Rating Action on Progressive

A.M. Best reiterated issuer credit ratings (ICR) of “a” and debt ratings of senior unsecured notes on The Progressive Corporation (PGR - Analyst Report). The outlook remains stable.

Concurrently, the rating agency also reiterated the financial strength rating (FSR) of A+ (Superior) and ICR of “aa” on Progressive Agency Pool, Progressive Direct Pool and Progressive Commercial Auto Group and their members. Also, A.M. Best reiterated FSR of A (Excellent) and ICR of “a+” on National Continental Insurance Company. The outlook for all the ratings remains stable.

The rating affirmations came following Progressive’s solid capitalization, better operating performance and favorable competitive advantages. The company’s capitalization is supported by solid underwriting results and turnaround in the investment portfolio. Progressive’s management team, brand positioning, multiple channel distribution and underwriting and claims handling technology augur well for future growth.

However, these positives are somewhat offset by the company’s high underwriting leverage compared with the industry averages. Though the company’s financial leverage also remained high, A.M. Best expects the same to come down as Progressive pays down $350 million of senior debt.

Nevertheless, the rating agency might downgrade their ratings if operating results and capitalization lag expectation and the capital erodes. On the other side, if Progressive delivers superior operating results with improved capitalization, A.M. Best might consider rating upgrades.

Recently, Progressive clocked fourth quarter earnings of 42 cents per share, surpassing the Zacks Consensus Estimate, but lagging year-ago results.

Over the last 7 days, only 1 out of 16 analysts covering the stock raised the estimates for the first quarter and fiscal 2012. We expect the rating affirmation to elicit more analysts to pull up their estimates.

The Zacks Consensus Estimate for first-quarter 2012 is 41 cents per share. For full years 2012 and 2013, the Zacks Consensus Estimates are, respectively, $1.58 per share and $1.61 per share.

We maintain our Neutral recommendation on Progressive. The quantitative Zacks #3 Rank (short-term Hold rating) for the company indicates no clear directional pressure on the shares over the near term.

Headquartered in Mayfield Village, Ohio, Progressive Corporation is one of the largest auto insurers in the country. It is a leading independent agency writer of private passenger auto coverage, market leader for the motorcycle product and is one of the leading companies in the commercial auto insurance market. It competes with Allstate Corporation (ALL - Analyst Report).

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