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Amerisafe Inc.’s (AMSF - Analyst Report) third-quarter 2012 operating earnings per share of 35 cents fell a penny short of the Zacks Consensus Estimate but surpassed the prior-year quarter’s earnings of 23 cents. Consequently, operating net income soared 48.2% year over year to $6.5 million.

Including after-tax net realized gains of $0.64 million against $0.5 million in the year-ago period, reported net income escalated to $7.1 million or 38 cents per share, compared with $4.9 million or 26 cents a share in the prior-year quarter.

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

The accident years primarily contributed to the favourable development of $1.6 million, while the accident years 2010 and 2011 incurred about $0.1 million of favourable development, thereby increasing LAE by $1.7 million. Consequently, the current accident year loss ratio was 76.5%, down from 78.2% in the prior-year quarter.

Amerisafe’s total revenue for the reported quarter was $80.4 million, up 12.0% from $71.7 million in the prior-year quarter. This also fell shy of the Zacks Consensus Estimate of $81.0 million. Gross premiums written for the quarter were $77.3 million, reflecting a 17.6% year-over-year expansion. The uptick was driven by payroll audits and related premium adjustments for policies written in previous periods. These adjustments increased premiums by $3.1 million in the reported quarter, while these had increased premiums by $2.5 million in the year-ago quarter.

Furthermore, voluntary premiums written jumped 16.6% year over year in the reported quarter. In addition, net premiums earned increased 12.4% from the year-ago quarter to $72.4 million. Net investment income, which represented about 8.5% of total revenue, was $6.8 million for the reported quarter, up 4.7% from the prior-year quarter.

Conversely, insurance loss and loss adjusted expenses (LAE) increased 9.2% year over year to $53.9 million (or about 74% of net premiums earned). As a result, total expenses grew 7.8% year over year to $72.6 million, while net underwriting expense ratio decreased to 22.8% from 25.4% in the year-ago quarter, due to higher premiums and a mere 0.9% growth in underwriting and operating costs.

Subsequently, underwriting profit stood at $1.1 million against a loss of $1.5 million in the year-ago quarter. Even net combined ratio for the reported quarter improved to 98.50% from 102.3% in the prior-year quarter.

Financial Update

Amerisafe exited the reported quarter with ROE of 7.7% that improved from 5.7% in year-ago quarter. Operating ROE also climbed to 7.1% from 5.2% in prior-year period. Additionally, book value per share came in at $20.46 as on September 30, 2012, up 8.6% from $18.84 in the prior-year quarter.

As on September 30, 2012, Amerisafe’s fair value of the portfolio, including cash and investments, stood at $882.6 million compared with $890.7 million at the end of 2011. Moreover, the investment portfolio improved to $929.1 million at September 2012-end versus $806.0 million at 2011-end. Total shareholders’ equity stood at $372.1 million at the end of September 2012, up from $349.4 million at the end of 2011.

On October 30, 2012, the board of Amerisafe protracted the company’s share repurchase program through December 2013. Since the initiation of its share repurchase program, the company has bought back about 1.26 million shares for $22.4 million, at an average price of $17.78.

However, no shares were repurchased during the first nine months of 2012, while the company had $24.4 million of shares available for repurchases as of September 30, 2012.

Our Take

Amerisafe has been benefiting from the exodus of some competition in the industry and the somewhat improved pricing environment, thereby creating excess capacity and demand. However, we remain cautious of adequate growth as 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. Higher-than-expected expenses further add to the woes and risks to the profitability metrics.

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 #4, implying a short-term Sell rating and a long-term Neutral stance.

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