TEXT-Fitch affirms Progressive Corps ratings

Fri Sep 28, 2012 4:06pm EDT

Sept 28 - Fitch Ratings affirms The Progressive Corporation's (NYSE:
PGR) ratings as follows:

--Issuer Default Rating (IDR) at 'A+';
--Senior debt ratings at 'A';
--Junior subordinated debt 'BBB+'.

Fitch also affirms Progressive's operating subsidiaries' Insurer Financial
Strength (IFS) rating at 'AA'. A complete list of ratings is provided at the end
of this release. The Rating Outlook is Stable.

Fitch's ratings are based on Progressive's excellent operating performance,
pricing and underwriting expertise, personal auto insurance franchise, modest
catastrophe risk, conservative investment allocation, and strong risk-based
capital position.

Progressive's overall GAAP combined ratios was 95.9% for first half 2012
compared to 92.5% for first half 2011 and a 93% for full year 2011. Fitch notes
that the 95.9% is virtually at PGR's stated limit of 96% and the company has
responded by increasing rates. Fitch believes these rate actions coupled with
some other management initiatives will slow written premium growth and allow the
company to finish out full year 2012 close to its 96% target.

Fitch believes that Progressive's financial leverage, as measured by total debt
to total capital, will remain within a reasonable range for the rating category
in the near term. The company's financial leverage at June 30, 2012 was 25.4%.
Fitch notes PGR's year end 2011 financial leverage ratio was 30.3%; however,
adjusting for the $350 million in debt that matured in January 2012 this ratio
was reduced to 26%.

Progressive's profitability promotes strong interest coverage. GAAP fixed charge
coverage for first half 2012 was 8.9 times (x) down from down from 13.3x for
first half 2011 and 11.4x at year end 2011. As PGR's target combined ratio
increases towards its 96% target, Fitch believes that interest coverage will be
closer to high single digits rather than the historical low double digits.

Fitch's ratings also reflect the limited product diversification and high
notional operating leverage of the company. Fitch notes that it would be short
sighted for Progressive, or any company, to diversify its product offerings
without a sound business justification for the sole purpose of diversification.

Progressive's high notional operating leverage potentially exposes capital to
unexpected pricing errors. This exposure is further exacerbated by the company's
monoline nature, which exposes the company to auto industry specific risks.
Thus, a sudden change in fortunes for auto writers, particularly in a manner
that is currently difficult to predict or model, would potentially have a
greater negative impact on Progressive's capital than it would for less
leveraged and more diversified companies.

Fitch continues to view Progressive as one of the strongest underwriters among
major property/casualty companies, and recognizes the company's history of
strong underwriting margins and stability. In fact, PGR's five and 10 year
combined ratio average is 93% and 90% respectively and over the last 44 years
PGR has a combined ratio in excess of 100% only three times. Fitch also
continues to recognize that when risk is adjusted to reflect this stable
history, risk-based capital ratios continue to look very strong.

Key rating triggers that could lead to a downgrade include the following:

--Failure to reduce the high operating leverage in an environment where the
combined ratio increases above 96%.
--Making a meaningful acquisition in a business line other than auto insurance.
--An increase in statutory net leverage, defined as net written premiums plus
total liabilities relative to policyholders surplus plus Progressive Investment
Company, Inc.'s assets, above 5.0x.
--A meaningful change to the auto insurance market that unfavorably alters
operating environment.

Fitch believes that a ratings upgrade for Progressive is unlikely in the near
term given the company's narrow product focus and high notional leverage. A
reduction in run-rate operating leverage or a significant increase in
capitalization, stemming from a permanent change in the company's operating
philosophy, could lead to a positive rating action.

Fitch has affirmed the following ratings with a Stable Outlook:

The Progressive Corporation
--IDR at 'A+';
--Senior debt at 'A';
--$150 million 7% due Oct. 1, 2013 at 'A';
--$500 million 3.75% due Aug. 23, 2021 at 'A';
--$300 million 6.625% due March 31, 2029 at 'A';
--$400 million 6.25% due Dec. 1, 2032 at 'A';
--Junior subordinated debentures at 'BBB+'.
--$732 million 6.7% due June 18, 2067 at 'BBB+'.

Fitch has affirmed the following companies' 'AA' IFS ratings with a Stable
Outlook:

The following are members of Progressive Direct Holdings:

Mountain Laurel Assurance. Co.
Progressive Advanced Insurance Company
Progressive Choice Ins Co.
Progressive Direct Insurance Co.
Progressive Freedom Ins Co.
Progressive Garden State Ins Co.
Progressive Marathon Ins Co.
Progressive MAX Ins Co.
Progressive Paloverde Ins. Co.
Progressive Premier Ins. Co. of IL
Progressive Select Insurance Co.
Progressive Universal Ins. Co. of IL

The following are members of Progressive Agency Holdings:

Drive New Jersey Ins Co.
Progressive American Ins. Co.
Progressive Bayside Ins. Co.
Progressive Casualty Ins. Co.
Progressive Classic Insurance Co.
Progressive County Mutual
Progressive Gulf Ins. Co.
Progressive Hawaii Ins. Co.
Progressive Michigan Ins. Co.
Progressive Mountain Insurance Co.
Progressive Northern Ins. Co.
Progressive Northwestern Ins.
Progressive Preferred Ins. Co.
Progressive Security Ins. Co.
Progressive Southeastern Ins. Co.
Progressive Specialty Ins. Co.
Progressive West Ins. Co.

The following are members of Progressive Commercial Holdings:

Artisan & Truckers Casualty Co.
Progressive Commercial Casualty Company
Progressive Express Ins. Co.
United Financial Casualty Co.

Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.

Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Sept. 19, 2012).

Applicable Criteria and Related Research:
Insurance Rating Methodology
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.