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
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
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
For more information, visit our website at www.moodys.com/insurance.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service
Financial Institutions Group
Moody's Investors Service