Fitch Ratings has affirmed The Progressive Corporation's (NYSE: PGR) operating subsidiaries' Insurer Financial Strength (IFS) ratings at 'AA' (Very Strong).

Fitch has also affirmed the holding company's Issuer Default Rating (IDR) at 'A+' and senior debt ratings at 'A'. The Rating Outlook is Stable.

Progressive's ratings reflect its consistently strong operating performance, very strong risk-based capital position, market leading risk-management and underwriting expertise. The ratings also reflects PGR's favorable business profile with a significant personal and commercial auto insurance franchise.

Key Rating Drivers

Favorable Business Profile: Progressive maintains a favorable business profile, as the second-largest U.S. private passenger auto writer based on 2023 direct premiums written, with continuing strong growth in market share. The business mix is weighted towards personal auto in the direct and agency channels, along with commercial lines and a modest allocation to its property segments. Progressive is the largest writer of U.S. commercial auto business. The company's competitive position in its key line of business is most favorable, relative to peers.

Excellent Underwriting Performance: Progressive is one of the most consistently profitable underwriters among leading property/casualty (P/C) insurers, with a history of favorable underwriting margins and stability. Favorable results in recent periods reflect rate increases and non-rate underwriting actions the company has implemented to address heightened severity trends.

Progressive's GAAP combined ratio significantly improved to 86.8% through April 2024, compared to 94.9% for YE23, a considerably stronger result than personal lines peers. The company is well positioned to profitably grow in 2024, in line with its long-standing groupwide target of a 96% combined ratio or better.

Very Strong Capital: Progressive has a very strong capital position that offsets the underwriting and general business risks the company faces, which also supports future growth. Statutory surplus increased by 11% in 1Q24 to $24.6 billion, following significant growth in 2023, reflecting very strong net earnings.

Progressive's Prism capital model results declined to 'Strong' in 2022, due to a drop in available capital from unrealized bond losses. However, excluding these losses, it remained 'Very Strong'. Prism results for 2023 will be available in summer 2024, which Fitch expects to benefit from surplus growth during the period and remain supportive of the ratings.

Financial Leverage: The company's financial leverage declined to 22.6% at March 31, 2024 compared to 24.8% at Dec. 31, 2023. Leverage improved as a result of equity growth from strong earnings and the redemption of series B preferred shares, which had received 50% equity credit.

Debt Service: Excellent profitability promotes strong interest coverage. GAAP fixed-charge coverage was approximately 15x in 2023 compared with its five-year 16x average (2019-2023). Fitch believes fixed-charge coverage will be in the low- to mid-double-digits over the near term. Fitch estimates statutory dividend fixed-charge coverage of approximately 13x for 2024 based on the insurance subsidiaries' maximum ordinary dividend capacity of over $3.4 billion without regulatory approval.

Concentration Risk: The ratings also reflect the company's limited historical product diversification and high notional operating leverage. Progressive's higher leverage potentially exposes capital to unexpected pricing errors. Therefore, a sudden change in the operating environment for auto writers would have a potentially greater negative impact on Progressive's capital than it would for less leveraged and more diversified companies.

RATING SENSITIVITIES

Factors that Could, Individually or Collectively, Lead to a Negative Rating Action/Downgrade

Reporting a GAAP calendar-year combined ratio of 99% or higher;

Sustained deterioration in consolidated statutory capital, measured by Fitch's capital model, NAIC RBC, and traditional leverage measures;

Financial leverage above 30%;

Homeowners insurance growth that substantially increases probable maximum loss levels;

Statutory maximum dividend coverage ratio of below 7x on a sustained basis;

Failure to maintain underwriting outperformance relative to peers.

Factors that Could, Individually or Collectively, Lead to a Positive Rating Action/Upgrade

Fitch believes that a rating upgrade for Progressive would require a broadened product focus with a material reduction of net leverage.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

ESG Considerations

The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.

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