Amerisafe Inc.’s (AMSF) fourth quarter operating earnings per share of 38 cents came in line with the Zacks Consensus Estimate but were modestly ahead of 32 cents reported in the prior-year quarter.
Operating income increased 8.5% year over year to $7.1 million, primarily on lower share count. Including net realized gains of $0.1 million against $0.02 million in the year-ago period, net income for the reported quarter was $7.3 million or 39 cents per share, compared with $6.6 million or 28 cents in the prior-year quarter.
Results appreciated primarily due to higher premiums written and net realized gains along with lower expenses and improved combined ratio, which further drove the return on average equity (ROE). However, lower premiums earned and low investment yield hampered the top line growth.
The accident years 2006, 2007 and 2008 primarily contributed to favourable development, reducing loss and loss adjustment expenses (LAE) by $7.7 million. This also generated the marginal improvement in current accident year loss ratio to 83.5% from 90.2% in the year-ago quarter.
Amerisafe’s total revenue for the quarter was $60.5 million, down 1.3% from $63.1 million in the prior-year quarter, but exceeded the Zacks Consensus Estimate of $58.0 million. Gross premiums written for the quarter were $52.1 million, up 5.6% year over year.
The growth was driven by low negative payroll audits and related premium adjustments for policies written in previous periods. These adjustments reduced premiums written by $2.5 million in the reported quarter compared to $8.2 million in the year-ago quarter.
However, net premiums earned declined 1.0% from the year-ago quarter to $56.4 million. As a result, underwriting expense ratio increased to 22.6% from 21.4% in the year-ago quarter due to higher underwriting and operating costs.
On the other hand, insurance loss and LAE decreased 7.7% year over year to $30.4 million (or about 70% of net premiums earned) from $42.7 million (or about 75% of net premiums earned) in the prior-year quarter. As a result, total expenses decreased 5.1% year over year to $52.6 million.
Net investment income, which represented 10.2% of total revenue, was $6.5 million for the reported quarter, down 4.8% from the prior-year quarter.
Net combined ratio for the reported quarter improved to 92.6% from 96.7% in the prior-year quarter. Consequently, ROE for the quarter increased to 9.1% from 8.5% in the prior-year quarter. Operating ROE improved marginally to 8.8% from 8.5% in the year-ago quarter.
Highlights of 2010
For full year 2010, Amerisafe reported operating earnings of $30.9 million or $1.62 per share, down from $44.4 million or $2.17 per share in 2009. Earnings also came in a penny lower than the Zacks Consensus Estimate of $1.63 per share.
Excluding net realized capital gains, net income was $33.4 million or $1.75 per share as compared with $46.4 million or $2.22 per share in 2009. Total revenue for the quarter declined 12.0% year over year to $248.2 million, but exceeded the Zacks Consensus Estimate of $242.0 million.
Total expenses decreased 6.5% from 2009 to $205.7 million. Meanwhile, combined ratio deteriorated to 93.3% from 86.9% in 2009, primarily due to accentuated current year accident loss ratio that peaked to 81.8% from 73.8% in 2009. The accident year loss ratio for 2010 also exceeded the prior projection of 81.2% due to higher claims.
These factors also dampened ROE growth that was recorded at 10.6% for 2010, down from 16.0% in 2009. Operating ROE also declined to 9.9% from 15.4% in 2009. However, book value per share came in at $17.72 as on December 31, 2010, up 10.8% from $16.00 at the end of 2009.
As on December 31, 2010, Amerisafe held cash and investments of $826.5 million as compared with $800.5 million at the end of 2009. The fair value of the portfolio was $846.6 million at the end of the reported quarter. Total shareholders’ equity was recorded at $325.2 million, up from $302.4 million at the end of 2009.
Share Repurchase Update
During the reported quarter, Amerisafe repurchased stock worth approximately $1.7 million. As of December 31, 2010, Amerisafe had spent approximately $12.1 million on its share repurchase program.
Expanding its existing program, the board of Amerisafe had sanctioned another $25 million share buyback program, effective October 1, 2010, which is scheduled to expire by December 11, 2011. At the end of 2010, the company had about $23.3 million left under the current authorization.
Amerisafe is expected to face an uncertain environment for the next few quarters as the economic fragility continues to hurt payrolls and underwriting results. However, though the pricing environment is somewhat improving now, it fails to drive adequate growth due to challenging industry trends and robust price competition fuelled by excess capacity and muted demand.
Nevertheless, improved book value, prudent capital management, expanded share repurchase plan and a strong financial strength rating augur a decent mid- to long-term growth. Hence, we maintain a Neutral rating on the stock, with a Zacks #3 Rank over the short term.
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