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Higher Premiums Drive Amerisafe's 1Q

AMSF EIG

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Amerisafe Inc.’s (AMSF - Analyst Report) first-quarter 2012 operating earnings per share of 45 cents outpaced the Zacks Consensus Estimate of 33 cents and the prior-year quarter’s earnings of 35 cents, primarily on lower share count. Consequently, operating net income escalated 28.6% year over year to $8.4 million.

Including net realized gains of $1.8 million against $0.1 million in the year-ago period, reported net income soared to $9.6 million or 52 cents per share, compared with $6.6 million or 35 cents in the prior-year quarter.

Reported results reflect higher premiums written and earned that shored up the top line, underwriting results and investment portfolio. These factors also drove the capital position, book value of the shares and return on equity (ROE), while also improving combined ratio and other profitability metrics. However, the positives were mitigated by higher-than-expected loss and loss adjustment expenses (LAE) and tax expense along with lower investment yields.

The accident years prior to 2010 primarily contributed to the favourable development, reducing LAE by $1.6 million. This also helped the current accident year loss ratio to be 76.5%, slightly down from 77.0% from the prior-year quarter.

Amerisafe’s total revenue for the reported quarter was $78.7 million, up 17.5% from $67.0 million in the prior-year quarter, edging past the Zacks Consensus Estimate of $74.0 million. Gross premiums written for the quarter were $84.9 million, reflecting an 18.9% 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 $5.4 million in the reported quarter, while they reduced premiums by $0.1 million in the year-ago quarter.

Furthermore, voluntary premiums written climbed 11.3% year over year in the reported quarter. Besides, net premiums earned increased 16.1% from the year-ago quarter to $69.8 million. Net investment income, which represented about 9% of total revenue, was $6.9 million for the reported quarter, thereby improving 6.2% from the prior-year quarter. Subsequently, underwriting profit jumped to $2.8 million against $1.0 million in the year-ago quarter.

Conversely, insurance loss and loss adjusted expenses (LAE) increased 17.2% year over year to $51.8 million (or about 66% of net premiums earned). As a result, total expenses climbed 12.9% year over year to $67.2 million, while net underwriting expense ratio decreased to 21.1% from 24.2% in the year-ago quarter due to flattish growth in underwriting and operating costs. Even net combined ratio for the reported quarter improved to 96.0% from 98.3% in the prior-year quarter.

Financial Update

Amerisafe exited the reported quarter with ROE of 10.8% that rose from 8.0% in year-ago quarter. Operating ROE also improved to 9.5% from 7.9% in prior-year period. Moreover, book value per share came in at $19.78 as on March 31, 2012, up 8.4% from $18.24 in the prior-year quarter.

As on March 31, 2012, Amerisafe’s fair value of the portfolio, including cash and investments, stood at $868.7 million compared with $890.7 million at the end of 2011. However, the investment portfolio improved to $908.1 million at March 2012-end versus $806.0 million at 2011-end.

Total shareholders’ equity stood at $359.1 million at the end of March 2012, up from $349.4 million at the end of 2011. No shares were repurchased during the reported quarter.

Our Take

Amerisafe is expected to face an uncertain environment for the next few quarters as the economic fragility continues to hurt payrolls, which could further fade 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, an improved book value, ROE, 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 and Employers Holders Inc. (EIG - Snapshot Report) 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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