2008-10-10 22:11:01 -
- Fitch Ratings has affirmed the 'AA-' Issuer Default Rating (IDR) and 'A+' senior debt ratings of The Progressive Corporation (Progressive; NYSE: PGR). Fitch has also affirmed the 'AA+' Insurer Financial Strength (IFS) rating of Progressive's operating subsidiaries. A complete list of affected ratings follows the end of the release. The Rating Outlook is Stable.
Fitch's rating action considered
Progressive's announcement today of a pretax $1.1 billion other than temporary impairment (OTTI) charge primarily related to preferred security holdings at Progressive Investment Corporation Inc (PICI). PICI is an investment subsidiary that gives management financial flexibility to move capital.
As of Sept. 30, 2008 PICI's assets were down approximately 50% from year end 2007 to $1 billion; however, not all of it was related to market declines. Year-to-date PICI liquidated $96 million for dividend payments and $178 million for stock repurchases. Fitch excludes the assets of PICI when analyzing capital adequacy of the insurance subsidiaries in Prism, Fitch's stochastic economic capital model, due to the lack of permanency of the assets PICI holds. PGR's 2007 Prism score is 235% of the 'AAA' level of capital as of year-end 2007. A proforma Prism analysis as of Sept. 30, 2008 still indicates excellent operating capital at the operating subsidiary level since the reduction in capital was mainly at PICI an entity Fitch excludes from Prism.
Fitch does, however, consider the assets of PICI and the role it plays when assessing financial leverage, holding company liquidity, and financial flexibility. Fitch recognizes that PICI provides certain favorable characteristics that could narrow the current standard notching; however, due to the lack of permanency of PICI's capital Fitch has maintained standard notching of the debt to IDR since inception of the ratings.
Fitch stressed capital by excluding PICI's assets and calculating financial leverage, which Fitch measures as debt to total capital. Based on this stress financial leverage would increase to approximately 26.4% from 22.3% as of Sept. 30, 2008. Fitch's target for PGR's financial leverage at the current ratings is for financial leverage to be below 30%. Fitch does note though that material additional reductions in equity would be evaluated for metrics other than financial leverage such as operating leverage to make sure they are maintained within Fitch's tolerances for the current rating category.
The ratings and Stable Outlook reflect Progressive's strong operating performance, pricing and underwriting expertise, personal auto insurance franchise, modest catastrophe risk, and strong capital position. Progressive's overall GAAP combined ratios for nine months ended Sept. 30, 2008 and 2007 were 94.4% and 91.8%, respectively.
The ratings also reflect Progressive's declining growth rate, limited product diversification, and modest reserve position. Fitch believes Progressive's primary goal is the achievement of a 96% GAAP combined ratio. Thus, Fitch expects that Progressive's premium growth rate will depend on its ability to achieve its profitability goal and that growth will moderate if competition in the auto insurance industry increases. Fitch also considers Progressive's loss reserves to be adequate and expects that loss reserve development, if any, will generally be modest.
The Progressive Corporation is an insurance holding company based in Mayfield Village, OH, selling personal and commercial automobile insurance through independent agent and direct distribution channels.
Fitch has affirmed the following companies with a Stable Outlook:
The Progressive Corporation
--IDR 'AA-';
--Senior debt 'A+';
--$347.7 million 6.375% due Jan. 15, 2012 'A+';
--$148.9 million 7.0% due Oct. 1, 2013 'A+';
--$294.1 million 6.625% due March 31, 2029 'A+';
--$393.7 million 6.25% due Dec. 1, 2032 'A+';
--Junior subordinate debentures 'A';
--$1 billion 6.70% due June 18, 2067 'A'.
Fitch has also affirmed the 'AA+' IFS ratings for the following members of Progressive Direct Holdings, also with a Stable Outlook:
--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.
Fitch has also affirmed with a Stable Outlook the 'AA+' IFS ratings for the following members of Drive Insurance Holdings:
--Drive New Jersey Ins Co;
--Progressive American Ins. Co.;
--Progressive Bayside Ins. Co.;
--Progressive Casualty Ins. Co.;
--Progressive Classic Insurance Co;
--Progressive Gulf Ins. Co.;
--Progressive Hawaii Ins. Co.;
--Progressive Michigan Ins. Co.;
--Progressive Mountain Insurance Co;
--Progressive Northeastern Ins. 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..
Fitch has affirmed the 'AA+' IFS ratings for the following members of Progressive Commercial Holdings with a Stable Outlook:
--Artisan & Truckers Casualty Co.;
--Progressive Express Ins. Co.;
--United Financial Casualty Co.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings, Chicago
Gerry Glombicki, +1-312-606-2354
Gretchen K. Roetzer, +1-312-606-2327
Media Relations, New York
Tyrene Frederick-Mack, +1-212-908-0540
Sandro Scenga, +1-212-908-0278
