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Fitch Affirms Progressive's Ratings Following ARX Controlling Interest Acquisition
December 17, 2014 / 5:27 PM / 3 years ago

Fitch Affirms Progressive's Ratings Following ARX Controlling Interest Acquisition

(The following statement was released by the rating agency) CHICAGO, December 17 (Fitch) Fitch Ratings has affirmed the Progressive Corporation's (NYSE: PGR) Issuer Default Rating (IDR) of 'A+', senior debt ratings of 'A', and junior debt rating of 'BBB+'. Fitch also affirms Progressive's operating subsidiaries' Insurer Financial Strength (IFS) rating at 'AA'. A complete list of ratings follows the end of the release. The Rating Outlook is Stable. KEY RATING DRIVERS Fitch's affirmation follows PGR's announcement that it entered into an agreement to acquire a controlling interest in ARX Holding Corporation (ARX), the parent company of homeowners' insurance specialist American Strategic Insurance (ASI), for total consideration of $875 million in cash, a price that represents approximately 2.6 times book value. The transaction would bring PGR's ownership interest in ARX to 67% from its current 5% stake in the company acquired in 2012. The transaction is expected to close by April 1, 2015, subject to closing conditions. PGR also has the option to purchase the remaining 33% of ARX over the next six years. ASI's management team is expected to remain in place and the company will continue to be run as a separate entity. PGR is expected to use ARX to enhance product offerings that include bundled personal auto and homeowners policies which have historically been a limited segment for the company but could in time become a larger portion of PGR's business mix. ARX's net premiums through nine months 2014 represent approximately 4% of Progressive's overall net premiums written during the period. As primarily a Florida and Gulf Coast writer of homeowners' insurance policies, ARX presents an increased presence of gross catastrophe loss exposures for PGR. ARX has traditionally relied on substantial catastrophe reinsurance coverage to manage net catastrophe exposures. The company has experienced significant premium growth and generated favorable underwriting results over the last five years, and has fortunately not experienced large catastrophe related losses over this period. Looking forward, there is some uncertainty regarding future expansion plans by PGR in the homeowners' line in terms of overall premium growth targets and geographic business mix, and strategies for managing gross and net of reinsurance catastrophe exposures. Homeowners' growth that substantially increases probable maximum loss (PML) levels could lead to a negative change in ratings or Rating Outlooks. Fitch's ratings for Progressive continue to be based on excellent operating performance, pricing and underwriting expertise, a unique personal auto insurance franchise, conservative investment allocation, and strong risk-based capital position. Fitch continues to view Progressive as one of the strongest underwriters among major property/casualty companies, and recognizes the company's history of strong underwriting margins and stability. Progressive's financial leverage, as measured by total debt to total capital, is expected to remain within a reasonable range for the rating category in the near term. The company's financial leverage at Sept. 30, 2014 was 24.1%. Progressive's profitability promotes strong interest coverage. Annualized GAAP fixed charge coverage at nine months 2014 was 14.4x, up from year-end 2013 of 12.8x. Fitch believes that GAAP fixed charge coverage will range from high single digits to low double digits over the near term. RATING SENSITIVITIES Factors that could lead to a ratings downgrade include: --Obtaining a GAAP calendar-year combined ratio of 99% or higher; --Failure to maintain a Prism score of 'Very Strong' or better. Based on year-end 2013 data PGR's Prism score was 'Very Strong'; --An increase in statutory net leverage, defined as net written premiums plus total liabilities relative to policyholders surplus plus Progressive Investment Company, Inc's assets, above 5x; --Failure to maintain statutory maximum dividend coverage ratio of 7x or higher on a sustained basis; --A meaningful change to the auto insurance market that unfavorably alters the operating environment; -- Homeowners' growth that substantially increases PML levels. Fitch believes that a ratings upgrade for Progressive is unlikely in the near term given the company's narrow product focus and high notional leverage. Fitch has affirmed the following ratings with a Stable Outlook: The Progressive Corporation --IDR at 'A+'; --$500 million 3.75% due Aug. 23, 2021 at 'A'; --$300 million 6.625% due March 31, 2029 at 'A'; --$400 million 6.25% due Dec. 1, 2032 at 'A'; --$350 million 4.35% due Apr. 25, 2044 at 'A'; --Junior subordinated debentures at 'BBB+'. --$732 million 6.7% due June 18, 2067 at 'BBB+'. Fitch has affirmed the following companies' 'AA' IFS ratings with a Stable Outlook: The following are members of Progressive Direct Holdings: Mountain Laurel Assurance. Co. Progressive Advanced Insurance Company Progressive Choice Ins Co. Progressive Direct Insurance Co. Progressive Freedom Ins Co. Progressive Garden State Ins Co. Progressive Marathon Ins Co. Progressive MAX Ins Co. Progressive Paloverde Ins. Co. Progressive Premier Ins. Co. of IL Progressive Select Insurance Co. Progressive Universal Ins. Co. The following are members of Progressive Agency Holdings: Drive New Jersey Ins Co. Progressive American Ins. Co. Progressive Bayside Ins. Co. Progressive Casualty Ins. Co. Progressive Classic Insurance Co. Progressive County Mutual Insurance Co. Progressive Gulf Ins. Co. Progressive Hawaii Ins. Co. Progressive Michigan Ins. Co. Progressive Mountain Insurance Co. Progressive Northern Ins. Co. Progressive Northwestern Ins. Progressive Preferred Ins. Co. Progressive Security Ins. Co. Progressive Southeastern Ins. Co. Progressive Specialty Ins. Co. Progressive West Ins. Co. The following are members of Progressive Commercial Holdings: Artisan & Truckers Casualty Co. Progressive Commercial Casualty Company Progressive Express Ins. Co. United Financial Casualty Co. Contact: Primary Analyst Christopher A. Grimes, CFA Director +1-312-606-2354 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Gerry Glombicki, CPA Director +1-312-606-2354 Committee Chairperson Donald Thorpe, CFA, CPA Senior Director +1-312-606-2353 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: Additional information is available at ''. Applicable Criteria and Related Research: --'Insurance Rating Methodology' (Sep. 4, 2014). Applicable Criteria and Related Research: Insurance Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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