Amerisafe Upgraded to Neutral - Analyst Blog

Given the current market recovery factor and valued growth indicators, we are upgrading our recommendation for the shares of Amerisafe Inc. (AMSF) to Neutral from Underperform. Although the current economic turmoil has weakened growth and the operating leverage of organizations across the financial industry, we believe that once the economy rebounds, it will also have a substantial positive effect on the earning power of the company.
 
Amerisafe’s first quarter earnings of 58 cents per share came in substantially ahead of the Zacks Consensus Estimate of 44 cents and favorably ahead of 54 cents in the prior-year quarter. Results benefited, primarily due to substantial net realized gains on investments and lower expenses. However, the top line declined on a year-over-year basis as a result of lower net premiums earned and reduced investment income.
 
Amerisafe has a history of profitable underwriting for workers’ compensation insurance in hazardous industries. The policy renewal rates of the company on voluntary business were 91.1% in 2006, 90.8% in 2007, 91.7% in 2008 and 91.8% in 2009. We believe that the company’s specialized knowledge and extensive experience of insuring employers engaged in hazardous industries will help it serve its policyholders better, leading to enhanced employer loyalty and policy retention.
 
Further, higher premiums paid by the policyholders of Amerisafe along with its strategy of employing a proactive and disciplined approach in underwriting and prudent capital management contributed to the favorable growth of return on average equity (ROE) and book value per share. Despite the economic downturn, Amerisafe has been accomplishing its financial objective, producing an ROE of at least 15% over the long term, while maintaining optimal operating leverage in its insurance subsidiaries that is commensurate with the A.M. Best rating. Also, a continuous increase in book value was witnessed during the last several years.
 
Additionally, Amerisafe enjoys a strong financial strength rating (FSR) of “A-" (Excellent) from A.M. Best, reflecting a strong capital position and the ability to meet its claims. An “A-" rating is the fourth highest of the 15 rating categories used by A.M. Best. In April 2009, A.M. Best affirmed the company’s FSR. The outlook for the rating was upgraded to “positive" from “stable". The outlook upgrade was based on Amerisafe's excellent risk-adjusted capitalization and continuous improvement in its underwriting and operating results even during difficult financial times. The ratings also reflect the increased stability within Amerisafe’s loss reserves in recent years and its strong market presence in its niche workers’ compensation market for high hazard risks.
 
However, the workers’ compensation industry is cyclical in nature and gets influenced by many factors including price competition, natural and man-made disasters, change in interest rates and general economic conditions. Currently, the workers’ compensation insurance industry is in the midst of a soft market cycle, characterized by increased competition that results in lower premium rates, expanded policy coverage terms and higher commissions paid to agencies. Though Amerisafe is focused on maintaining underwriting profitability in this ongoing soft market environment, it is experiencing premium contraction. Total revenue for the last couple of years showed an overall decreasing trend as a result of a moderation in gross premiums written.
 
Moreover, though the company operates on a geographically diverse basis and is licensed to provide workers’ compensation insurance in 47 states, 54.4% of its voluntary in-force premiums for the full year 2009 were derived from the seven states in which it generated 5.0% or more of its gross premiums written. Unfavorable change in economic conditions affecting the states in which the company writes the major percentage of its gross premiums could adversely affect its results from operations and financial conditions.
 
Overall, although Amerisafe is expected to face the risk of a volatile economic environment in the near term as the state of economy continues to hurt payrolls, the pricing environment tends to augur well for long-term improvement. Furthermore, the claim frequency continues to fall and Amerisafe progresses well with its excellent expense management. Also, significant increase in premium retention helps the company gain market share.
 
On Thursday, the shares of Amerisafe closed at $16.89, up 2.4%, on Nasdaq Exchange.