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Insurer stays on roll by hitting the brakes: Baldwin & Lyons profits more despite revenue drop

May 28, 2007

But that axiom doesn't seem to apply to Baldwin & Lyons Inc.

The quiet trucking-fleet insurer headquartered in Indianapolis happily let its revenue slide last year 7 percent, ending a four-year run of rapid growth.

Why? Because new competitors have aggressively entered Baldwin's traditional trucking market with lower prices. The industry's margins have been slashed by half or more.

Most businesses would call that trend a threat. But not Baldwin.

President Joe DeVito disdainfully calls these new competitors "naive capital," adding, "We sit back and watch them lose their money."

Sitting back meant letting some of its customers switch to other insurance carriers by not lowering its prices, which drove down the company's revenue to $213 million last year.

But, at the same time, Baldwin's profit has been growing, going from $34.2 million in 2005 to $38 million last year.

Premiums are high for trucking insurance, making it attractive for new players. But the claims can be high, too. If a company prices its policies too low, it can be overwhelmed by claims.

Trucking insurance is highly cyclical. Whereas three years ago one of the major issues for Indiana's trucking companies was the scarcity and high cost of insurance, now that's not a problem, said Kenny Cragen, president of the Indiana Motor Truck Association.

"Now, [insurance] is more available and not as expensive," Cragen said.

But Baldwin maintains some of those prices are unsustainably low.

The business is a tricky one because trucking companies self-insure their fleets for the first $2 million to $3 million in claims. Not until they've exceeded that threshold do the truckers file claims with Baldwin or competitors such as Chicagobased Old Republic and Boston-based Liberty Mutual.

That lag can throw off players not used to the industry, claims Baldwin's DeVito.

But Baldwin, which has insured trucking fleets since its founding in 1930, says its deep experience helps it price insurance where it needs to be to cover losses-and no lower.

"We pride ourselves, really, in being able to identify the price that will generate profits. In none of our products do we do market-based pricing," DeVito said. "We're really more concerned with the bottom line than with the top line."

Baldwin gets applause from John Gwynn, managing director at Morgan Keegan, a stock market research firm in Memphis, Tenn.

"I know it's the American way to always talk about growth," he said. "But the industry segment they're in is not a growth proposition. Sometimes they need to shrink, and that's what they're doing."

In the last year, Baldwin's stock price has risen nearly 10 percent. Its shares are thinly traded, as the Chicago-area Shapiro family effectively controls the company. The Shapiros hold 47 percent of the company's common stock and four seats on its board.

Gwynn still rates Baldwin's common stock "outperform." He likes the generous dividend the company pays per year. And he expects the company in the future to distribute some of its $437 million in reserves to shareholders.

"The company is way overcapitalized," Gwynn said. "They have probably three times as much as they need to do business."

But Baldwin is also investing in new ventures to grow its business beyond its traditional large-fleet trucking customers.

Baldwin plans to launch a program next month called Artisan, which will offer insurance products for the lighter trucks used by plumbers, electricians, landscapers and similar businesses.

It's looking to further grow two lines of business that have boosted its growth since 2001: auto insurance for high-risk motorists and insurance that covers independent contractors when they drive trucks for a trucking carrier.

And it is researching and developing new products aimed at midsize trucking fleets, which Baldwin does not serve.

One of Baldwin's subsidiaries, Protective Insurance Co., insures fleets with more than 200 trucks. And through another subsidiary, Sagamore Insurance Co., Baldwin covers fleets with six or fewer trucks.

"We don't write much in between, which is probably 80 percent of the truck companies in the country," DeVito said.

He hopes the Protective agents can sell to slightly smaller companies and the Sagamore agents can sell to slightly bigger companies.

DeVito also thinks Baldwin's insurance agents can provide add-on services-such as claims administration and loss-control services-to trucking companies that might buy bare-bones policies.

"We want to find some products that don't move in lock step with the trucking cycle," DeVito said.
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