An Insurance Pair Trade: Overweight Allstate, Underweight Progressive

Citi has initiated a pair trade recommendation of overweighting Allstate Corp (NYSE: ALL) and underweighting Progressive Corp (NYSE: PGR)."We think underlying margins for Progressive will deteriorate over the balance of 2016. This is the polar opposite of Allstate, where we expect underlying auto margins to improve from 1% in 2015, to 4-5% in 2017 as pricing accelerates and loss trends moderating in the Agency Auto," analyst James Naklicki wrote in a note.Naklicki said Allstate's stock is worth $78 over the next 12 months, for a potential total return of 18 percent. On the other hand, Progressive is expected to trade to $31 over the next 6 months, an expected return, not including the dividend, of -7 percent.The analyst said the risk to the pair trade recommendation is that loss trends at Progressive come in below the usual 4 percent level, which would boost margins. On the Allstate side, the company's homeowners business is operating near peak margins, while pricing trends have been moderating. "Allstate has a material contribution to earnings from its alternative portfolio. If yields on the portfolio fall faster than expected, consensus EPS projections would prove too aggressive, and would need to come down," Naklicki highlighted.Naklicki rates Allstate Buy and Progressive Sell.According to TipRanks, Naklicki has a success rate of 67 percent with an average return per recommendation of +7.2 percent. The analyst is ranked 1,480 out of 3,986 analysts.At the time of writing, shares of Allstate were down 0.19 percent to $67.31 and Progressive fell 0.99 percent to $33.07.