2012 financial results explained
A. Net premiums: $104.7 million
Net LAWPRO revenues in 2012 were $104.7 million, $5 million lower than in 2011, even though the base premium remained stable at $3,350 per lawyer.
Of that $5 million decrease, $4.8 million was in the mandatory E&O program, and is attributable to the reduction in the Real Estate Practice Option (REPCO) premium, and to increased discounts for newly-called lawyers, lawyers practising part-time, and lawyers practising exclusively criminal and/or immigration law.
B. Net claims: $106.1 million
Net claims increased by $5 million over 2011, totalling $106.1 million for 2012. This total would have been substantially higher were it not for a $9.4 million reduction made to reserves for prior years.
That reduction was made possible by a re-evaluation of the actuarial model used to calculate reserves requirements.
Also with respect to prior years, favourable claims developments led to a $10.3 million decrease in the estimate of ultimate claims costs. Unfortunately, that reduction was almost completely offset by a $10.2 million expense prompted by a decline in the discount rate, plus a review of adjustment expenses reserves which resulted in an increase in those reserves of $1.4 million.
C. General expenses: $18.3 million
While operating expenses rose by $0.9 million compared to last year, they came in $1.5 million under budget at $18.4 million, and reflect the company’s continued success in carefully managing operating costs. LAWPRO ended 2012 with an expense ratio of 21 per cent.
D. Investment income: $14.9 million
Investment income for 2012 decreased by $7 million compared to the previous year. While investment income from interest receipts increased by $0.5 million to $16.2 million, the company experienced a $1.9 million decrease in net unrealized gains on the portfolio that is used to match claims liabilities. Net capital gains on disposition of assets during the year were also lower, at $1.4 million, than in 2011.
Finally, as required by an IFRS accounting change that took effect in 2011, LAWPRO was required to report a write-down of $2.5 million on certain securities.
E. Net income (loss): $(2.9) million
LAWPRO experienced a net loss for 2012 of $2.9 million (compared to net income of $8.7 million in the previous year).
Nevertheless, shareholders’ equity for the year increased by $3.7 million, as the net loss was more than fully offset by other comprehensive income of $6.6 million (see item F).
F. Other comprehensive income: $6.6 million
An increase in net unrealized gains on its surplus investments and a change in the reporting of impairments to the value of certain assets garnered “other comprehensive income” of $6.6 million for LAWPRO in 2012. This compares to a loss of $0.1 million for the same category of income for 2011.
This income, when applied against the $2.9 million net loss for the year, fully offset that loss for the purpose of calculating shareholders’ equity in the company, such that equity increased from $167,876 million at the end of 2011 to to $171,571 million at the end of 2012.
These financial results, coupled with favourable changes to the Minimum Capital Test (MCT) calculation for 2012, meant that LAWPRO’s MCT stood at 223 per cent as of December 31, 2012, up from 220 per cent at the same time last year. This result continues to meet the MCT benchmarks set by our regulators.
This MCT level is expected to help LAWPRO to absorb a degree of financial adversity in the short term; however, regulatory changes on the horizon are expected to place significant pressures on the company’s financial results going forward. Less favourable changes to the MCT calculation will become effective on January 1, 2015, forcing LAWPRO to reassess its revenue strategy in the intervening months to prepare for compliance.