Why the Downgrade?
Earnings estimates for Universal American have witnessed a decline owing to dismal third-quarter 2013 results, higher financial leverage and reduced investment returns. The company has delivered negative earnings surprises in 2 of the last 4 quarters, with a negative average of 66.6%.
Additionally, this specialty health and life insurer underperformed the year-to-date S&P 500 index, which posted growth of 25.9% against a negative return of 15.4% clocked by Universal American.
On Nov 7, Universal American reported third-quarter operating loss per share of 8 cents. Results deteriorated significantly from the year-ago quarter earnings of 16 cents and the Zacks Consensus Estimate of 7 cents.
While lower premiums, fees and net investment income pulled down the top line, which reduced 5.3% over the prior-year quarter, higher benefit expenses and deferred acquisition costs led to an overall operating loss. Consequently, book value per share and return on equity also suffered.
Universal American's attempts to focus primarily on Medicare Advantage markets are far from showing any desired positive results. Sluggish business renewals and lack of growth catalyst for its health insurance and managed care products in the intensely competitive healthcare industry further add to the woes. Amid this, a weakening financial leverage that deteriorated to 17.5% at the end of Sep 2013 from 14.5% at 2012-end are also making investors jittery.
Following the earnings release, the Zacks Consensus Estimate for 2013 plunged 67.6% to 12 cents per share in the last 30 days. Moreover, the estimate for 2014 decreased 38.5% to 24 cents in the last 30 days.
Meanwhile, the Most Accurate Estimate for Universal American's 2014 earnings stands at 23 cents a share, resulting in a negative Earnings ESP of 4.2%. Furthermore, no upward revision in estimates was witnessed for both the years.
Other Insurers Worth a Look
We prefer to avoid Universal American for the time being. However, investors interested in the insurance industry may consider stocks like StanCorp Financial Group Inc. ( SFG ), Hilltop Holdings Inc. ( HTH ) and Hallmark Financial Services Inc. ( HALL ). All these stocks carry a Zacks Rank #2 (Buy).