We have retained our recommendation on Amerisafe Inc. (AMSF) at Neutral based on the current sustainability factors, which underscore improvement in premiums’ growth amid higher-than-expected expenses.
The company’s 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.
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 also hampered the underwriting results, return on equity (:ROE), combined ratio and other profitability metrics.
Although the pricing environment and industry demand has witnessed some improvement, Amerisafe is expected to face uncertainty in the upcoming quarters as the market weakness continues to hurt payrolls. Meanwhile, sluggish investment yields pose direct risks on the earnings potential. Higher LAE and underwriting expenses also led to a surge in total expenses by 24.3% year over year in 2011, followed by a 14.9% growth during the first half of 2012.
Nevertheless, Amerisafe’s strong underwriting results are reflected in its steady operating performance, stemming from prudent management practices, better product pricing and demand structure, effective loss control, safety measures and an active claims management system. We believe that the company’s specialized knowledge and extensive experience of insuring employers engaged in hazardous industries will help it serve its policyholders better, leading to enhanced employer loyalty and policy retention.
Moreover, the prudent capital management, expanded share repurchase plan and affirmation of a strong financial strength rating augur decent long-term growth, while retaining investors’ confidence. Going ahead, we believe that Amerisafe is well positioned to capitalize on the changing market dynamics, wherein the workers' compensation market remains firm, as carriers re-evaluate their positions, thereby providing quite a boost to the company’s fundamental growth and competitive edge against peers such as SeaBright Holdings, Inc. (SBX) and Employers Holdings Inc. (EIG).
Amerisafe is slated to release its third quarter result after the closing bell on November 1, 2012. Based on the pros and cons, the Zacks Consensus Estimate pegs earnings for the third-quarter of 2012 at 38 cents per share, which is about 16% higher than the year-ago quarter. For 2012, earnings are expected to escalate about 23% over 2011 to $1.40 per share.
Currently, Amerisafe carries a Zacks Rank #3, implying a short-term Hold rating and indicating no clear directional pressure on the stock in the near term.
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