A.M. Best 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 (Sagamore). In addition, A.M. Best has affirmed 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 the Baldwin & Lyons Group (the group). Concurrently, A.M. Best has affirmed the ICR of “a-” of the group’s ultimate publicly traded parent, Baldwin & Lyons, Inc. (B&L) [NASDAQ: BWINA and BWINB]. The outlook for all ratings is stable. All companies are domiciled in Indianapolis, IN. The ratings of PIC and Sagamore reflect their superior risk-adjusted capitalization, historically excellent operating performance and solid market position in their core commercial trucking market. 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 of large trucking firms, including the group’s largest customer, resulting from its commitment to service and product development initiatives, which somewhat offsets A.M. Best’s concerns regarding customer concentration. In addition, 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. These positive rating attributes are partially offset by 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; below-average net yield on investments; variability in earnings due to catastrophe losses; shareholder dividend requirements of B&L and the degree of concentration with its largest customer. While growth in the group’s Florida business owners policies (BOP) and assumed property reinsurance businesses in recent years diversified revenues, the growth added a new potential source of variability through exposure to natural catastrophes, as evidenced in the group’s assumed property reinsurance business in 2010 and 2011. In 2012 and 2013, the group terminated three assumed property reinsurance programs and all of its Florida BOP business, believing their catastrophe exposures outweighed their potential profitability; thus, significantly lowering overall catastrophe exposure. A.M. Best anticipates the group will have largely eliminated all non-U.S. property catastrophe exposure once all this business runs off in 2014.
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, PSIC’s ratings consider the mitigation of underwriting risks through its substantial reinsurance programs.These positive rating factors are partially offset by 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 as evidenced in 2013. Effective December 31, 2012, the company’s catastrophe-exposed Florida BOP business was discontinued and remained in run off mode through 2013, due to management believing its risk/reward aspects were no longer favorable. A.M. Best will continue to closely monitor PSIC’s progress to ensure targeted results are attained and capital and surplus are in compliance with A.M. Best’s standards relative to its ratings. B&L is 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 ratings and outlook of PIC and Sagamore could come under negative rating 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 and/or should there be a material decline in the group’s risk-adjusted capitalization. PSIC’s ratings and outlook could come under negative rating pressure should execution risks associated with growth and/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. The methodology used in determining these ratings is Best’s Credit Rating Methodology, which provides a comprehensive explanation of A.M. Best’s rating process and contains the different rating criteria employed in the rating process. Best’s Credit Rating Methodology can be found at www.ambest.com/ratings/methodology. A.M. Best Company is the world's oldest and most authoritative insurance rating and information source. For more information, visit www.ambest.com. Copyright © 2014 by A.M. Best Company, Inc. ALL RIGHTS RESERVED.