Shares of The Progressive Corporation (PGR) gained about 1.5% in the last two trading sessions following rating affirmations by two major credit rating agencies.
A.M. Best Co. reiterated the issuer credit ratings (ICR) of “a”of Progressive. Concurrently, the rating agency reiterated the financial strength rating (FSR) of A+ (Superior) and the ICR of “aa” of the members of Progressive Agency Pool, Progressive Direct Pool and Progressive Commercial Auto Group. It also reiterated the FSR of A (Excellent) and ICR of “a+” of National Continental Insurance Company. The ratings carry a stable outlook.
The rating affirmations came on the back of sturdy capitalization that continues to benefit from favorable underwriting results as well as a strong investment portfolio. Also, adding to the strength are Progressive’s strong operating performance and competitive advantages. Other drivers include a balanced management team, brand recognition (benefitting from direct operations), a multiple channel distribution network and efficient underwriting and claims handling technology. However, high underwriting leverage is a partial dampener.
The rating agency stated that Progressive’s acquisition of a majority stake in ARX Holding Corp. will have no impact on its current ratings.
Progressive might witness a positive rating action if it can maintain the streak of solid operational results outperforming its peer group by a considerable margin and continue improving risk-adjusted capitalization.
However, the ratings are subject to negative rating action if operational results and risk-adjusted capitalization fail to match A.M. Bests’ expectation. Moreover, if capital erodes from investment volatility or an increased risk appetite, a negative rating action can follow.
In a separate development, Moody's Investors Service of Moody’s Corp. (MCO) reiterated the IFS of Aa2 of Progressive’s operating subsidiaries. However, the senior debt rating was lowered to A2 from A1.
The rating affirmation came on the back of its solid insurance foothold in the U.S. auto insurance market, improved underwriting performance, efficient expense management and a solid balance sheet. Its distribution channels and solid risk-adjusted capitalization are among the other strengths. Nonetheless, high operating leverage, competition and potential adverse regulation in personal insurance lines weigh on its positives.
However, sustained lower operating leverage (statutory net written premiums to surplus below 2x) along with financial leverage below 20% will likely lead to a rating upgrade at Progressive, though higher operating leverage (statutory net written premiums to surplus above 3x), combined ratio above 96%, or financial leverage exceeding 30% will subject ratings to a downgrade.
Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as in maintaining credit worthiness in the market. On the other hand, rating downgrades affect the business, apart from increasing the cost of future debt issuances. We believe that strong ratings will help Progressive to retain investor confidence and write more businesses going forward.
Progressive currently carries a Zacks Rank #2 (Buy). Investors interested in property and casualty insurers may also consider Hallmark Financial Services Inc. (HALL) and AmTrust Financial Services, Inc. (AFSI). Both sport a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment