Given the critical sustainability factor in the current sluggish economic recovery, we have recently downgraded our recommendation on Amerisafe Inc. (AMSF) to Underperform.
Amerisafe’s fourth quarter operating earnings of 32 cents per share came in substantially short of the Zacks Consensus Estimate of 58 cents. This also compares unfavorably with earnings of 94 cents in the prior-year quarter. Results for the reported quarter exclude net realized after-tax capital gains and losses.
Results deteriorated due to a year-over-year decrease in top line and an increase in expenses. For the reported quarter, the adjustment of current accident year loss ratio resulted in an additional loss and loss adjustment expense (LAE) of $12.1 million. The current accident year loss ratio adjustment was primarily driven by severe claims occurring in the reported quarter.
Headquartered in DeRidder, Louisiana, Amerisafe Inc. is a specialty provider of workers’ compensation insurance, which markets and underwrites its insurance through its subsidiaries.
Amerisafe’s focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in fewer but more severe claims than many other workers’ compensation insurance companies.
Additionally, employers engaged in hazardous industries pay substantially higher than average rates for workers’ compensation insurance due to the inherent dangers in the workplace.
Amerisafe has a history of profitable underwriting in these industries. The policy renewal rates of the company on voluntary business were 91.1% in 2006, 90.8% in 2007, 91.7% in 2008 and 91.8% in 2009. 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.
However, the workers’ compensation industry is cyclical in nature and influenced by many factors including price competition, natural and man-made disasters, changes in interest rates and general economic conditions.
Currently, the workers’ compensation insurance industry is in the midst of a soft market cycle, characterized by increased competition that results in lower premium rates, expanded policy coverage terms and higher commissions paid to agencies.
Though the company is focused on maintaining underwriting profitability during the ongoing soft market environment, it is experiencing premium contraction. Total revenue for the last couple of years showed an overall decreasing trend as a result of a moderation in gross premiums written.
Also, while the economy is showing signs of recovery, there are lingering concerns. The sharp increase in the level of unemployment is one of the major worries at present. Rising unemployment could result in lower revenues due to lower insured payrolls, though Amerisafe’s major industry sector (high-hazard) is expected to be slightly less affected than other industries/sectors. Also, any change in the workers’ compensation laws could affect revenues.
However, improved premium retention, prudent capital management and a strong financial strength rating augur well for a decent mid- to long-term growth. On the other hand, though the pricing environment is now improving somewhat, the company is expected to face uncertainty for the next few quarters as the market weakness continues to hurt payrolls.