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On February 13, we reiterated our Neutral recommendation on Amerisafe Inc. (AMSF - Analyst Report) based on its steady growth momentum and prudent capital management. However, higher operating and underwriting expenses deter desired growth.

Why Neutral?

Estimates of this workers’ compensation insurance provider have moved down only slightly since it reported the third quarter results on November 2. Amerisafe’s third quarter operating earnings per share and revenue of 35 cents and $80.4 million marginally missed the Zacks Consensus Estimate of 36 cents and $81.0 million, respectively.

Reported results reflect higher premiums written and earned that boosted the top line and the underwriting results. In addition improved investment portfolio and capital position drove the book value of the shares, return on equity (ROE), combined ratio and other profitability metrics. However, the positives were substantially offset by higher-than-expected tax, underwriting and loss and loss adjustment expenses (LAE) along with lower investment yields.

Following the release of the third quarter results, the Zacks Consensus Estimate for 2012 inched down 1.4% to $1.36 per share in the last 90 days. However, the Zacks Consensus Estimate for 2013 moved up by a penny to $1.84 a share. With the Zacks Consensus Estimates for both 2012 and 2013 showing no clear directional pressure on the stock in the near term, the company now has a Zacks Rank #3 (Hold).

While Amerisafe’s results have benefited from the improved pricing environment and industry demand, the company is expected to face uncertainty in the upcoming quarters as the market weakness continues to hurt payrolls, while sluggish investment yields pose direct risks on earnings expansion. Nevertheless, prudent capital management, improved ROE and affirmation of a strong financial strength rating bode well for decent long-term growth.

Other Stocks to Consider

Besides Amerisafe, other stocks in the insurance sector that are currently performing well include Employers Holdings Inc. (EIG - Snapshot Report), RLI Corp. (RLI - Analyst Report) and XL Group Plc (XL - Analyst Report). All these carry a Zacks Rank #1 (Strong Buy).

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