Moody’s drops Progressive debt to A2

Moody's Investors Service said it affirmed the Aa2 insurance financial strength ratings of major operating companies of Progressive Corp.

In the same action, the agency downgraded Progressive's senior debt rating to A2 from A1, reflecting its view that Progressive will be increasingly opportunistic in its use of cash and investments at its unregulated investment subsidiary Progressive Investment Co., Inc.

The outlooks are stable.

Progressive announced plans to acquire a controlling interest in ARX Holding Corp., parent of American Strategic Insurance (ASI), for about $875 million. Progressive will increase its ownership in ARX to about 67% from the 5% it has held since 2012. Upon completion of the transaction, expected by April 1, 2015, Progressive and American Strategic will work closely to sell bundled auto and home insurance policies, giving both firms greater access to an attractive segment of the personal lines market.

"By delivering two or more products per customer, an insurer can offer favorable pricing and service to customers while enhancing its own customer retention and profitability," Bruce Ballentine, Moody's lead analyst for Progressive, said in a news release.

"However, ASI's homeowners book carries greater catastrophe risk than Progressive has faced as an auto insurer, particularly because ASI has business concentrations in the catastrophe-prone states of Florida, Texas and Louisiana."

Moody's expects Progressive to carefully monitor and manage its catastrophe exposure, along with its operating and financial leverage, so as to protect its capital.

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