Rating Action on Progressive Corp. - Analyst Blog

By Zacks | October 01, 2012 AAA

Fitch Ratings reiterated Issuer Default Rating ("IDR") at 'A+', senior debt ratings at 'A' and Junior subordinated debt 'BBB+' of Progressive Corp. (PGR), according to Reuters.

Concurrently, the rating agency reiterated the Insurer Financial Strength ("IFS") rating at 'AA' of the operating subsidiaries of the company.

All the ratings carry a stable outlook.

The ratings affirmation came on the back of solid operational results, excellent pricing and underwriting practice, sturdy capitalization, strong franchise of personal auto insurance, moderate catastrophe risk, and conventional investment.

Progressive's combined ratio is almost in line with its maximum limit of 96%. Fitch believes pricing actions undertaken by the company will drag written premium growth but will let the company's combined ratio remain within 96% in 2012.

Fitch also expects interest coverage to grow towards the high-single digits if combined ratio tends towards 96%.

Fitch stated upward revision in rating is less likely in the near term due to Progressive's higher leverage and restricted product offering. Nevertheless, ratings could be upgraded if leverage lowers or capitalization improves.

Rating would be subject to downgrade if leverage remains high when combined ratio deteriorates beyond 96%, statutory net leverage moves higher than 5.0x, purchase business that are not into auto insurance or macro environment in the auto insurance market changes adversely.

Fitch, however, considers Progressive as one of the dominant underwriters in the property/casualty space and acknowledges its sustained underwriting margins.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe the company's strong score with the credit rating agencies will help it write more business going forward.

Progressive currently carries a Zacks Rank #3, reflecting short term Hold rating. The Allstate Corporation (ALL), which closely competes with Progressive, holds a Zacks Rank #3, translating into short term buy rating.
 

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