Fitch Expects to Rate Progressive's Senior Notes 'A'
KEY RATING DRIVERS
Fitch's ratings are based on Progressive's excellent operating performance, pricing and underwriting expertise, personal auto insurance franchise, conservative investment allocation, and very strong risk-based capital position.
Progressive's financial leverage, as measured by total debt to total capital adjusted for the impact of FAS 115 unrealized gains on fixed income investments as of July 31, 2016, was 25.3%. Pro forma leverage as of July 31, 2016, including the additional debt, will increase to 28.7%, within Fitch's expectations.
The new notes' expected rating is equivalent to the ratings on Progressive's existing senior debt. Net proceeds from the issuance are expected to be used for general corporate purposes.
Progressive's profitability promotes strong interest coverage. GAAP fixed charge coverage, excluding realized gains, through the first seven months of 2016 was 9.9x, down from the five-year average between 2011 - 2015 of 12.6x. Fitch believes that GAAP fixed charge coverage will range from high single-digits to low double-digits over the near term, including the new senior note issuance.
Factors that could lead to a ratings downgrade include the following:
--Obtaining a GAAP calendar year combined ratio of 99% or higher.
--Failure to maintain a Prism score of 'Very Strong' or better.
--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.
--Growth in homeowners business that substantially increases probable maximum loss (PML) levels.
Fitch believes that a ratings upgrade for Progressive would require a broadened product focus with a material reduction of net leverage.
FULL LIST OF RATING ACTIONS
Fitch has assigned the following ratings:
The Progressive Corporation
--$500 million senior notes due Jan. 15, 2027 'A (EXP)';