Progressive Corp's Ratings Affirmed by Standard & Poor's
11 November 1998
Progressive Corp's Ratings Affirmed by Standard & Poor's; Outlook Stable
NEW YORK, Nov. 10 -- Standard & Poor's today affirmed its
single-'A'-plus issuer credit and senior debt ratings and single-'A'
subordinated debt and preferred stock ratings on Progressive Corp. The
ratings are based on the company's excellent business profile and operating
performance.
Major Rating Factors:
-- Excellent business profile. Progressive is the fifth largest auto
writer with a 3.6% national market share at year-end 1997. The
company's efforts to build brand recognition have been successful to
date. While the extraordinary growth rate in 1997 is not sustainable,
Standard & Poor's expects strong growth in the mid-teens.
-- Excellent operating performance. Progressive Corp. generated a
healthy 13% return on revenue (ROR) in 1997. As of third quarter
1998, the ROR was up to 14%. On a GAAP basis, the combined ratio
improved to 91% from 93% at year-end 1997. Standard & Poor's believes
that prudent expense management combined with effective underwriting
will enable the company to outperform industry averages despite
increasing competition.
-- Sound growth strategy. Progressive has effectively managed
above-average growth over the last few years. Management has a clear
vision that is effectively implemented. Progressive's culture and
infrastructure is expected to successfully support all projected
growth in the short term.
-- Lean and efficient operations. For a company that has very strong
ties to its agency force, Progressive has been remarkably successful
in increasing the efficiency of its operations. Progressive has a
creative commission structure that allows different levels of
compensation for agents selling at different price points. The
overall GAAP expense ratio was 23% at Sept. 30, 1998. This reflects a
one point deterioration over 1997's ratio of 22%. Standard & Poor's
believes that this investment is necessary and inevitable if
Progressive is going to succeed in its apparent goal to build market
share.
-- Challenge of maintaining dual distribution systems. Progressive will
be challenged to maintain parallel distribution systems given the
inherent conflict between the agency and direct modes of operation.
In the near term, Standard & Poor's expects that the book will
overwhelmingly be agent driven.
-- Investment risk. Standard & Poor's believes that Progressive is
susceptible to interest rate volatility through its $1.6 billion
portfolio of asset and commercial mortgage-backed securities (as of
Sept. 30, 1998). In addition, equity securities represented about 43%
of shareholder's equity at Progressive Corp. Standard & Poor's
believes that equities are an appropriate investment for Progressive
which has a long track record of strong operating cash flows.
-- Year 2000 liability issues. Progressive, through its Professional
Liability Group, writes director's and officer's liability for
community banks. This makes them susceptible to year 2000 liability
issues. Progressive is, however, well ahead of some of its peers.
The exposure has been identified and steps are being taken to mitigate
any material adverse development.
OUTLOOK: STABLE
While the superior earnings expectation continues to be met, Standard &
Poor's believes that these margins are not sustainable for a commodity line of
business. Even as the results converge to the target 96% combined ratio, RORs
will remain very strong in the 6% area. In addition, Progressive will
continue to maintain excellent financial flexibility in the debt and equity
markets as it continues to post profitable results. Standard & Poor's expects
financial leverage to increase to the 30% area in 1999-2000. Interest
coverage will remain strong in light of the healthy projected earnings growth.
-- CreditWire