Fitch Affirms Progressive's Ratings; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed The Progressive Corporation's (NYSE: PGR) Issuer Default Rating (IDR) at 'A+'; senior debt ratings at 'A'; and junior debt at 'BBB+'. Fitch has also affirmed 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.

KEY RATING DRIVERS

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 ratio was 92.8% through August 2014, an improvement over full year 2013's result of 93.5%. Embedded in PGR's culture is obtaining a GAAP calendar year combined ratio of 96% or better. In fact, the company's annual dividend to shareholders and employee bonuses are based on 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.

Progressive's financial leverage, as measured by total debt to total capital, is expected to remain within a reasonable range for the rating category in the near term. The company's financial leverage at June 30, 2014 was 25.0%.

Progressive's profitability promotes strong interest coverage. GAAP fixed charge coverage at year-end 2013 was 12.9x up from year end 2012 of 9.2x. Similarly, statutory interest coverage improved to 9.9x at year-end 2013 compared to 7.9x for prior year-end. Fitch believes that GAAP fixed charge coverage will range from high single digits to low double digits over the near term.

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.

RATING SENSITIVITIES

Factors that could lead to a ratings downgrade include the following:

--Obtaining a GAAP calendar year combined ratio of 99% or higher.

--Failure to maintain a Prism score of 'Very Strong' or better. Based on year-end 2013 data PGR's Prism score was 'Very Strong.'

--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+';

--$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';

--$350 million 4.35% due Apr. 25, 2044 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.

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 Insurance Co.

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' (Nov. 13, 2013).

Applicable Criteria and Related Research:

Insurance Rating Methodology -- Effective Nov. 13, 2013-Sept. 4, 2014

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=723072

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=880094

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Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1-312-606-2354
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gerry Glombicki, CPA
Director
+1-312-606-2354
or
Committee Chairperson
Donald Thorpe, CFA, CPA
Senior Director
+1-312-606-2353
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Christopher A. Grimes, CFA
Director
+1-312-606-2354
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gerry Glombicki, CPA
Director
+1-312-606-2354
or
Committee Chairperson
Donald Thorpe, CFA, CPA
Senior Director
+1-312-606-2353
or
Media Relations
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com