Fitch Comments on Progressive's Special Dividend

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has taken no rating action on The Progressive Corporation` (NYSE: PGR) or its operating subsidiaries following the company's announcement today of a $1 per share special dividend. See below for a full list of ratings.

Progressive announced plans to pay a $1 per share special dividend that will result in an extraordinary payment to shareholders of approximately $605 million. PGR had reported financial leverage of 24.7% as of Sept. 30, 2012, and pro forma analysis indicates financial leverage would increase to 26.7%, which is below Fitch's rating trigger of sustained financial leverage above 30%.

Fitch notes that this is the third and smallest special dividend PGR has had since its variable dividend rate program began in 2007. PGR had a $2 per share dividend that resulted in a payment of $1.4 billion in 2007 and a $1 per share dividend in 2010 that resulted in a payment of $663 million.

Fitch believes that PGR's management continuously evaluates capital and will return any excess capital, as defined by PGR, to shareholders via share repurchases or extraordinary dividends. Any future special dividends are likely to depend on management's perspective on capital adequacy, and are unlikely to occur with any regularity.

Progressive has also recently reported third quarter 2012 results via its monthly filings, but has not yet filed a 10Q with the SEC. Progressive reported a GAAP calendar year combined ratio of 95.9% and an accident year combined ratio 95.6%. Fitch notes that the 95.9% is virtually at PGR's stated target high limit of 96% and the company has responded by increasing rates. Fitch believes these rate actions coupled with some other management initiatives will slow written premium growth and allow the company to finish out full year 2012 close to its 96% objective.

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

Fitch's ratings also reflect the limited product diversification and high notional operating leverage of the company. Fitch notes that it would be shortsighted for Progressive, or any company, to diversify its product offerings without solid business justification other than the sole purpose of diversification.

Progressive'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 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, could potentially have a greater negative impact on Progressive's capital than it would for less leveraged and more diversified companies.

Key rating triggers that could lead to a downgrade include the following:

--Failure to reduce the high operating leverage in an environment where the combined ratio increases above 96%;

--Making a meaningful acquisition in a business line other than auto insurance;

--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, to above 5.0x;

--A meaningful change to the auto insurance market that unfavorably alters the operating environment.

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. A reduction in run-rate operating leverage or a significant increase in capitalization, stemming from a permanent change in the company's operating philosophy, could lead to a positive rating action.

Fitch has taken no ration action on the following ratings, with a Stable Outlook:

The Progressive Corporation

--IDR at 'A+';

--Senior debt at 'A';

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

--Junior subordinated debentures at 'BBB+'.

--$732 million 6.7% due June 18, 2067 at 'BBB+'.

Fitch has taken no rating action on the following companies' 'AA' Insurer Financial Strength (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 Company

Progressive Express Ins. Co.

United Financial Casualty Co.

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

Applicable Criteria and Related Research:

--'Insurance Rating Methodology' (Sept. 19, 2012).

Applicable Criteria and Related Research:

Insurance Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=688011

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Fitch, Inc
Primary Analyst
Gerry Glombicki, CPA, +1-312-606-2354
Director
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Gretchen K. Roetzer, +1-312-606-2327
Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Source: Fitch Ratings