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Rating Action:

Moody's affirms Progressive's financial strength, downgrades senior debt to A2, outlook stable

18 Dec 2014

Progressive buying Florida-based home insurer; rating action affects $2.2 billion of debt securities

New York, December 18, 2014 -- Moody's Investors Service has affirmed the Aa2 insurance financial strength (IFS) ratings of major operating companies of The Progressive Corporation (Progressive). In the same action, Moody's downgraded Progressive's senior debt rating to A2 from A1, reflecting the rating agency's view that Progressive will be increasingly opportunistic in its use of cash and investments at its unregulated investment subsidiary Progressive Investment Company, Inc. (PICI). The rating outlook for the IFS and debt ratings is stable.

RATINGS RATIONALE

Progressive has announced plans to acquire a controlling interest in ARX Holding Corp. (ARX), parent of American Strategic Insurance (ASI), a Florida-based home insurer, for approximately $875 million. Progressive will increase its ownership in ARX to about 67% from the 5% it has held since 2012. Upon completion of the transaction, expected by 1 April 2015, Progressive and ASI will work closely to sell bundled auto and home insurance policies, giving both firms greater access to an attractive segment of the personal lines market.

"By delivering two or more products per customer, an insurer can offer favorable pricing and service to customers while enhancing its own customer retention and profitability," said Bruce Ballentine, Moody's lead analyst for Progressive.

"However, ASI's homeowners book carries greater catastrophe risk than Progressive has faced as an auto insurer," added Ballentine, "particularly because ASI has business concentrations in the catastrophe-prone states of Florida, Texas and Louisiana." Moody's expects Progressive to carefully monitor and manage its catastrophe exposure, along with its operating and financial leverage, so as to protect its capital.

Through the first nine months of 2014, ASI recorded direct written premiums of $875 million and net written premiums of $554 million, a majority in the homeowners line. These premium volumes amounted to 6% and 4%, respectively, of Progressive's direct and net written premiums for the same period.

IFS RATINGS

Moody's said the affirmation of Progressive's Aa2 IFS ratings reflects the group's strong presence in the US auto insurance market, superior underwriting and expense management, balanced distribution channels and solid balance sheet. The company exhibits good risk-adjusted capitalization, with a high-quality, liquid investment portfolio and short-tail, granular insurance liabilities. The rating agency commented that these strengths are partly offset by Progressive's high operating leverage and its aggressive payments to shareholders through variable and special dividends and share buybacks. The company also faces persistent competition and potential adverse regulation in personal insurance lines.

DEBT RATINGS

Progressive's senior debt rating is now a standard three notches below the IFS ratings of its operating subsidiaries, reflecting Moody's view that PICI's portfolio size will likely average less than 75% of the group's consolidated debt (Moody's typical threshold for narrower notching). Progressive may use PICI to help manage parent/corporate actions such as receipt of dividends from insurance subsidiaries, payments to shareholders through dividends and share buybacks, and helping to fund acquisitions.

Moody's cited the following factors that could lead to an upgrade of Progressive's ratings: (i) consistently lower operating leverage, e.g., ratio of statutory net written premiums to surplus below 2x, and (ii) consolidated financial leverage below 20%.

The following factors could lead to a rating downgrade: (i) higher operating leverage, e.g., ratio of statutory net written premiums to surplus above 3x, (ii) weakened core profitability, e.g., combined ratio above 96% for an extended period, (iii) consolidated financial leverage above 30%, or (iv) significant increase in gross or net catastrophe exposure relative to consolidated shareholders' equity.

Moody's has affirmed the following ratings with a stable outlook:

National Continental Insurance Company, Progressive American Insurance Company, Progressive Bayside Insurance Company, Progressive Casualty Insurance Company, Progressive Classic Insurance Company, Progressive Gulf Insurance Company, Progressive Mountain Insurance Company, Progressive Northern Insurance Company, Progressive Northwest. Insurance Company, Progressive Preferred Insurance Company, Progressive Southeastern Insurance Company, Progressive Specialty Insurance Company, United Financial Casualty Company -- insurance financial strength Aa2.

Moody's has downgraded the following ratings and assigned a stable outlook:

Progressive Corporation -- senior unsecured debt to A2 from A1, junior subordinated debentures to A3 (hyb) from A2 (hyb).

The principal methodology used in these ratings was Global Property and Casualty Insurers published in August 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Moody's insurance financial strength ratings are opinions of the ability of insurance companies to pay senior policyholder claims and obligations.

Based in Ohio, Progressive is the publicly traded parent of a group of US property & casualty insurance companies offering coverages for personal and commercial automobiles and trucks as well as motorcycles, boats and recreational vehicles. For the first nine months of 2014, the company reported net written premiums of $14.0 billion and net income of $911 million. Shareholders' equity was $6.9 billion as of 30 September 2014.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Ballentine
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Robert L Riegel
MD - Insurance
Financial Institutions Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Progressive's financial strength, downgrades senior debt to A2, outlook stable
No Related Data.
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