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, 2015. 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 2015 Annual Statement is available upon request.
ARE WE THERE YET?
Each year, management spends a significant amount of time projecting where the Company will be financially a year, two years and even three years down the road. The only certainty with projections is that actual results will be different to some extent. The past year, Lawyers Mutual’s results of operations were positive and in line with our projections. The Company’s surplus, a measure of the ability to continue offering quality professional liability coverage, improved by 4% during the year, somewhat lower than expected due to investment market valuation declines. Growing the Company’s surplus via responsible underwriting and prudent investments continues to be management’s goal.
LAWYER'S MUTUAL BUSINESS ENVIRONMENT
Lawyers Mutual has experienced a significant decline in the number of claims reported and activated over the past five years and it appears that claim frequency is stabilizing after the extremely high counts experienced during the real estate recession. However, with business activity increasing, the likelihood of a greater number of future reported claims exists. Wells Fargo recently commented in its 2016 Economic Outlook that:
Housing demand is gradually reviving as the housing market becomes unstuck. Buyers and sellers are becoming more comfortable with the state of the market.
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 $2.2 million underwriting gain and $3.6 million net income in 2015, lower than the 2014 underwriting gain of $6.6 million and the 2014 net income of $9.3M. The Company’s unassigned surplus, as of year-end, was approximately $68.9 million representing a $2.8 million increase over the prior year-end. This strong level of surplus enables the Company to endure a probable continuation of low investment yields and volatility in claims, among other various risks. Lawyers Mutual reported total revenues (comprised of premiums, investment gains and other income) of $17.4 million during 2015. Revenues were approximately $2.7 million lower than the prior year due to a reduction in realized gains on sale of investments of $3.1 million. The reduction of realized gains in 2015 followed the completion of an investment diversification project begun in 2014 that required sale and reacquisition of investments.
Management expected an increase in claims incurred during 2015 and the Company did see an increase of $3.8 million over the prior year. Included in this increase was a large single claim that went to policy limits as well as a moderate increase in overall claim counts. Lawyers Mutual experienced a 56.7 percent loss ratio and an 82.5 percent combined ratio (loss ratio + expense ratio excluding dividends) during the calendar year ended December 31, 2015. These strong ratios followed the even stronger favorable ratios from the previous year. Lawyers Mutual’s investment income, from all sources, increased approximately $169,000 during 2015. The Company’s diversified investment portfolio contained modest allocations to energy partnerships that suffered value declines during the year that were partially offset by increased income and valuation increases in REIT investments. The overall total return on investments, net of fees, was a positive 1.12 percent for the year and exceeded a weighted average benchmark used to judge performance. Lawyers Mutual’s investment income improved in 2015 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. As bonds held either mature or are called, the reinvestment of these funds are often at lower yields, challenging overall investment yields.
Although surplus increased less than expected in 2015 the Company declared a 5.7% policyholder dividend for 2015 and a 10% policyholder dividend for 2014 payable upon the expiration of year-end in-force claims-made policies. This is the fifth consecutive year of policyholder dividends and is part of the $7.5 million of policyholder dividends declared over the past twelve years.