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State Auto Financial Corp.: A Strong Buy

Zacks Equity Research

On Aug 6, 2013, Zacks Investment Research upgraded State Auto Financial Corp. (STFC) to a Zacks Rank #1 (Strong Buy) from a Zacks Rank #3 (Hold).

Why the Upgrade?

State Auto Financial has been experiencing rising earnings estimates on the back of improved second-quarter 2013 results. Moreover, the company’s strategic efforts to enhance its underwriting capabilities and coverage ratios as well as healthy capital position have been impressive. Additionally, this property-casualty insurer delivered positive earnings surprises in 3 of the last 4 quarters with an average beat of 113.4%.

On Aug 1, State Auto Financial reported second-quarter 2013 operating earnings of 13 cents per share, which rebounded from the Zacks Consensus Estimate of a loss of 7 cents and year-ago quarter’s loss of 18 cents per share.

Results were supported by 2% growth in premiums earned, which was more than offset by 3.9% decline in net investment income, resulting in reduced total revenue. However, lower catastrophe as well as loss and loss adjusted expenses narrowed the underwriting loss, while improving the combined ratio, bottom line and return on equity (:ROE). Retention and new business also remained stable amid price hikes.

State Auto Financial’s strong brand name and strategy of growth through diversification, technology upgrade and agency expansion complements well with the recent industry price hikes and reinsurance programs. While catastrophe losses and weak property-casualty market lay down business risks, healthy risk-based capitalization and pricing initiatives as well as stable loss costs should drive growth in the long run. The creditworthiness of State Auto Financial also helps retain investor confidence in the stock.

Based on State Auto Financial’s fundamental strength and capital management, the Zacks Consensus Estimate for 2013 jumped 9.2% to $1.07 per share in the last 7 days. The estimate for 2014 is pegged at $1.37, up 7.0% in the last 7 days. Meanwhile, no downward revision in estimates was witnessed for both the years.

Other Stocks to Consider

Apart from State Auto Financial, HCI Group Inc. (HCI) carries a Zacks Rank #1 (Strong Buy). Other stocks that are outperforming in the insurance sector include and Everest Re Ltd. (RE) and Chubb Corp. (CB). Both the stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on STFC

Read the Full Research Report on HCI

Read the Full Research Report on CB

Read the Full Research Report on RE

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