The following information summarizes the financial position and operations of Lawyers Mutual Liability Insurance Company of North Carolina for the two years ending December 31, 2014. This information is based on statutory accounting principles codified by the National Association of Insurance Commissioners and subject to any deviations prescribed or permitted by the North Carolina Department of Insurance. A copy of the Company’s 2014 Annual Statement is available upon request.
National and North Carolina Business Environment
The economic measures of the general U.S. economy and the state of N.C. in particular exhibited both improvements and declines over the past five years. Unusually high liquidity from the Fed’s Quantitative Easing programs has caused certain assets such as equity stocks to grow, whereas wage growth has been stagnant at best. The reported national unemployment rate has steadily declined but on the other hand the percentage of the total population actively at work is at a low level that hasn’t been seen since March 1978. With the Fed’s Near-Zero Interest Rate Policy in place, the Company and its insureds are faced with a slowly improving business environment but average investment income yields that are below long term yields and mixed inflationary effects. The ability to financially navigate these times with such disparate signals is critical to Lawyers Mutual’s ability to continue providing practicing attorneys of North Carolina with the professional liability coverage they need. The Company approaches the challenges mentioned above with conservative diversification of its investments and prudent underwriting. When sufficient positive results yield underwriting and surplus gains, the Company shares the results with insureds through dividends.
Lawyers Mutual’s Business Environment
Lawyers Mutual has experienced a significant decline in the number of claims reported and activated over the past two year. However, with business activity tentatively increasing, the likelihood of a greater number of future reported claims follows. The declining number of claims reported to the Company during 2013 and 2014 has enabled Lawyers Mutual to record underwriting gains that, in turn, have enabled the payment of policyholder dividends in both years. The Company continues to approach the current business environment with conservatism while striving to provide its insureds with coverage at good value and policyholder dividends when justified by underwriting results and surplus position.
Summary of Financial Results
Lawyers Mutual recorded a $6.6 million underwriting gain and $9.3 million net income in 2014, approximately the same underwriting gain as in 2013 and a $3 million increase in net income due largely to realized gains on sales of investments. The Company’s unassigned surplus, as of year-end, was approximately $66.1 million representing a $7.3 million increase over the prior year-end. This strong level of surplus has allowed the Company to endure declining bond investment yields. Lawyers Mutual reported total revenues (comprised of premiums, investment gains and other income) of $20.1 million during 2014. Revenues were approximately $2.8 million higher than the prior year due to investments diversification and resulting capital gains partially offset by a small decline in premiums charged. Claims incurred in 2014 increased 2.9% over the prior year. Lawyers Mutual experienced a 51.8 percent loss ratio and a 73.1 percent combined ratio (loss ratio + expense ratio excluding dividends) during the calendar year ended December 31, 2014. Lawyers Mutual’s investment income, from all sources, increased approximately $507,000 during 2014. Excluding affiliated investment income, Lawyers Mutual’s investment income improved due to re-allocations of investments from value style equities to yield focused investments such as quality preferred stocks, dividend focused common stocks and tax advantaged municipal bonds. The Company’s investments are weighted heavily toward investment grade bonds with relatively short effective maturities. The bond allocations are designed to accommodate claims payout patterns and protect the portfolio against large potential future increases in interest rates that would cause bond market values to decline.
Based on the positive underwriting results and improvements in surplus position described above, the Company declared dividends of 7.5% for 2013 and 10% for 2014, payable upon the expiration of year-end in-force claims-made policies. The 10% or $1.7 million policyholder dividend declared at the end of 2014 represented a 33% dividend rate increase over the prior year. This is the fourth consecutive year of policyholder dividends and is part of the $5.7 million of policyholder dividends declared over the past ten years.