Amerisafe Inc. (AMSF), a specialty provider of high-hazard workers’ compensation insurance, is becoming less attractive to analysts following its fourth quarter 2009 earnings release last week.
With a soft market cycle, characterized by increased competition that results in lower premium rates, expanded policy coverage terms and higher commissions paid to agencies, Amerisafe reported lower-than-expected quarterly results. The weak earnings ultimately translated to estimate revisions in the downward direction over the last 7 days.
Downward Estimate Revisions Trend
Over the last 7 days, 3 of the 7 analysts covering the stock have lowered their estimates for the first quarter of 2010, while no upward revisions were given. Currently, the Zacks Consensus Estimate for the first quarter is operating earnings of 45 cents per share, which would be down by 16.7% from the year-ago quarter.
The absence of any upward estimate revisions for the first quarter indicates a likelihood of downward pressure on the performance of the stock in the near term.
Disappointing Earnings Surprise History
With respect to earnings surprises, the stock has not been very steady over the last four quarters, with two negative surprises. The average remained negative at 6.3%. This implies that, on an average, Amerisafe has fallen short of the Zacks Consensus Estimate by 6.3% over that period.
The primary reason for missing expectations is lower revenues due to lower insured payrolls with the soaring level of unemployment and rising accident year loss ratios.
Downside Potential
The downside potential for the estimate for the first quarter, essentially a proxy for future earnings surprises, currently stands at 4.4%. Also, there are few positive forces to check the downside potential in the following quarters until the economy rebounds to its historical highs.
Earnings Recap and Thoughts
Amerisafe Inc.’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 the 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 the top line and an increase in expenses. For the reported quarter, the adjustment of the current accident year loss ratio resulted in an additional loss and loss adjustment expense of $12.1 million.
The current accident year loss ratio adjustment was primarily driven by severe claims occurring in the fourth quarter of 2009. Amerisafe’s results for the year-ago quarter included $9.3 million of favorable prior year loss development and $2.2 million of policyholder dividend expense in Florida.
Amerisafe’s total revenues for the quarter were $64.0 million, flat compared with the prior-year quarter. Gross premiums written for the quarter were $49.4 million, down 24.2% from $65.1 million in the year-ago quarter.
Voluntary premiums for policies written in the quarter decreased 11.8%, the effect of which was compounded by negative payroll audits and related premium adjustments for policies written in previous quarters.
We expect demand for workers’ compensation insurance to be restricted through the remainder of 2010 as the economy is expected to recover at a slower pace and unemployment will prevail at a high level.
Amerisafe’s net loss and loss adjustment expenses (LAE) increased 14.8% year-over-year to $42.7 million (or 74.9% of net premiums earned) from $37.2 million (or 51.8% of net premiums earned) in the prior-year quarter. Net combined ratio for the reported quarter deteriorated to 96.7% from 73.7% in the prior-year quarter. Return on average equity (ROE) for the quarter was 8.5%, compared with 8.4% in the prior-year quarter. Operating ROE for the reported quarter was substantially down to 8.5% from 27.8% in the prior-year quarter.
Amerisafe announced a share repurchase program for $25 million that will expire on Dec 31, 2010. The buyback initiative shows management’s confidence in its capital position. Amerisafe maintains an excellent risk-adjusted capitalization. We think the strength of capital assures its strong market presence in its niche workers’ compensation market for high-hazard risks.
Looking Ahead
We expect accident year loss ratios will increase modestly in the upcoming quarters. As a result, Amerisafe will exercise caution with respect to reserves.
Further, as the unemployment rate is expected to prevail at around 10% through the remainder of 2010, there will be lower demand for Amerisafe’s high-hazard workers’ compensation. As a result, net written premiums (NWP) for the entire workers’ compensation industry will continue to decline over that period.
However, management believes that there will be less pressure in terms of price competition and Amerisafe will be able to generate an accident year combined ratio better than its peers such as AFLAC Inc. (AFL), Catalyst Health Solutions Inc. (CHSI) and Unum Group (UNM).
Our Take on the Stock
Given the current market recovery and valued growth indicators, we are not too pessimistic on the stock. Also, with its existing strategy and additional expense management initiatives, we trust Amerisafe will be able to attain strong operating results again in the long run.
We therefore, recommend a long-term Neutral stance on the stock. Also, the stock retains its Zacks #3 Rank, which translates into a short-term “Hold” rating.
Read the full analyst report on “AMSF”
Read the full analyst report on “AFL”
Read the full analyst report on “CHSI”
Read the full analyst report on “UNM”
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