Fitch Affirms Progressive's Ratings; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed The Progressive Corporation's PGR Issuer Default Rating (IDR) of 'A+', senior debt ratings of 'A', and junior debt of '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.

KEY RATING DRIVERS

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

Fitch views the company's market position and size/scale as 'Large' and notes that companies with this profile are typically rated in the 'AA' IFS rating category. Progressive is the fourth-largest U.S. private passenger auto writer based on 2014 premium written. Fitch views Progressive's market share and competitive positioning in its key line of business as slightly favorable relative to peers.

Progressive completed its acquisition of a controlling interest in ARX Holding Corporation (ARX), the parent company of homeowners' insurance specialist American Strategic Insurance (ASI) on April 1, 2015. Progressive's Property segment consists primarily of the business acquired with the ARX transaction and accounted for approximately 3.2% of total net premiums written by the company in the third quarter of 2015.

Progressive's overall GAAP combined ratio was 92.7% through the first three quarters of 2015, an improvement over the nine month 2014 result of 92.9%. Embedded in PGR's culture is obtaining a GAAP calendar year combined ratio of 96% or better. Fitch continues to view Progressive as one of the strongest underwriters among major property/casualty companies, and recognizes the company's history of favorable underwriting margins and stability.

Capitalization at the operating company level scored 'Very Strong' based on year-end 2014 data on Fitch's proprietary capital model, Prism, which is considered consistent with Progressive's 'AA' IFS rating. Total shareholders' equity increased by 7.6% to nearly $7.5 billion at Sep. 30, 2015, driven by net earnings of $951 million, offset by $245 million of unrealized investment losses during the first nine months of the year.

Progressive's financial leverage, as measured by total debt to total capital, is anticipated to remain near current levels in the near term. The company's debt-to-total capital ratio adjusted for the impact of FAS 115 unrealized gains on fixed income investments as of Sept. 30, 2015 was 26.8%, following Progressive's $400 million 1st quarter 2015 senior debt issuance.

Progressive's profitability promotes strong interest coverage. GAAP fixed charge coverage at nine months 2015 was 13.8 times(x), up from the five-year average between 2010-2014 of 12.1x. Fitch believes that GAAP fixed charge coverage will range from high single digits to low double digits over the near term.

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.

--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.

-- Homeowners' growth that substantially increases probable maximum loss (PML) levels.

Fitch believes that a ratings upgrade for Progressive would require a broadened product focus with a material reduction of net leverage.

FULL LIST OF RATING ACTIONS

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';

--$400 million 3.70% due Jan. 26, 2045 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

Insurance Rating Methodology (pub. 16 Sep 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=871172

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=996584

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=996584

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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