Amerisafe Inc.’s (AMSF) second-quarter operating earnings per share of 23 cents substantially lagged the Zacks Consensus Estimate of 38 cents and 53 cents reported in the prior-year quarter.
Operating income plummeted 56.4% year over year to $4.4 million. Including net realized gains of $0.15 million against $0.29 million in the year-ago period, net income for the reported quarter was $4.6 million or 24 cents per share, compared with $10.4 million or 54 cents in the prior-year quarter.
Results worsened primarily due to higher underwriting losses, reduced investment income and higher-than-expected expenses, which further impacted the combined ratio and weakened the return on average equity (ROE).
However, higher premiums earned shored up the top-line growth while a modest cash and capital position coupled with lower share count, which supported the growth in book value per share.
The accident years 2003, 2006 and 2007 primarily contributed to favourable development, reducing loss and loss adjustment expenses (LAE) by $1.2 million. However, current accident year loss ratio improved to 77.0% from 78.2% in the year-ago quarter.
Amerisafe’s total revenue for the quarter was $67.1 million, up 11.6% from $60.1 million in the prior-year quarter, also exceeding the Zacks Consensus Estimate of $65.0 million. Gross premiums written for the quarter were $72.9 million, up 15.8% year over year.
The uptick was driven by low negative payroll audits and related premium adjustments for policies written in previous periods. These adjustments reduced premiums written by $0.3 million in the reported quarter compared to $9.2 million in the year-ago quarter.
Besides, net premiums earned jumped 13.7% from the year-ago quarter to $60.3 million. Net investment income, which represented 9.8% of total revenue, was $6.6 million for the reported quarter, declining 1.2% from the prior-year quarter.
On the flip side, insurance loss and loss adjusted expenses (LAE) increased 38.2% year over year to $46.6 million (or about 77% of net premiums earned). As a result, total expenses surged drastically by 33.4% year over year to $62.3 million, while underwriting expense ratio increased to 24.8% from 23.3% in the year-ago quarter due to higher underwriting and operating costs.
Further, net combined ratio for the reported quarter deteriorated to 102.7% from 87.3% in the prior-year quarter. Consequently, ROE for the quarter plummeted to 5.5% from 13.3% in the prior-year quarter. Operating ROE also dipped to 5.3% from 13.0% in the year-ago quarter. However, book value per share came in at $18.31 as on June 30, 2011, up 7.6% from $17.01 at the end of the prior-year quarter, primarily due to lower share count.
As on June 30, 2011, Amerisafe’s fair value of the portfolio, including cash and investments, stood at $828.9 million as compared with $826.5 million at the end of 2010. Total shareholders’ equity was recorded at $337.2 million, up from $325.2 million at the end of 2010.
Amerisafe did not make any repurchases during the reported quarter. At the end of June 2011, the company had about $20.4 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 owing to challenging industry trends and robust price competition fueled by excess capacity and muted demand. Nevertheless, improved book value, prudent capital management, expanded share repurchase plan and a strong financial strength rating augur well for decent growth in the mid- to long-term.
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