Fitch Affirms Progressive's IDR at 'A+'; Outlook Stable

Fitch has also affirmed Progressive's operating subsidiaries Insurer Financial Strength (IFS) rating of 'AA'. A complete list of affected ratings follows the end of the release. The Rating Outlook is Stable for all ratings.

Fitch's ratings are based on PGR's excellent operating performance, pricing and underwriting expertise, personal auto insurance franchise, modest catastrophe risk, conservative investment allocation, and strong risk-based capital position.

The ratings also reflect the limited product diversification and high notional leverage of the company. Fitch notes that it would be short sighted for Progressive, or any company, to diversify its product offerings without a sound business justification. Fitch unfavorably views diversification for the sake of diversification.

PGR's high notional operating leverage potentially exposes capital to unexpected pricing errors. This exposure is further exacerbated by the company's monoline nature, which exposes the company in a highly concentrated manner to auto industry specific risks. Thus, a sudden change in fortunes for auto writers, particularly in a manner that is currently difficult to predict or model, would potentially have a greater negative impact on PGR's capital than it would for less leveraged and more diversified companies.

Fitch continues to view PGR as one of the strongest underwriters among major property/casualty companies, and recognizes the company's history of strong underwriting margins and stability. Fitch also continues to recognize that when risk is adjusted to reflect this stable history, risk-based capital ratios continue to look very strong.

Within Fitch's rating rationale are multiple considerations. If Progressive were to materially deviate from any of these items, especially for an extended period, the ratings could be affected. Included within these key rating rationale factors are the following:

--Fitch anticipates that near-term average operating results will not materially breach management's target combined ratio of 96%. A failure to reduce the high operating leverage in an environment where the combined ratio increases above 96% could put negative pressure on PGR's current ratings.

--Fitch expects limited prior period reserve development. The agency notes that Progressive's reserve margin is lower than peers but is adequate for the current rating category given the company's capital strength, short liability duration, and frequent re-pricing of the product.

--Fitch does not believe the company will make any meaningful acquisition in a business line other than auto insurance; doing so would likely place negative rating pressure on the current ratings.

--Fitch's current ratings anticipate that the company's statutory net leverage, defined as net written premiums plus total liabilities relative to policyholders surplus plus Progressive Investment Company, Inc's assets, will be 5.0 times (x) or lower. If the company were to operate at a level above this ratio, Fitch would consider a negative rating action due to capital constraints.

--Fitch anticipates that the statutory maximum dividend will meet or exceed interest expense on the debt by a ratio of 5.5x or greater. Failure to do so will cause Fitch to further scrutinize the company's liquidity position.

--Financial leverage is expected to remain below rating category tolerance of 30% over the long run but in the short run Fitch anticipates that debt to tangible capital will approximate its current pro forma 23%. Pro forma adjustments include the July repurchase of approximately $223 million in debt. Further, Fitch's ratings anticipate earnings-based interest coverage will remain in the high single-digit range; as of June 30, 2010 earnings-based coverage was 11.8x.

The Progressive Corporation is an insurance holding company based in Mayfield Village, OH. The company sells personal and commercial automobile insurance through independent agent and direct distribution channels.

Fitch has affirmed the following ratings with a Stable Outlook:

The Progressive Corporation

--IDR at 'A+';

--Senior debt at 'A';

--$350 million 6.375% due Jan. 15, 2012 at 'A';

--$150 million 7% due Oct. 1, 2013 at 'A';

--$300 million 6.625% due March 31, 2029 at 'A';

--$400 million 6.25% due Dec. 1, 2032 at 'A';

--Junior subordinated debentures at 'BBB+'.

--$777 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. of IL

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

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 Co.

Progressive Express Ins. Co.

United Financial Casualty Co

These rating actions reflect the application of Fitch's current criteria which are available at '[ www.fitchratings.com ]' and specifically include the following reports:

--'Insurance Rating Methodology' (Dec. 29, 2009);

--'Non-Life Insurance Rating Criteria' (March 24, 2010);

--'Fitch's Approach to Rating Insurance Groups' (March 24, 2010);

--'Insurance Industry: Global Notching Methodology and Recovery Analysis' (Dec. 29, 2009);

--'Equity Credit for Hybrids & Other Capital Securities - Amended'(Dec. 29, 2009);

--'Rating Hybrid Securities'(Dec. 29, 2009).

Additional information is available at '[ www.fitchratings.com ]'.

Related Research:

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493126 ]

Non-Life Insurance Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506369 ]

Fitch's Approach to Rating Insurance Groups

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=506368 ]

Insurance Industry: Global Notching Methodology and Recovery Analysis

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493114 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. 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.

Contributing Sources

Market Wire

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Fitch Affirms Progressive's IDR at 'A+'; Outlook Stable