Amerisafe Results Pretty Unsafe (revised) - Analyst Blog

Amerisafe Inc.'s (AMSF) third quarter operating earnings per share of 26 cents came in substantially behind the Zacks Consensus Estimate of 46 cents and 64 cents in the prior-year quarter.

Operating income declined 62.6% year over year to $4.9 million. Including net realized losses of $0.6 million against net realized gains of $1.9 million in the year-ago period, net income for the reported quarter was $4.4 million or 23 cents per share, compared with $15.1 million or 74 cents in the prior-year quarter.

Results were disappointing primarily due to lower premiums written and earned coupled with low investment yield and  higher-than-expected expenses. This also led to reduced top and bottom lines along with declines in ROE and higher combined ratio.

The accident years 2005, 2006 and 2007, partially offset by accident year 2009, primarily contributed to favourable development, reducing loss and loss adjustment expenses (LAE) by $5.3 million. However, current accident year loss ratio increased to 95.5% from 69.0% in the year-ago quarter. Amerisafe increased the accident year loss ratio for 2010 from 74.0% to 81.2% due to higher claims.

Amerisafe's total revenue for the quarter was $60.5 million, down 10.0% from $67.2 million in the prior-year quarter, but came in above the Zacks Consensus Estimate of $58 million. Gross premiums written for the quarter were $52.2 million, down 5.3% from $55.1 million in the year-ago quarter. Gross premiums shrunk primarily as a result of decline in voluntary premiums for policies written in the quarter, the effect of which was accentuated by negative payroll audits and related premium adjustments for policies written in the previous quarters.

Net premiums earned declined 6.4% from the year-ago quarter to $54.4 million. However, underwriting expense ratio decreased to 15.4% from 21.6% in the year-ago quarter due to rate reductions for certain loss-based assessments and lower fixed costs.

Insurance loss and LAE increased 39.9% year over year to $46.7 million (or 85.8% of net premiums earned) from $33.4 million (or 57.5% of net premiums earned) in the prior-year quarter. As a result, total expenses increased 19.8% year over year to $55.7 million.

Net investment income, which represented 10.9% of total revenue, was $6.6 million for the reported quarter, down 4.3% from the prior-year quarter.

Net combined ratio for the reported quarter deteriorated to 101.7% from 79.3% in the prior-year quarter. Consequently, return on average equity (ROE) for the quarter was 5.5%, compared with 19.3% in the prior-year quarter.

However, book value per share came in at $17.26 as on September 30, 2010, up 8.3% from $15.94 in the prior-year quarter.

As on September 30, 2010, Amerisafe held cash and investments of $806.1 million as compared with $801.7 million as of June 30, 2010. The fair value of the portfolio was $841.3 million at the end of the reported quarter. Total shareholders' equity was recorded at $318.2 million, up from $316.4 million at the end of June 30, 2010.

Share Repurchase Update

During the reported quarter, Amerisafe repurchased stock worth $3.8 million. As of September 30, 2010, Amerisafe had spent approximately $10.4 million on its share repurchase program that authorises to buy back shares up to $25 million. This share repurchase program is scheduled to expire on December 31, 2010.

Replacing its existing share buyback program, the board of Amerisafe has sanctioned $25 million effective October 1, which is scheduled to expire on December 11, 2011. This new repurchase plan replaces the old one, it does not add to the existing share buyback totals.

Amerisafe is expected to face an uncertain environment for the next few quarters as the state of the economy continues to hurt payrolls, and though the pricing environment is somewhat improving now, it fails to drive growth for the company. However, 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, which carries a Zacks #3 Rank over the short term.

(We are reissuing this article to correct a mistake. The original article, issued earlier today, should no longer be relied upon.)