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Amerisafe Stays Neutral

Zacks Equity Research

On Oct 4, we reiterated our recommendation on Amerisafe Inc. (AMSF) at Neutral based on its steady operating growth and financial sturdiness. However, higher expenses and low investment yields simultaneously raise caution.

Why the Retention?

Estimates for Amerisafe have remained steady since the company reported its second-quarter 2013 results on Jul 31. The company’s earnings per share of 45 cents and revenues of $87.5 million exceeded the year-ago results by 150% and 14.2%, respectively. However, both the top and bottom line lagged the Zacks Consensus Estimate by 3.8% and 10%, respectively.

While higher premiums shored up the top line as well as the underwriting results, higher underwriting expenses along with lower investment yields deterred the desired upside. Nevertheless, improved investment portfolio and capital position drove the book value of the shares, operating cash flow, return on equity (:ROE) and combined ratio.

Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 edged down 1% to $1.96 per share in the last 60 days. Additionally, the Zacks Consensus Estimate for 2014 remained static at $2.47 a share. With the Zacks Consensus Estimate for both 2013 and 2014 showing slight downward pressure on the stock in the near term, the company now has a Zacks Rank #4 (Sell).

However, on a year-over-year basis, earnings in 2013 is expected to increase 32.3% over 2012, and further escalate 26.1% in 2014.

Despite the lingering macro concerns, Amerisafe holds a risk-free balance sheet. Additionally, the company’s growth is sustained by its double-digit growth in premiums written, fair liquidity, capital flexibility and an enhanced operating cash flow, which spiked 41.9% in the first half of 2013.

Amerisafe is well-positioned to capitalize on the changing market dynamics, wherein the workers' compensation market remains firm as carriers re-evaluate their positions. This provides quite a boost to the company’s fundamental growth. These factors score well with the ratings agencies as well.

However, lower investment yields deters the desired upside in earnings. Higher loss and loss adjusted expenses (:LAE) as well as volatile underwriting experience further add to the woes, also hindering share buybacks during the whole of 2012 and so far in 2013.

Other Financial Stocks That Warrant a Look

While we prefer to avoid Amerisafe for some time, other stocks in the financial sector that are outperforming include Employers Holdings Inc. (EIG), Total System Services Inc. (TSS) and Everest Re (RE). All these stocks carry a Zacks Rank #1 (Strong Buy).

Read the Full Research Report on TSSRead the Full Research Report on RERead the Full Research Report on AMSFRead the Full Research Report on EIGZacks Investment Research