Progressive Corp. (PGR) has recently issued 3.70% senior notes worth $400 million. The 30-year notes are scheduled to mature in 2045. However, this announcement did not affect the share price owing to broader market dynamics.
Although the purpose of the issuance was not disclosed, we believe that initiatives like the acquisition of ARX Holding Corp., the parent company of American Strategic Insurance (“ASI”) and its affiliates, scheduled to close by April this year, and dividend payout (payable on Feb 13, to shareholders of record as of Feb 4, 2015) would benefit from this issuance.
The latest debt issuance of Progressive will require it to pay interests worth $14.8 million annually. Owing to the company’s solid operational performance, the company generates enough funds to service the debt uninterruptedly.
Progressive’s interest expenses have been declining over the last two years. It declined year over year by 8.5% in 2012 and by 4% in 2013. The first nine months of 2014 also witnessed a 5% decrease in interest expense. However, the above-mentioned issuance will likely increase this metric to some extent thereby weighing on margin expansion.
The balance sheet of the company demonstrates that Progressive’s financial leverage has increased over the first nine months of 2014 compared to year-end 2013. Its existing debt portfolio consists of 3.75% senior notes due 2021, 6.625% senior notes due 2029, 6.25% senior notes due 2032, 4.35% senior notes due 2044 and 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067. Its debt-to-capital ratio has also deteriorated 70 basis points to 23.8% at the end of the first nine months of 2014. The latest issuance, when added to its debt portfolio, is expected to increase the debt burden and affect the debt-to-capital ratio adversely, thereby weighing on Progressive’s balance sheet strength. Other stocks in the property and casualty insurance space that boast a better-debt position than Progressive include The Allstate Corporation (ALL), Platinum Underwriters Holdings Ltd. (PTP) and The Chubb Corporation (CB).
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