AMSF AMERISAFE Inc

Amerisafe Inc.’s (AMSF) fourth-quarter 2011 operating earnings per share of 32 cents missed the Zacks Consensus Estimate by a couple of pennies but modestly lagged the prior-year quarter earnings of 44 cents.

Consequently, operating net income plunged 29.1% year over year to $5.9 million. Including net realized gains of $0.95 million against $0.11 million in the year-ago period and valuation allowance of $1.2 million versus $0.08 million in the year-ago quarter, reported net income came in at $8.06 million or 44 cents per share, compared with $8.55 million or 45 cents in the prior-year quarter.

Reported results reflect higher premiums written and earned that shored up the top line and investment portfolio. These factors also drove the capital position and book value of the shares. However, the positives were mitigated by higher-than-expected underwriting and operating expenses along with a deteriorating combined ratio, all of which dampened the underwriting results, bottom line and ROE.

The accident year 2007 primarily contributed to favourable development, reducing loss and loss adjustment expenses (LAE) by $2.2 million. This also helped the current accident year loss ratio to be flat at 78.2% from the prior quarter.

Amerisafe’s total revenue for the reported quarter was $74.9 million, up 18.6% from $63.1 million in the prior-year quarter, also exceeding the Zacks Consensus Estimate of $70.0 million. Gross premiums written for the quarter were $62.1 million, reflecting a 19.1% year-over-year surge. The uptick was driven by payroll audits and related premium adjustments for policies written in previous periods. These adjustments increased premiums by $3.8 million in the reported quarter, while they reduced premiums by $2.5 million in the year-ago quarter.

Furthermore, voluntary premiums written climbed 5.9% year over year in the reported quarter. Besides, net premiums earned jumped 17.3% from the year-ago quarter to $66.2 million. Net investment income, which represented about 9% of total revenue, was $6.7 million for the reported quarter, thereby improving 3.8% from the prior-year quarter. However, underwriting profit substantially reduced to $1.1 million against $6.1 million in the year-ago quarter.

On the flip side, insurance loss and loss adjusted expenses (LAE) increased 26.0% year over year to $49.6 million (or about 74% of net premiums earned). As a result, total expenses jumped 29.0% year over year to $65.4 million, while net underwriting expense ratio increased to 22.7% from 19.2% in the year-ago quarter due to higher underwriting and operating costs. Even net combined ratio for the reported quarter deteriorated to 98.4% from 89.2% in the prior-year quarter.

Full-Year 2011 Highlights

For full-year 2011, Amerisafe reported operating net income of $21.2 million or $1.14 per share compared with $32.1 million or $1.68 per share in 2010. Earnings per share also lagged the Zacks Consensus Estimate of $1.27.

Including net capital gains and valuation allowance, reported net income came in at $24.1 million or $1.29 per share versus $34.6 million or $1.81 per share in 2010.

However, Amerisafe’s total revenue increased 13.1% year over year to $280.7 million in 2011, and exceeded the Zacks Consensus Estimate of $275.0 million. Meanwhile, total expenses surged 24.3% year over year to $253.4 million. Net combined ratio deteriorated to 100.5% in 2011 from 92.4% in 2010. The effective tax rate reduced to 11.5% in 2011 from 22.0% in 2010.

Amerisafe exited 2011 with ROE of 7.1% that dipped from 10.9% in 2010. Operating ROE also plummeted to 6.3% from 10.2% in 2010. However, book value per share came in at $19.33 as on December 31, 2011, up 7.5% from $17.99 at 2010-end.

As on December 31, 2011, Amerisafe’s fair value of the portfolio, including cash and investments, stood at $890.7 million compared with $826.5 million at the end of 2010. The investment portfolio also improved to $806.0 million at 2011-end versus $765.5 million at 2010-end. Total shareholders’ equity stood at $350.9 million in 2011, up from $330.2 million at the end of 2010.

Share Repurchase Update

In November 2011, the board of Amerisafe had 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 32,610 shares at an average price of $18.78, for a total cost of $0.6 million including commissions. Since the initiation of its share repurchase program, the company has bought back shares worth $22.4 million, at an average price of $17.78 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. Amerisafe competes with SeaBright Insurance Holdings (SBX) and Employers Holders Inc. (EIG) in its industry space.

Currently, Amerisafe carries a Zacks Rank #2, implying a short-term Buy rating and a long-term Neutral stance.

 
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