Fitch Ratings affirms The Progressive Corporation's (PGR) ratings as follows:
--Issuer Default Rating (IDR) at 'A+';
--Senior debt ratings at 'A';
--Junior subordinated debt 'BBB+'.
KEY RATING DRIVERS
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 was 93.3% as of Sept. 30, 2013 an improvement over full year 2012's result of 95.6% and Sept. 30, 2012 result of 95.9%. Embedded in PGR's culture is obtaining a GAAP calendar year combined ratio of 96% or better. In fact, the company's annual dividend and employee bonuses are tied, in part, to obtaining this goal.
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. PGR's five- and 10-year statutory combined ratio average is 93.4% and 90.4% respectively and over the last 45 years PGR has a combined ratio in excess of 100% only three times.
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, 2013 was 24.3%. Fitch's pro forma Sept. 30, 2013 financial leverage ratio, including the retirement of $150 million due Oct. 1, 2013 was 22.1%.
Progressive's profitability promotes strong interest coverage. Pro forma GAAP fixed charge coverage for Sept. 30, 2013 is 14.2x up from year end 2012 of 9.2x. If PGR's target combined ratio deteriorates 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. However, Fitch notes that diversification without a sound business strategy would be a credit negative.
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.
Key rating triggers that could lead to a downgrade include the following:
--Obtaining a GAAP calendar year combined ratio of 99% or higher;
--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;
--Failure to maintain statutory maximum dividend coverage ratio of 7.0x or higher on a sustained basis;
--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.
Fitch has affirmed the following ratings with a Stable Outlook:
The Progressive Corporation
--IDR at 'A+';
--Senior debt 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'.
Applicable Criteria and Related Research:
--'Insurance Rating Methodology' (Aug. 19, 2013).
Applicable Criteria and Related Research:
Insurance Rating Methodology
- Security Upgrades & Downgrades
- Fitch Ratings
Gerry Glombicki, CPA, +1-312-606-2354
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Gretchen K. Roetzer, +1-312-606-2327
Donald Thorpe, CFA, CPA, +1-312-606-2353
Brian Bertsch, New York, +1-212-908-0549