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Meadowbrook Insurance: A Strong Sell

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On Feb 22, Zacks Investment Research downgraded Meadowbrook Insurance Group Inc.  to a Zacks Rank #5 (Strong Sell) from a Zacks Rank #3 (Hold).

Why the Downgrade?

Earnings estimates for Meadowbrook have declined owing to disappointing fourth-quarter 2013 results, higher debt and reduced investment returns. The company has delivered negative earnings surprises for 3 straight quarters, with an average miss of 226.9%.

Additionally, this multi-line property-casualty and specialty insurer underperformed the one-year S&P 500 index, which posted growth of 21.9% against a negative return of 25% clocked by Meadowbrook.

On Feb 18, Meadowbrook reported fourth-quarter operating loss per share of 30 cents. Results desperately lagged earnings of a penny in the year-ago quarter and the Zacks Consensus Estimate of earnings of 12 cents.

A year-over-year fall of 11.4% in total expense was more than offset by 34.4% plunge in the top line, due to substantially weak premiums earned and net realized investment gains. Also, combined ratio, operating cash flow and book value per share witnessed deterioration, while debt remained elevated, weakening leverage. No shares were bought back in 2013.

Further adding to the investors’ jitters, management pegged gross written premiums for 2014 in the band of $775−800 million, substantially lower than $944 million earned in 2013.

Following the earnings release, the Zacks Consensus Estimate for 2014 plunged 19.2% to 42 cents per share in the last 7 days. Moreover, the estimate for 2015 is pegged at 58 cents a share, down 14.7% during the same period. This reflects a cautious estimate, below the company’s earnings guidance of 50−70 cents per share for 2014.

Meanwhile, the Most Accurate estimate for Meadowbrook’s 2014 and 2015 earnings stands at 25 cents and 40 cents a share, resulting in an Earnings ESP of -40.5% and -31.0%, respectively. No upward revision in estimates was witnessed for both the years.

Other Stocks to Consider

While we prefer to avoid Meadowbrook at present, some top-ranked insurers worth considering are Ace Ltd. , Aegon NV (AEG - Free Report) and RLI Corp. (RL - Free Report) I). All these stocks sport a Zacks Rank #1 (Strong Buy).

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