UBS: We're Upgrading Progressive, Acquisition Will Drive Growth

In a report published Friday, UBS analysts upgraded their rating on

from Neutral to Buy, while raising the price target from $28 to $31. The recent acquisition is expected to drive premium growth in the company's Agency channel, while driving earnings in 2016 and beyond. Progressive completed the acquisition of a controlling stake in ARX Holdings on April 1, 2015. "Growth in Agency will come as PGR will have a true "package" policy (combining homeowners insurance and personal auto insurance) to sell through its Agency channel, fostering new business and improved retentions," the analysts stated. This, along with the high-single-digit growth in the company's Direct business, is expected to drive multiple expansion for the stock over the next 12 to 18 months. In the longer term, the analysts believe that Progressive is well positioned to benefit from the increase in short-term rates, given that it has "one of the shortest duration portfolios in the industry." According to the recent pricing trends survey by UBS, "While awareness of the acquisition was split evenly among our surveyed agents, 45 percent of respondents are more likely to place packaged business with PGR after the acquisition, assuming the rate is competitive. Among agents that already do business with PGR, 52 percent indicated they are more likely to place packaged business with PGR." On the other hand, the analysts believe that there could be an increase in the claims frequency for Progressive, which could lead to additional margin pressure.