Optimistic on Amerisafe Growth - Analyst Blog


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We have upgraded our recommendation on Amerisafe Inc. ( AMSF ) to Outperform based on consistent top-line growth and sound financial position witnessed over the last few quarters, which paves the way for an improved growth outlook.

The company's first-quarter 2012 operating earnings of 45 cents per share outpaced the Zacks Consensus Estimate of 33 cents per share and the prior-year quarter earnings of 35 cents per share. Consequently, operating net income escalated 28.6% year over year to $8.4 million.

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

Amerisafe has a history of profitable underwriting in the hazardous industries in which it operates. 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.

After a period of consistent declines in the past years, Amerisafe's top line started improving in 2011 with growth of 13.1% over 2010, followed by 17.5% year-over-year growth in the first quarter of 2012. The upward trend was driven by higher premiums and improvement in investment income.

Additionally, Amerisafe's strong underwriting results are reflected by 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. These factors have generated positive calendar-year reserve development trends.

Looking ahead, we believe that Amerisafe is well positioned to capitalize on changing market dynamics, wherein the workers' compensation market remains firm, as carriers re-evaluate their positions, thereby providing a boost to the company's fundamental growth and competitive edge against peers such as SeaBright Holdings, Inc. ( SBX ) and Employers Holdings Inc. ( EIG ).

Moreover, despite lingering macro concerns, Amerisafe holds a risk-free balance sheet. Armed with a strong cash and investment portfolio of $868.7 million at the end of the first quarter of 2012, up from $582.9 million at 2005-end, the company enjoys fair liquidity and capital flexibility. This also enables Amerisafe to efficiently deploy capital, primarily through share repurchases, thereby retaining investors' confidence going forward.

Nevertheless, although the pricing environment and industry demand has witnessed some improvement, Amerisafe is expected to face uncertainty in the upcoming quarters as market weakness continues to hurt payrolls, while sluggish investment yields pose direct risks on the earnings potential. Nevertheless, prudent capital management, expanded share repurchase planand affirmation of a strong financial strength rating augur decent long-term growth.

Based on the pros and cons, the Zacks Consensus Estimate pegs earnings for the second quarter of 2012 at 40 cents per share, which is about 74% higher than the year-ago quarter. For 2012, earnings are expected to escalate about 52% over 2011 to $1.73 per share.

Currently, Amerisafe carries a Zacks Rank #1, implying a short-term Strong Buy rating, at par with its long-term Outperform recommendation.

AMERISAFE INC (AMSF): Free Stock Analysis Report
EMPLOYERS HLDGS (EIG): Free Stock Analysis Report
SEABRIGHT INSUR (SBX): Free Stock Analysis Report
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Business , Stocks
Referenced Stocks: AMSF , EIG , SBX

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