Best Affirms Baldwin & Lyons and Operating Subs Ratings; Outlook Stable

April 8, 2013

A.M. Best Co. has affirmed the financial strength rating (FSR) of ‘A+’ (Superior) and issuer credit ratings (ICR) of “aa-” of Protective Insurance Company (PIC) and its wholly owned subsidiary, Sagamore Insurance Company, as well as the FSR of ‘A’ (Excellent) and ICR of “a” of PIC’s other wholly owned, separately rated subsidiary, Protective Specialty Insurance Company (PSIC). Collectively, these three companies are referred to as Baldwin & Lyons Group.

In addition Best has affirmed the ICR of “a-” of the group’s ultimate publicly traded parent, Baldwin & Lyons, Inc. The outlook for all of the ratings is stable. All of the companies are domiciled in Indianapolis, Indiana.

The ratings of PIC and Sagamore reflect the group’s “superior risk-adjusted capitalization, historically excellent operating performance and solid market position in its core commercial trucking market,” Best explained.

“These positive rating factors are derived from the group’s modest underwriting leverage, disciplined underwriting practices and solid market presence within the national and regional commercial trucking market. Long-standing relationships are maintained with a core group of large trucking firms, including the group’s largest customer, resulting from its commitment to service and product development initiatives, which somewhat offsets concerns regarding customer concentration.”

Best also indicated that the “group increasingly operates as a diversified carrier through its expansion of products and markets, including non-standard personal automobile coverage, small fleet trucking programs, assumed property reinsurance, and more recently, professional lines errors and omissions (PL E&O) insurance, and workers’ compensation insurance, the latter largely marketed, along with other coverages, to commercial trucking independent contractors. Historically, the group’s emphasis on disciplined underwriting and loss control has led to solid underwriting profitability and substantial loss reserve redundancies on prior accident years.”

As partial offsetting factors Best cited “the long-term competitive nature of the group’s core commercial trucking and non-standard personal automobile markets; elevated exposure to investment variability due to above-average common stock and limited partnership investments; variability in earnings due to catastrophe losses; below-average net yield on investments; the shareholder dividend requirements of Baldwin & Lyons, Inc.; and the degree of concentration with its largest customer.”

Best added that “while growth in the group’s Florida business owners policies (BOP) and assumed property reinsurance business in recent years diversified revenues, the growth added a new potential source of variability in results through exposure to natural catastrophes, as evidenced in the group’s assumed property reinsurance business in 2010 and 2011.

“In 2012, the group terminated two assumed property reinsurance programs and began terminating all of its Florida BOP business, due to the belief that these catastrophe exposures outweighed potential profitability, thus significantly lowering overall catastrophe exposure.”

Best said: “PSIC’s ratings recognize its excellent risk-adjusted capitalization, the operational and financial support of PIC, its experienced management team and the targeted earnings and capital accumulation projections set forth by management. In addition, the ratings consider the mitigation of underwriting risks through the company’s substantial reinsurance programs.”

As partial offset factors Best noted the “significant challenges and uncertainties associated with PSIC’s PL E&O insurance operations launched in 2010, including acceptance in the marketplace, the execution risks associated with growing the business in competitive markets and the potential variability in profitability.”

Best also said the company began terminating all of its catastrophe exposed Florida BOP business in 2012, “believing its risk/reward aspects were no longer favorable.” Best added that it “will continue to closely monitor PSIC’s progress to ensure targeted results are attained and capital and surplus are in compliance with Best’s standards relative to its ratings.”

Best described Baldwin & Lyons, Inc. as being “financially strong with very low financial leverage and solid coverage ratios, as well as access to capital markets. Stockholder dividends from its agency/brokerage and insurance operations comfortably support its dividend and debt obligations,” the report continued.

Best also indicated, however, that the “ratings and outlook of PIC and Sagamore could come under pressure should soft market conditions and a lack of underwriting discipline result in the group’s underwriting and overall profitability underperforming its peers for a sustained period or should there be a material decline in the group’s risk-adjusted capitalization.

“PSIC’s ratings and outlook could come under pressure should execution risks associated with growth or soft market conditions result in its underwriting and overall profitability underperforming its peers, should there be a material decline in its risk-adjusted capitalization or should affiliates not provide continued necessary financial and operational support.”

Source: A.M. Best

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