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On Mar 19, Zacks Investment Research upgraded Hilltop Holdings Inc. (HTH - Analyst Report) to a Zacks Rank #1 (Strong Buy).

Why the Upgrade?

Following a solid fourth-quarter 2012 earnings, Hilltop has been witnessing appreciation in its earnings estimates. In an effort to diversify its operations from core P&C insurance toward a profitable banking operation, this property-casualty (P&C) insurer acquired PlainsCapital Corp.– a highly lucrative $1 billion banking entity – on Nov 30. The acquisition will add significant stability and visibility to the operating leverage in the future.

On Mar 15, Hilltop reported fourth-quarter 2012 earnings of 10 cents per share, improving from the Zacks Consensus Estimate of 8 cents and year-ago period’s earnings of 9 cents a share. Earnings were primarily aided by higher revenue that escalated to $134.9 million, ahead of both the Zacks Consensus Estimate of $52.0 million as well as the year-ago quarter’s $38.2 million.

Higher interest and non-interest income led by the incorporation of PlainsCapital’s financials for Dec 2012 contributed to the upside in earnings. Further, the acquisition enhanced total assets to $7.29 billion at 2012-end from $925.4 at 2011-end. Hilltop remains well capitalized with Tier 1 leverage ratio of 13.08% and total capital ratio of 17.81% at 2012-end, all well above the regulatory requirements.

PlainsCapital is expected to be highly accretive to earnings from 2013 onward. Hilltop’s P&C insurance segment (NLASCO) and free cash of $200 million at 2012-end, should further position it to generate higher growth in the future.

Subsequently, the Zacks Consensus Estimate for 2013 increased 3.2% to $1.30 per share, over the last 7 days. For 2014, estimates improved 1.6% to $1.29 per share, over the last 7 days. No downward revisions have been witnessed for both the years. Moreover, the Most Accurate Estimate for Hilltop’s 2013 earnings stands at $1.40, resulting in a positive ESP (read: Zacks Earnings ESP: A Better Method) of 7.69%.

Other Stocks to Consider

Apart from Hilltop, other stocks that are outperforming in the insurance sector include EMC Insurance Group Inc. (EMCI - Snapshot Report), XL Group Plc (XL - Analyst Report) and Navigators Group Inc. (NAVG - Snapshot Report). All these stocks carry a Zacks Rank #1 (Strong Buy).

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