June 6, 2017 / 1:26 PM / 2 months ago

Fitch Affirms Progressive's Ratings; Outlook Stable

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(The following statement was released by the rating agency) CHICAGO, June 06 (Fitch) Fitch Ratings has affirmed The Progressive Corporation's (NYSE: PGR) Issuer Default Rating (IDR) at 'A+', senior debt ratings at 'A', and junior subordinated debt rating at '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 very strong operating performance and risk-based capital position, market leading risk-management and underwriting expertise, and its significant personal and commercial auto insurance franchise. Progressive is the fourth-largest U.S. private passenger auto writer and largest commercial auto writer based on 2016 premiums written. Progressive reported a GAAP combined ratio of 90.9% through the first four months of 2017, down from 95.1% for full-year 2016. 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 2015 data on Prism, Fitch's proprietary capital model. Prism results for 2016 will be available in late summer 2017. Total shareholders' equity increased by 10.3% through the first four months of 2017, to nearly $8.8 billion at April 30, 2017. Equity growth was driven by net earnings of $621 million and $190 million of unrealized investment gains through the first four months of 2017. Progressive issued $850 million of 30-year senior notes in April 2017. Net proceeds from the issuance are expected to be used to redeem $564 million of its junior subordinated debentures due in 2067 on June 15, 2017. The remaining net proceeds are expected to be used for general corporate purposes. Progressive's financial leverage as of April 30, 2017 was 31.2%. Pro forma leverage as of the same date, including the expected redemption of the company's junior subordinated debentures, will decrease to 28%. Progressive's profitability promotes very strong interest coverage. GAAP fixed-charge coverage, excluding realized gains, in 2016 was 11.1x, down from the five-year average between 2012 - 2016 of 12.5x. Fitch believes that GAAP fixed-charge coverage will range from high single-digits to low double-digits over the near term, including the new senior note issuance. 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; --Financial leverage above 30%; --Homeowners' growth that substantially increases probable maximum loss (PML) levels; --Failure to maintain statutory maximum dividend coverage ratio of 7x or higher on a sustained basis; --A meaningful change to the auto insurance market that unfavorably alters the operating environment. 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 2021 at 'A'; --$500 million 2.45% due 2027 at 'A'; --$300 million 6.625% due 2029 at 'A'; --$400 million 6.25% due 2032 at 'A'; --$350 million 4.35% due 2044 at 'A'; --$400 million 3.70% due 2045 at 'A'; --$850 million 4.125% due 2047 at 'A'; --Junior subordinated debentures 6.7% due 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 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 Commercial Casualty Company 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 Express Ins. Co. United Financial Casualty Co. Contact: Primary Analyst Christopher A. 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