Fitch gradual decline of the IDR at 'A +' Outlook Stable

 

Tuesday, Aug 18,2009, 8:13:47 AM   Click:

Fitch Ratings has downgraded The Progressive Corporation (NYSE: PGR) notes as follows:


- Issuer Default Rating (IDR) at 'A +' from 'AA-';


- Notice of senior debt 'A' from 'A +'.


Fitch has also lowered its operating subsidiaries progressive Insurer Financial Strength (IFS) rating to 'AA' from 'AA +'. A complete list of ratings affected after the release. The Rating Outlook is Stable for all ratings.


The rating action today reflects a decision by Fitch increased the weighting to be given, in its analysis of the PMP to the capital of the strength of the fictitious firm leverage ratios, which have always been relatively high compared to its peers and the society monoline nature. Accordingly, the downgrade is based solely on a change in how the criteria are applied by Fitch, and does not relate to the deteriorating financial profile PGR. The change in the criteria for application is designed to understand the impact of unforeseen events queue.

PGR's net premiums written to surplus and net leverage ratios are high relative to property casualty insurer peers. This high notional leverage potentially exposes capital to unexpected pricing errors. This exposure is further exacerbated by the company's monoline nature, which exposes the company in a highly concentrated manner to auto industry specific risks. Thus, a sudden change in fortunes for auto writers, especially in a manner that is currently difficult to predict or model, would potentially have a greater negative impact on PGR's capital than it would for less leveraged and more diversified companies.

Despite the downgrade, Fitch continues to view PGR as one of the strongest underwriters among major property-casualty companies, and recognizes the company's history of strong underwriting margins and stability. Fitch also continues to recognize that when risk-adjusted to reflect this stable history, risk-based capital ratios continue to look very strong.

Fitch's ratings are based on PGR's solid operating performance, modest catastrophe risk as an auto writer, and strong liquidity profile. PGR's GAAP combined ratio for the first half of 2009 was 91.1% compared to a 94.1% for same period prior year. PGR publicly reports monthly accounting figures and thru July 31, 2009 PGR still has a 91.1% combined ratio.

PGR reported a $70 million net loss for the full year 2008, the company's first net loss since 1982, due to $1.9 billion in Other Than Temporary Impairments (OTTI). Approximately 90% of impairments were related to redeemable and non-redeemable preferred stock holdings mainly in financial institutions. While investment losses were higher than expected, PGR has taken several steps to reduce its risk exposure in its investment portfolio including significantly reducing common equity exposure and increasing its exposure to cash and U.S. Treasuries.

As of June 30, 2009 PGR reported net income of $482.6 million, approximately a 6% improvement over June 30, 2008. PGR's unadjusted debt to capital was 30.6% or 20.2% when giving 75% equity credit to the $1 billion junior subordinated debt due 2067. PGR's operating earnings based interest coverage remains strong a 12.5 times as of June 30, 2009. PGR's shareholder's equity increased 15% from year end 2008 to $7.3 billion as of July 31, 2009.

Fitch believes PGR's primary goal is the achievement of a 96% GAAP combined ratio. Thus, Fitch expects that PGR'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 PGR's loss reserves to be adequate and expects that loss reserve development will generally be modest.

The Progressive Corporation is an insurance holding company based in Mayfield Village, OH. The company sells personal and commercial automobile insurance through independent agent and direct distribution channels.

Fitch notes that any topics that are covered in its criteria reports not specifically mentioned above are considered neutral to the rating as of the date of this publication.

Fitch has downgraded the IFS ratings for the following companies 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.

--IFS to 'AA' from 'AA+'.

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 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.

--IFS to 'AA' from 'AA+'.

The following are members of Progressive Commercial Holdings:

Artisan & Truckers Casualty Co.

Progressive Express Ins. Co.

United Financial Casualty Co.

--IFS to 'AA' from 'AA+'.

Fitch assigns an IFS rating of 'AA' with a Stable Outlook to the following entities:

Progressive County Mutual Insurance Co (a member of Drive Holdings)

Progressive Commercial Casualty Company (a member of Progressive Commercial Holdings)

Fitch has downgraded the following ratings with a Stable Outlook:

The Progressive Corporation

--IDR to 'A+' from 'AA-';

--Senior debt to 'A' from 'A+';

--$350 million 6.375% due Jan. 15, 2012 to 'A' from 'A+';

--$150 million 7% due Oct. 1, 2013 to 'A' from 'A+';

--$300 million 6.625% due March 31, 2029 to 'A' from 'A+';

--$400 million 6.25% due Dec. 1, 2032 to 'A' from 'A+';

--Junior subordinate debentures to 'A-' from 'A'.

--$1 billion 6.70% due June 18, 2067 to 'A-' from 'A'.