BEHIND THE NEWS: 'Cautious' truck insurer collides with shareholder

June 2, 2008

Baldwin & Lyons Inc. has been publicly traded for nearly four decades. For most of that span, the Indianapolis company has gone quietly about its business of providing insurance for truck fleets. And investors who went along for the ride generally fared well.

But recent months have been bumpy. Baldwin is in the tricky game of setting premiums, then hoping claims come in low enough to ensure a profit. The company's financial results of late have been worse than expected. And adding new accounts has been tough. Commercial property-and-casualty insurance is notoriously cyclical. We're in a down cycle now, meaning too many insurers are clamoring for business, driving down premiums.

In markets like these, Baldwin & Lyons' modus operandi is to keep its powder dry and await better times.

"I don't intend to sell $5 bills for $4. You can do a heck of a volume. But when you count the dollars at the end of the day, it isn't that rewarding," said Gary Miller, 67, who's been CEO since 1997 and previously spent 14 years as president.

"We are prudent. We are cautious," he added. "We think that is what our shareholders expect from us."

But a high-powered New York-based shareholder charges Baldwin is cautious to a fault. Gideon King, whose Loeb Partners Corp. owns 5.4 percent of the company, is chagrined with its slump, which has knocked one-quarter off the stock price since August. He calls the business "wildly overcapitalized" and says it should use its financial firepower to dramatically boost returns for shareholders.

"We would be surprised if anyone could produce evidence that your current balance sheet makes any sense," King wrote in a May 20 letter imploring the board to explore selling the company or issuing a hefty special dividend to shareholders.

King's firm, which manages more than $1 billion, holds Baldwin shares worth nearly $15 million. The investment executive isn't above using inyour-face tactics to make his point. When the company staged its first-quarter conference call with analysts on May 1, King joined the conversation and publicly chided executives.

"What is going on guys? When are we going to do something to deploy this capital in a more efficient manner?" he asked.

King declined to comment to IBJ. But in the May 20 letter, he estimated that Baldwin could afford a dividend of about $22 a share, or a total of $333 million. He contended the company has the wherewithal for such a large payout even though the per-share amount would be a shade higher than the current stock price and the total payout would exceed the company's stock market value.

In response, Baldwin & Lyons executives take a page from Diplomacy 101. "First off, he is a stockholder, and we respect all stockholders. We certainly listen to all suggestions," Miller told IBJ.

But he and Chief Financial Officer Pat Corydon said King vastly overstates the company's surplus and is proposing a dividend that would deplete its capital base.

They're not keen on the idea of selling the company, either. To boost returns for shareholders long term, Miller said, "We'll be following the course we have followed."

That course isn't completely out of sync with King's wishes. Over the past four years, Baldwin & Lyons has paid out more than $7 a share in cash dividends. It also has bought back stock-a move that drives up profit per share.

Meanwhile, Baldwin has been stashing reserves in investments, some of which have produced impressive returns. The company four years ago poured $15 million into an India investment fund that has more than doubled in value.

But King isn't cheering. He's troubled that investment represented nearly 12 percent of the company's equity at year end, which he calls an imprudent concentration. And he's uneasy that the manager of that fund, as well as some limited partnerships in which Baldwin also invested, is partly owned by three members of the company's board.

Miller is unapologetic. He said board members who stand to gain financially from the investing relationships recused themselves from the selection process.

"Our feeling is, we are blessed with some very good investment people. Not being able to take advantage of their expertise, abilities and track record would, in a sense, be a disservice to the firm," Miller said.

"The proof is in the pudding," he added. "Those investments historically have done very well for us."

If Miller sounds unfazed, it's for good reason. King can howl in protest all he wants, but he doesn't have the votes.

His firm holds Class B shares, which have no voting rights. The company is firmly in the grip of its largest shareholder, the Shapiro family of Highland Park, Ill., which owns 47 percent of the Class A voting stock.

The family long has been in management's corner. Four of the company's 13 board members are Shapiros. And two of them, plus fellow board member Thomas Patrick, have partial ownership of businesses handling Baldwin investments.
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