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Cover of 2014 Year in Review issue

Net premiums: $114.9 million

Net LAWPRO revenues in 2014 were $114.9 million, almost exactly as budgeted. Premiums from the mandatory insurance program were $8.4 million higher than in 2013.

Net claims: $99.6 million

Incurred claims and adjustment expenses for 2014 increased by $2.9 million compared to 2013. However, they were lower than the $105.3 million budgeted.

The discount rate used to value claims liabilities decreased from 2.68 per cent at December 31, 2013 to 1.95 per cent at December 31, 2014. Tracking the discount rate causes an adjustment to the amount reserved to pay future claims costs (it reflects current and projected interest rates on investments). The decrease in the discount rate creates a higher additional claims liability; in this case, an unfavourable development of $7.7 million. In other words, because we must assume we will make less interest on our reserves while we wait to pay individual claims, we must set more money aside.

General expenses: $16.8 million

LAWPRO’s general expenses in 2014 were $0.5 million higher than in 2013, but still $450,000 lower than budgeted, as a result of disciplined cost containment efforts.

Investment income: $26.5 million

Investment income increased by $10.2 million to $26.5 million in 2014. This was primarily due to a $2.3 million increase in unrealized gains and losses on the cash flow matched investment portfolio (compared to prior year’s same period decrease of $6.0 million), combined with realized gains of $7.6 million (compared to prior year’s same period realized gains of $5.6 million).

Net income: $17 million

LAwPRO experienced total net income for 2014 of $17 million (compared to net income of $5.9 million for 2013). After including $1.7 in other comprehensive income this resulted in shareholder’s equity of $208.6 million at the end of 2014, up from $189.9 million at the end of 2013 – for a year-over-year increase of $18.7 million.

Other comprehensive income: $1.7 million (after tax amounts quoted)

In the category of other comprehensive income, LAwPROearned $1.7 million in 2014. This compares to 2013 other comprehensive income of $12.7 million, which was primarily driven by a late rally in the markets in that year.

Minimum Capital Test: a key solvency benchmark

The Minimum Capital Test (MCT) is designed to ensure that a financial institution’s assets are sufficient to meet its present and future obligations.

Calculating the MCT at December 31, 2014, LAwPRO’S score is 251 per cent – up from 233 per cent on December 31, 2013, and above the 220-230 score for which the company aims.

However, regulatory changes have begun to place significant pressure on the company’s MCT result. Less favourable changes to the MCT calculation began to be phased in effective January 1, 2015. The full scope of the changes will come to bear over a 3-year period. A current calculation based on the eventual formula (ignoring the phase-in) results in a MCT score of 214 per cent, below the company’s preferred target range. As a result, despite the encouraging financial results in 2014, LAwPRO continues to face pressure to maintain an acceptable MCT result in the coming years.