We are downgrading our recommendation on Amerisafe, Inc. (AMSF) to Underperform based on its first quarter earnings that modestly lagged the Zacks Consensus Estimate, owing to low underwriting profits coupled with higher expenses. These significantly deteriorated both the combined ratio and the operating ROE
Overall, though the pricing environment has witnessed some improvement, the company is expected to face uncertainty for the next few quarters as the market weakness continues to hurt payrolls. The sluggish economic recovery and dampened macro factors have produced an operating ROE of 9.9% for 2010 against 15.4% in 2009, and 8.1% in the first quarter of 2011 against 14.7% in the year-ago period.
Our six-month target price of $20.00 per share equates to about 12.6x our earnings estimate for 2011. With no dividend to supplement, this target price implies a total expected negative return of 10.5% over that period, which is consistent with our Underperform recommendation.
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