On Jul 5, we downgraded our recommendation on Amerisafe Inc. (AMSF) to Neutral based on its consistently higher expense trend and lower yield from investments that limit earnings upside from current levels. Yet, improved underwriting performance instills confidence.
Why the Downgrade?
Amerisafe reported first-quarter 2013 operating earnings per share of 47 cents on May 2, exceeding 2 cents recorded in the year-ago quarter. However, results came in line with the Zacks Consensus Estimate. While total revenue of $86.5 million rose 9.9% year over year, it lagged the Zacks Consensus Estimate of $89 million. Higher premiums were partially offset lower investment income and higher loss and loss adjusted expenses.
Although underwriting profits surged over 50% during the reported quarter, underwriting expenses also grew about 29%, leading to deteriorated expense ratio and return on equity (ROE). Overall, Amerisafe delivered positive earnings surprises in 2 of the last 4 quarters with an average negative surprise of 10.7%.
Accordingly, the Zacks Consensus Estimate for both 2013 and 2014 stood intact at $2.04 per share and $2.48 per share, respectively, over the last 60 days. With the estimates of this specialty provider of workers' compensation insurance having witnessed no revisions, we see no clear directional pressure on the stock in the near term. Consequently, the company now has a Zacks Rank #3 (Hold).
While the pricing environment and industry demand has witnessed some improvement, the company is expected to face uncertainty in the upcoming quarters as the market weakness continues to hurt payrolls. Nevertheless, improved underwriting experience, prudent capital management, higher cash and investment portfolio, efficient capital deployment and affirmation of a strong financial strength rating augur decent long-term growth.
Other Insurers to Consider
While we prefer to remain on the sidelines on Amerisafe for now, other stocks that are outperforming in the insurance sector include Hilltop Holdings Inc. (HTH), AmTrust Financial Services Inc. (AFSI) and HCI Group Inc. (HCI). All these stocks carry a Zacks Rank #1 (Strong Buy).
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