Is it Time to Move Out of Universal American Corp. (UAM)?

On Dec 30, 2014, Zacks Investment Research downgraded Universal American Corp. UAM by two notches to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #3 (Hold).

Why the Downgrade?

Earnings estimates for Universal American have been experiencing a downturn since the company reported dismal third-quarter 2014 results, while persistently low premium revenues cast a disappointing outlook for fourth-quarter 2014 as well. Additionally, this healthcare insurer has delivered negative earnings surprises for all of the trailing four quarters, with an average miss of 81.1%.

On Oct 29, Universal American reported third-quarter 2014 operating earnings per share of 1 cent, which was narrower than the Zacks Consensus Estimate of 5 cents. However, results tightened from the loss of 7 cents a share in the prior-year quarter.

The downsides were led by historically low memberships and premium yield per member due to a change in the membership mix and the new Affordable Care Act fee. This not only affected the premium income adversely but also reduced the top line by about 13% year over year in the first nine months of 2014.

Alongside, Universal American's increased concentration of operations in the competitive markets of Texas and Northeast are restricting growth. Premiums are also unlikely to improve in the upcoming quarters, given the substantial changes in the Medicare Advantage products. Moreover, higher dividends from its insurance subsidiaries are weighing on the risk-adjusted capital.

Going forward, absence of any major growth catalyst amid the aforementioned factors may further drag estimates, thereby keeping investors at bay.

Meanwhile, the Zacks Consensus Estimate for 2014 and 2015 plunged 16.7% and 7.8% to 10 cents and 24 cents per share, respectively, in the last 60 days. There were no upward estimate revisions for both the years over the same time frame.

Moreover, the Most Accurate estimate for Universal American's 2014 and 2015 earnings currently stand at 9 cents and 23 cents a share, translating into Earnings ESP of -10.0% and -4.2%, respectively. This indicates likely earnings miss for both the years.

Other Worthy Insurers

While we prefer to avoid Universal American for the time being, some better-ranked insurers such as American Equity Investment Life Holding Co. AEL, StanCorp Financial Group Inc. SFG, both sporting a Zacks Rank #1 (Strong Buy), are worth considering. Another peer, Lincoln National Corp. LNC, with a Zacks Rank #2 (Buy), also looks promising.