Amerisafe Upgraded to Buy

Amerisafe, Inc. (AMSF - Analyst Report) is a specialty provider of workers’ compensation insurance, which markets and underwrites its insurance through its subsidiaries.

On April 29, 2009, AMSF reported its 1Q09 financial results. Diluted earnings allocable to common shareholders came in at $0.54 per share, up 92.4% from $0.28 per share in the prior quarter but down 8.2% from $0.58 per share in the prior-year quarter. During the quarter, the top line was down, due primarily to decrease in audit adjustments and a decline in net premiums earned that resulted from the soft insurance market condition as a whole. However, effective expense management, stable pricing environment and growth in the voluntary workers' comp business were impressive during 1Q09.

In April 2009, A.M. Best revised its outlook to positive from stable and affirmed its financial strength rating of A- (Excellent) for the company and its wholly-owned insurance subsidiaries.

Based on 1Q09 results, we are revising our FY09 and FY10 earnings estimates to $2.17 per share and $2.37 per share, respectively. Our six-month target price of $18.00 per share equates to about 8.3 times our forward estimate for 2009 and a multiple of 1.20 times our September 30, 2009 estimated book value of $14.99 per share. With no dividend to supplement, this target price implies about 10% expected total return over this period.

Though the company faces an uncertain environment for the next couple of quarters as the recession continues to hurt the payrolls, the pricing environment in now improving. Further, claim frequency continued to fall and the company continued its excellent expense management. Also, the premium retention increased significantly and the company continued to gain market share. In view of the above, we are upgrading our recommendation on AMSF from Hold to Buy.