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Rating Action:

Moody's affirms Progressive ratings, outlook on debt changed to negative

12 Sep 2008
Moody's affirms Progressive ratings, outlook on debt changed to negative

Rating action considers company's exposure to Fannie Mae and Freddie Mac

New York, September 12, 2008 -- Moody's Investors Service today affirmed the A1 senior debt rating of Progressive Corporation (NYSE: PGR) and the Aa2 insurance financial strength (IFS) ratings of its primary insurance operating subsidiaries. In the same action, Moody's changed the outlook on Progressive Corporation's debt ratings to negative from stable. The outlook on the IFS ratings of the insurance operating subsidiaries remains stable.

Progressive recently announced that the company would incur a significant write down of its large investment in Fannie Mae and Freddie Mac preferred stock given that the two entities were placed into conservatorship by the Federal Housing Finance Agency on September 2, 2008. As of June 30, 2008, Progressive held approximately $431 million of Fannie Mae and Freddie Mac preferred stock holdings at fair value, which represented 9% of Progressive's shareholders' equity (6% on an after tax basis).

Progressive's Fannie Mae and Freddie Mac preferred stock holdings are mostly held at Progressive Investment Company, Inc. ("PICI"), its unregulated subsidiary, rather than at its insurance operating subsidiaries. As such, the credit profiles of the company's insurance subsidiaries are not expected to be directly impacted by the preferred write downs, in spite of an anticipated significant reduction in third quarter consolidated GAAP earnings.

Progressive's A1 senior debt rating is rated two-notches below the Aa2 IFS ratings of its insurance operating subsidiaries, rather than the typical three notch spread, reflecting additional financial flexibility and support provided by the invested assets held at PICI. The negative outlook on the debt reflects the reduced financial flexibility and liquidity afforded to the holding company given the significant asset impairments at PICI. In addition, the high level of exposure within PICI to Fannie Mae and Freddie Mac preferred shares raises questions regarding risk management and the adequacy of existing investment portfolio guidelines.

According to Moody's, the affirmation and stable outlook of Progressive's Aa2 insurance financial strength ratings reflect the organization's leadership position in the personal automobile market, along with its strong commitment to profitability and efficiency in its core business, excellent use of data and technology, a record of product and operational innovation, and strong risk adjusted capitalization. Somewhat offsetting these strengths is the group's product concentration in personal automobile insurance, which tends to magnify the impact of broad market disruptions and accentuates exposures to regulation and competition. Also constraining the rating to a degree is the company's commitment to aggressively managing capital levels by maintaining a relatively high premiums-to-surplus ratio in its operating subsidies. The company also actively returns capital to shareholders though through dividends and share buybacks.

At the current rating level, Moody's expects Progressive to generate combined ratios in the mid-90s or better, maintain net underwriting leverage between about 2x and 3x, and maintain adjusted financial leverage below 30%. Moody's also believes that Progressive is likely to slow its stock buyback activity. In order to insure capital generation and based on Progressive's variable dividend policy, it is unlikely a dividend will paid for 2008.

The outlook on the company's debt ratings could return to stable if capital is once again built up within PICI and financial flexibility restored to its previous levels. Conversely, a downgrade of the company's debt ratings could occur if capital levels at PICI remain diminished or if Moody's concludes that the potential investment volatility within PICI is too high to justify a narrowing of the standard notching.

Moody's last rating action on Progressive Corporation occurred on June 19, 2007 when the rating agency assigned an A2 rating to the company's proposed $1 billion offering of junior subordinated debentures due 2067.

The following ratings have been affirmed with a negative outlook:

The Progressive Corporation -- senior unsecured debt at A1, prospective senior unsecured debt at (P)A1;

The following ratings have been affirmed with a stable outlook:

National Continental Insurance Company -- insurance financial strength at Aa2;

United Financial Casualty Company -- insurance financial strength at Aa2;

Progressive Classic Insurance Company -- insurance financial strength at Aa2;

Progressive Mountain Insurance Company -- insurance financial strength at Aa2;

Progressive Northwest Insurance Company -- insurance financial strength at Aa2;

Progressive Gulf Insurance Company -- insurance financial strength at Aa2;

Progressive Southeastern Insurance Company -- insurance financial strength at Aa2;

Progressive Northern Insurance Company -- insurance financial strength at Aa2;

Progressive Preferred Insurance Company -- insurance financial strength at Aa2;

Progressive Specialty Insurance Company -- insurance financial strength at Aa2;

Progressive American Insurance Company -- insurance financial strength at Aa2;

Progressive Casualty Insurance Company -- insurance financial strength at Aa2; and,

Progressive Bayside Insurance Company -- insurance financial strength at Aa2.

Progressive Corporation, headquartered in Mayfield Village, Ohio, generated revenue of $7.1 billion and net income of $455 million during the first half of 2008. As of June 30, 2008, shareholders' equity was $4.8 billion.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to repay punctually senior policyholder claims and obligations. For more information, visit our website at www.moodys.com/insurance.

New York
Paul Bauer
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Robert Riegel
Managing Director
Financial Institutions Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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