Fitch Affirms Progressive’s Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)-- 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 follows the end of the 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 for nine months ended Sept. 30, 2011 and 2010 were 93% and 92.2%, respectively.

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 Sept. 30, 2011 increased to 29.6% from 23.6% at June 30, 2011 due to its $500 million senior debt issuance which will refinance maturing debt in 2012. Fitch views this increase as temporary and within expectations. Progressive's profitability promotes strong interest coverage of 10.5 times (x) at Sept. 30, 2011.

The 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. 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 decline in the ratio of statutory maximum dividend to interest expense of less than 5.5x.

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';
--$350 million 6.375% due Jan. 15, 2012 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+'.
--$777 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
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. 22, 2011).

Applicable Criteria and Related Research:

Insurance Rating Methodology

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Fitch Ratings
Primary AnalystGerry Glombicki, CPA, +1-312-606-2354
Director
Fitch, Inc
70 West Madison Street
Chicago, IL 60602
or
Secondary AnalystGretchen K. Roetzer, +1-312-606-2327
Director
Committee ChairpersonDonald Thorpe, CFA, CPA, +1-312-606-2353
Senior Director
or
Media RelationsBrian Bertsch, +1-212-908-0549 (New York)
[email protected]

Source: Fitch Ratings