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Rating Action:

Moody's rates Progressive's jr. sub. debt A2

19 Jun 2007
Moody's rates Progressive's jr. sub. debt A2

$1 billion of junior subordinated debentures rated.

New York, June 19, 2007 -- Moody's Investors Service has assigned an A2 rating to Progressives Corporation's (NYSE: PGR, senior debt rated A1) proposed $1 billion offering of junior subordinated debentures due 2067. The net proceeds from the offering are expected to be used to partially finance the company's stock buyback program and special dividend announced on June 14, 2007. The outlook for the ratings is stable.

Moody's A2 rating on the debentures is based on the junior subordinated ranking of these instruments, and considers the structural priority of claim for holders of the company's A1-rated senior unsecured debt, as well as the fundamental credit profile of Progressive Corporation.

According to Moody's, Progressive's 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, very strong risk adjusted capitalization, and its moderate financial leverage profile. Offsetting this to a modest degree 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.

Progressive's financial leverage will increase in the near-term due to the announced recapitalization plan, but will remain within Moody's rating's expectations. Moody's considers operational leverage approaching 3 times to be high compared to PGR's peers, however, the company's strong risk adjusted capitalization and consistent history of robust subsidiary earnings and surplus growth mitigates our concerns to some degree.

Because of certain equity-like features contained in the junior subordinated debentures, Moody's has accorded them Basket D treatment at the time of issuance on Moody's Hybrid Debt-Equity Continuum, which means that they will initially be treated as 75% equity and 25% debt for financial leverage calculations. Basket D treatment will apply for 10 years or until 2017 (i.e. until 50 years prior to the debentures' final maturity). After this time, but only until 2037 (i.e. 30 years prior to maturity), they will shift to Basket C (50% equity and 50% debt). Thereafter, until 2047 (i.e. 20 years until maturity), the instruments will be accorded Basket B treatment (25% equity, 75% debt) and will finally shift to Basket A for the remaining 20 years to maturity. Interest payments on the junior subordinated debentures will be incorporated as presented under GAAP and incorporated into the fixed charge coverage ratio.

Moody's said that the basket designations are based on the following rankings on the three dimensions of equity:

No Maturity -- Strong

The junior subordinated debentures have a final maturity of 60 years with a scheduled maturity of 30 years and are callable at par after 10 years. All calls are subject to a legally binding Replacement Capital Covenant (RCC). The RCC obligates Progressive not to redeem or repurchase the junior subordinated debentures prior to 2047 unless they are refinanced through the issuance of the same or more equity-like securities, which have been clearly specified. The RCC initially runs in favor of a specified series of Progressive's indebtedness ("Initial Covered Debt"). Progressive Corporation will receive an acceptable opinion from outside legal counsel regarding the enforceability of this Covenant.

No Ongoing Payments -- Moderate

The junior subordinated debentures have an optional deferral feature, which enables Progressive to defer payments for up to 10 years. As an ongoing concern, at the earlier of five years or resumption of interest payments, Progressive must settle deferred distributions through the issuance of common stock or warrants, subject to a cap of 2% of shares outstanding, qualifying preferred stock or mandatorily convertible preferred stock, subject to a cap of 25% of aggregate principal amount. Qualifying preferred stock means perpetual preferred stock that is subject to an RCC or has mandatory deferral triggers and intent-based replacement language. In bankruptcy, any deferred interest not settled through the alternate payment mechanism is limited to 2 years of accumulated and unpaid interest plus any excess remaining under the 25% limit for mandatorily convertible preferred stock and qualifying preferred stock. The junior subordinated debentures also contain a dividend stopper, which prevents the issuer from redeeming, repurchasing or making distributions on capital stock or securities that rank pari passu or junior to the junior subordinated debentures if interest on the junior subordinated debentures is being deferred.

Loss Absorption - Moderate

The junior subordinated debentures will rank junior to all indebtedness, including liabilities of the subsidiaries and pari passu with trade accounts of Progressive Corporation, the holding company.

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 last rating action on Progressive Corporation occurred on June 14, 2007 when the rating agency affirmed the group's ratings following the company's announcement that it intended to return about $3 billion to shareholders through a combination of a $1.46 billion extraordinary dividend and a newly authorized share repurchase program.

Progressive Corporation, headquartered in Mayfield Village, Ohio, generated revenue of $3.5 billion and net income of $364 million during the first quarter of 2007. As of March 31, 2007, shareholders' equity was $6.9 billion.

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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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