Fitch Expects to Rate Progressive's Senior Notes 'A'

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings expects to assign an 'A' rating to Progressive Corporation's PGR $400 million issuance of senior unsecured notes maturing in 2045. The new notes' rating is equivalent to the ratings on PGR's existing senior debt.

KEY RATING DRIVERS

Fitch's anticipated rating reflects PGR's strong balance sheet and Fitch's belief that PGR'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. PGR's financial leverage at Sept. 30, 2014 was 24.1%. Pro-forma leverage as of nine months 2014, including the additional debt, will temporarily increase to 27.3%, within Fitch's expectations.

Progressive's profitability promotes strong interest coverage. GAAP fixed charge coverage through the first nine months of 2014 was 14.4 times (x) up from year end 2013 of 12.9x. Fitch believes that GAAP fixed charge coverage will range from high single digits to low double digits over the near term.

On Dec. 17, 2014, Fitch affirmed all of its ratings for PGR and PGR's subsidiaries with a Stable Outlook following the company's announcement that it entered into an agreement to acquire a controlling interest in ARX Holding Corporation (ARX), the parent company of homeowners' insurance specialist American Strategic Insurance (ASI).

The acquisition added uncertainty regarding future expansion plans by PGR in the homeowners' line in terms of overall premium growth targets and geographic business mix, and strategies for managing gross and net of reinsurance catastrophe exposures.

Further increases in financial leverage or homeowners' growth that substantially increases probable maximum loss (PML) levels could lead to a negative change in ratings or Rating Outlooks.

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.

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

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.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 4, 2014).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=756650

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=974675

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