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On Nov 15, we upgraded our recommendation on Hilltop Holdings Inc. (HTH - Analyst Report) to Outperform, based on its consistently strong financial results since the acquisition of PlainsCapital in Nov 2012. Strong fundamentals signal steady improvement in the upcoming quarters as well.

Why the Upgrade?

Estimates for this bank holding company and property-casualty insurer have been steadily rising since the company reported third-quarter 2013 results on Nov 12. Hilltop reported third-quarter operating earnings per share of 36 cents and revenues of $285 million, both of which modestly exceeded the Zacks Consensus Estimate for earnings of 31 cents a share and revenues of $263 million, respectively.

Both earnings and top line were also significantly higher than the year-ago quarter results of a loss of 7 cents per share and $43 million.

The notable upside was driven by improved premiums, interest and non-interest income, along with lower-than-expected loss adjusted expenses and provision for loan losses, which also resulted in an improved combined ratio. While underwriting, interest and non-interest expenses rose, operating cash flow and capital ratios improved.

A diversified business mix and adequate liquidity signify potential for consistent growth going forward. The Zacks Consensus Estimate for 2013 rose 5.5% to $1.34 per share, whereas it increased 9.6% to $1.60 per share for 2014, over the last 7 days. Consequently, with the Zacks Consensus Estimate for both 2013 and 2014 depicting clear upward pressure in the near term, Hilltop now has a Zacks Rank #1 (Strong Buy).

While the PlainsCapital acquisition has boosted the company’s operating and competitive efficiencies over the past few quarters, the latest FNB acquisition further amplifies the company’s asset-base, earnings potential and retail network. Moreover, Hilltop enjoys a diversified business-mix, a strong investment portfolio and operating cash flow. A sturdy risk-based capitalization also reflects adequate financial surplus and a risk-free balance sheet for the company.

Other Worthy Stocks to Consider

Apart from Hilltop, other stocks that are outperforming in the insurance sector include Aspen Insurance Holdings Ltd. (AHL - Snapshot Report), CNA Financial Corp. (CNA - Snapshot Report) and Hallmark Financial Services Inc. (HALL - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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