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State Auto, Navigators face volatility after earnings reports

State Auto Financial Corp. and Navigators Group Inc. rode out volatile trading sessions during the past week, following the companies' fourth-quarter 2017 earnings results.

After Navigators reported higher after-tax net operating earnings and after-tax net income for the quarter on Feb. 15, the company's share price shot up more than 17%. But the stock sunk nearly 9% over the following days, finishing the week up 6.61% to $54.05. The stock received two analyst downgrades during the week.

Despite the company reporting a good quarter, "the stock ran up so much that it went from cheap to expensive, and we had to downgrade" it, Sandler O'Neill Partners analyst Paul Newsome said in an interview.

The downgrade had less to do with the company's fourth-quarter results than investors being too "excited" about the stock, he explained.

"This quarter has been one of those quarters where trading has been kind of crazy," Newsome said, referencing the market's volatile start to 2018. "We've just seen very extreme reactions to the stocks both up and down. This is one of those examples."

Navigators reported after-tax operating earnings of $24.5 million, or 81 cents per share, up from $17.7 million, or 58 cents per share, in the year-ago period, reflecting strong fundamentals, Newsome said.

Keefe Bruyette and Woods analyst Christopher Campbell also downgraded the company for similar reasons. Campbell added that the sudden spike in share price after the earnings release reflected an improvement in the company's reserve development in the quarter.

The company added $44.6 million in reserves in the first three quarters of 2017 and stopped in the fourth quarter, Campbell said.

"I think the big driver behind the price reaction is that they recorded some favorable development," Campbell said in an interview.

Shares of State Auto also fell during the short trading week, with its price sliding 3.42% to $27.94 per share.

Campbell said the share price drop aligned more with State Auto's weaker earnings report. The company reported a higher expense ratio of 38% in the quarter, compared with 32.7% in the same year-ago period.

The company wrote that the expense ratio rose due to continued investment in its digital technology platform and changes in the company's agent bonus compensation plan.

The KBW analyst added that the company's continuing "disposal" of its specialty businesses also contributed to the drop in share price. State Auto has been withdrawing from less profitable businesses to turn around its financial performance, and it has taken rate increases to cover losses since the first quarter of 2017.

Shares of Kemper Corp. rose slightly in the week following its $1.4 billion bid for nonstandard auto insurer Infinity Property & Casualty Corp.

Kemper offered to acquire Infinity with cash and stock in a transaction valued $129 per share. As part of the deal, Infinity shareholders would receive $51.60 in cash and 1.2019 Kemper common shares for each Infinity share held.

Executives on a call to discuss terms of the deal said they want the company to become a leader in the nonstandard auto space. The deal is expected to close in the third quarter of 2018.

Kemper's shares rose 2.43% during the week to $56.85. Infinity's shares nudged 0.81% higher to $118.70.

The SNL Insurance Index dropped 0.73% for the week to 1,030.91, and the S&P 500 fell 1.00% to 2,703.96.