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High Expenses Dent Amerisafe's 2Q

AMSF EIG

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Amerisafe Inc.’s (AMSF - Analyst Report) second-quarter 2012 operating earnings per share of 18 cents came in way behind the Zacks Consensus Estimate of 40 cents and the prior-year quarter’s earnings of 24 cents. Consequently, operating net income plunged 24.6% year over year to $3.36 million.

Including after-tax net realized gains of $0.09 million against $0.15 million in the year-ago period, reported net income declined to $3.45 million or 19 cents per share, compared with $4.6 million or 24 cents a share in the prior-year quarter.

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

The accident years prior to 2009 primarily contributed to the favourable development of $1.9 million, while the accident years 2010 and 2011 incurred $5.3 million of unfavorable development, thereby reducing LAE by $3.4 million. Nevertheless, the current accident year loss ratio was 76.5%, down from 79.3% from the prior-year quarter.

Amerisafe’s total revenue for the reported quarter was $76.6 million, up 14.2% from $67.1 million in the prior-year quarter, also edging past the Zacks Consensus Estimate of $76.0 million. Gross premiums written for the quarter were $85.5 million, reflecting a 17.3% 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 $4.5 million in the reported quarter, while they reduced premiums by $0.3 million in the year-ago quarter.

Furthermore, voluntary premiums written climbed 8.9% year over year in the reported quarter. In addition, net premiums earned increased 15.6% from the year-ago quarter to $69.7 million. Net investment income, which represented about 9% of total revenue, was $6.6 million for the reported quarter, almost in line with the prior-year quarter.

Conversely, insurance loss and loss adjusted expenses (LAE) increased 21.7% year over year to $56.7 million (or about 81% of net premiums earned). As a result, total expenses escalated 16.7% year over year to $72.6 million, while net underwriting expense ratio decreased to 22.0% from 24.7% in the year-ago quarter, due to higher premiums that were offset by growth in underwriting and operating costs.

Subsequently, underwriting loss soared to $2.7 million against $1.6 million in the year-ago quarter. Even net combined ratio for the reported quarter deteriorated to 103.8% from 102.6% in the prior-year quarter.

Financial Update

Amerisafe exited the reported quarter with ROE of 3.8% that dipped from 5.5% in year-ago quarter. Operating ROE also decelerated to 3.7% from 5.3% in prior-year period. However, book value per share came in at $19.98 as on June 30, 2012, up 8.0% from $18.50 in the prior-year quarter.

As on June 30, 2012, Amerisafe’s fair value of the portfolio, including cash and investments, stood at $878.1 million compared with $890.7 million at the end of 2011. However, the investment portfolio improved to $920.4 million at June 2012-end versus $806.0 million at 2011-end.

Total shareholders’ equity stood at $363.5 million at the end of June 2012, up from $349.4 million at the end of 2011. No shares were repurchased during the reported quarter. Meanwhile, Amerisafe revised its financial data for 2011 to reflect the retrospective adoption of a new accounting standard for policy acquisition costs. The financials for the first half of 2012 also reflect the change in the estimate of liability for state guaranty fund assessments.

Our Take

As expected, Amerisafe will continue to face an uncertain environment for the next few quarters as the economic fragility continues to hurt payrolls, which could further affect the 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. Higher-than-expected expenses further add to the woes and risk the profitability metrics. Nevertheless, an 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 and Employers Holders Inc. (EIG - Snapshot Report) in its industry space.

Currently, Amerisafe carries a Zacks Rank #3, implying a short-term Hold rating and a long-term Neutral stance.

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