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Why Amerisafe Is a Strong Sell

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On Jun 28, 2014, Zacks Investment Research downgraded Amerisafe Inc. (AMSF - Free Report) to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Amerisafe has witnessed sharp downward estimate revisions since it reported first-quarter 2014 earnings that lagged the Zacks Consensus Estimate. Shares of this insurer have declined 5.2% since it reported first-quarter results to close at $40.31 in the last trading session. Given the absence of any significant near-term growth catalyst amid a moderate growth momentum, it has more downside left.

On Apr 30, Amerisafe reported first-quarter earnings per share of 56 cents, missing the Zacks Consensus Estimate by 11%. However, earnings increased year over year due to higher premiums and lower-than-expected decline in investment income.

Amerisafe incurred higher loss and loss adjustment expenses (LAE) compared with the prior-year quarter. Total expenses also increased from the first quarter of 2013 and underwriting expense ratio weakened due to higher underwriting and operating costs. These offset the positive impacts of the improvement in top line .

Additionally, the sharp increase of unemployment in the economy has hampered the investment portfolio of Amerisafe. The aforementioned factors may also have hindered share buybacks in all of 2012 and 2013. Given the current economic volatility, any significant improvement is unlikely in the near future.

Moreover, higher underwriting expenses also withheld the desired underwriting profitability of Amerisafe. Although combined ratio showed some year over year improvement it deteriorated sequentially by 1270 basis points.

The Zacks Consensus Estimate for 2014 decreased 7.8% to $2.47 per share over the last 60 days. For 2015, most of the estimates were revised downward over the last 60 days, sinking the Zacks Consensus Estimate by 7.2% to $2.98 per share.

Other Stocks to Consider

Better-ranked players in the insurance space that look attractive at current levels include Unum Group (UNM - Free Report) , China Life Insurance Co. Ltd. (LFC - Free Report) and Lincoln National Corp. (LNC - Free Report) . All these stocks have a Zacks Rank #2 (Buy).

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