Why The Travelers (TRV) Should Buy Progressive (PGR) - MKM Partners

Considering the current underwriting environment with low premium growth and interest rates, merger activity still makes sense for financial reasons and even better sense if there is a good strategic rationale behind it. Given Progressive's (NYSE: PGR) valuation, a deal would be modestly dilutive to Travelers (NYSE: TRV) earnings until potential synergies come through, but the consistency of Progressive's auto earnings may be sufficient to support this transaction. Travelers has a leading presence in the small commercial insurance business where a significant segment of it is likely headed over to the direct channel from the independent agency channel over the next five to 10 years and could significantly benefit from acquiring Progressive’s direct insurance technology, arguably one of the best in all of insurance.

Because Progressive is chiefly in the short tail personal auto insurance business, it does not earn nearly as much investment income as Travelers, however, it has a relatively stable underwriting history. Its more stable business should cushion some of the volatility in Travelers business.

The proposed merger between Travelers and Progressive would likely be low single-digit dilutive to operating income per share, with likely upside to synergies in the coming years. Based on a 30% premium to Progressive’s current price of about $33, the firm's 2017E pro-forma operating income per share equals approximately $9.80 for a P/E ratio of about 11x.

For an analyst ratings summary and ratings history on Travelers click here. For more ratings news on Travelers click here.

Shares of Travelers closed at $111.39 yesterday.

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