reduced premiums by $6.6 million in the year-ago quarter.

Furthermore, voluntary premiums written climbed 7.8% year over year in the reported quarter. Net premiums earned jumped 18.6% from the year-ago quarter to $64.5 million. Net investment income, which represented about 9% of total revenue, was $6.5 million for the reported quarter, almost flat from the prior-year quarter. Moreover, underwriting profit moderated at $1.3 million against a loss of $0.9 million in the year-ago quarter.

On the flip side, insurance loss and loss adjusted expenses (LAE) increased 5.6% year over year to $49.3 million (or about 77% of net premiums earned). As a result, total expenses jumped 13.8% year over year to $63.4 million, while net underwriting expense ratio increased to 21.1% from 15.4% in the year-ago quarter due to higher underwriting and operating costs.

However, net combined ratio for the reported quarter deteriorated to 98.0% from 101.7% in the prior-year quarter. Consequently, ROE for the quarter grew to 7.9% from 5.5% in the prior-year quarter. Operating ROE also climbed to 7.4% from 6.2% in the year-ago quarter. Meanwhile, book value per share came in at $18.74 as on September 30, 2011, up 8.6% from $17.26 at the end of the prior-year quarter.

As on September 30, 2011, Amerisafe’s fair value of the portfolio, including cash and investments, stood at $836.5 million as compared with $826.5 million at the end of 2010. Total shareholders’ equity was recorded at $338.5 million, up from $325.2 million at the end of 2010.

Share Repurchase Update

Concurrently, the board of Amerisafe also announced the renewal of the previously authorized share repurchase program through December 31, 2012. Additionally, the current program has been extended up to $25 million, effective October 1, 2011.

During the reported quarter, Amerisafe repurchased 357,970 shares at an average price of $18.99, for a total cost of $6.8 million including commissions. Since the initiation of its share repurchase plan, the company has bought back shares worth $21.8 million, at an average price of $17.75 including commissions.

Our Take

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 owing to challenging industry trends and robust price competition fuelled 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.

 
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