Fitch Ratings reiterated the Issuer Default Rating (“IDR”) of ‘A+’, Senior debt ratings of ‘A’ and Junior subordinated debt of ‘BBB+’ for The Progressive Corporation (PGR). The credit rating agency also reaffirmed the Insurer Financial Strength (“IFS”) rating of ‘AA’ on Progressive’s subsidiaries. The outlook is stable.
These ratings affirmation came on the back of Progressive’s outstanding operational performance, proficiency manifested in pricing and underwriting, conservative outlook toward allocating investments, sound capital position and reduced catastrophe risk.
The ratings also reflect restricted product offering by the company. However, the credit rating agency believes that diversification without a proper business model is not desirable. Also, elevated notional operating leverage might expose Progressive’s capital to unexpected pricing errors, which might be further worsened by the company’s blinkered focus on auto insurance segment.
Progressive’s company-wide GAAP combined ratios for first quarter 2012 stood at 94.1%. For fiscal 2011, it was 93%, deteriorating 80 basis points from fiscal 2010.
Progressive’s financial leverage as of 2011 end was 30.3%, adjusted for the maturity of $350 million in debt in January 2012, the leverage improved to 26%. As of first quarter 2012 end, the debt-to-total-capital ratio stands at 25%. It is expected that in the short-run Progressive’s financial leverage will remain within a range that is reasonable for rating. Also, interest coverage stood at 11.4x as of December 31, 2011.
The rating agency views certain modification in Progressive’s operating policies, reduction in operating leverage and considerable increase in capitalization to be catalysts for rating upgrades.
Given Progressive’s restricted focus and soaring notional leverage, the rating agency stated that it is unlikely that the ratings can be upgraded.
Nevertheless, the ratings are subject to downgrades if the company fails to lower its operating leverage when combined ratio goes beyond 96%, opting for inorganic growth in segments other than auto insurance, increase in statutory net leverage or if the statutory maximum to interest expense ratio declines beyond 7.0x.
Progressive reported earnings per share of 42 cents for the first quarter of 2012, down 24% from 55 cents in the year-ago quarter. However, reported results were ahead of the Zacks Consensus Estimate of 39 cents.
We retain our Neutral recommendation on Progressive Corp. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the stock over the near term.
Headquartered in Mayfield Village, Ohio, Progressive Corporation is one of the largest auto insurers in the country. It is a leading independent agency writer of private passenger auto coverage, market leader for the motorcycle product and is one of the leading companies in the commercial auto insurance market. It competes with Allstate Corporation (ALL).
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