Progressive's Rating Revisions - Analyst Blog

On Thursday, Standard & Poor's Ratings Services (“S&P") affirmed "A+" counterparty credit rating on Progressive Corporation (PGR) and upgraded the outlook to “stable" from “negative".
 
Also, the rating agency downgraded the counterparty credit and financial strength ratings to "AA" from "AA+" on Progressive’s operating companies. It, however, assigned a stable outlook. Lower capital adequacy and susceptibility to volatile earnings are attributable to the downgrade.

S&P expects heightened competition, sluggish auto sales and lackluster global markets to impact premium improvement in 2010 and 2011. The rating agency, however, expects Progressive’s well-known franchise and leading market share to position it strongly to outperform competition in net premium growth.
 
Another rating agency, Fitch Ratings, affirmed Progressive's issuer default rating at "A+", its senior debt ratings at "A" and junior subordinated debt at "BBB+". The rating agency reiterated its stable outlook.

Concurrently, Progressive was seeking consent from the holders of its 6.25% senior notes due 2032 to terminate the replacement capital covenant (RCC) relating to the notes. The RCC was granted by Progressive in June 2007 to the holders of the notes in connection with the company’s issuance of its 6.70% fixed-to-floating rate junior subordinated debentures due 2067.

Upon receiving the consent, the holders will be eligible to receive a consent fee of $5.00 for each $1,000 principal amount of notes.

Additionally, Progressive commenced an offer to purchase up to $350 million in aggregate principal amount of the debentures for cash. The company reserves the right to increase the maximum amount of debentures that may be repurchased under the notes offering. The aggregate outstanding principal amount of the debentures is $1 billion.

Accordingly, holders tendering their debentures on or before June 23, 2010 will receive a total consideration of $950 per $1,000 principal amount of debentures accepted for purchase by Progressive. The total consideration includes an early tender payment of $50 per $1,000 principal amount of debentures accepted for purchase.

Further, holders tendering their debentures between June 23, 2010 and July 8, 2010 will receive a tender offer consideration of $900 per $1,000 principal amount of the debentures accepted for purchase by Progressive.
 
If the amount of debentures tendered by July 8, 2010 exceeds $350 million or an increased upper limit as amended by Progressive, it will accept for payment debentures up to the maximum amount on a pro rata basis from among the tendered debentures.

Progressive’s strong liquidity supports the purchase of debentures for cash. The company’s cash position remains strong at $155.1 million at the end of first quarter 2010, higher than $134.5 million at the end of fourth quarter 2009.
 
Though Progressive’s industry-leading position, strong risk-based capital ratios and steady operating performance position it favorably to benefit from the economic recovery, increased competition and pressure on underwriting margin will remain a headwind in the upcoming quarters.