A.M. Best Revises Outlook to Stable for Lawyers’ Professional Indemnity Company

A.M. Best Co. has revised the outlook to stable from negative and affirmed the financial strength rating of A (Excellent) and issuer credit rating of “a” of Lawyers’ Professional Indemnity Company (LAWPRO), (Toronto, Canada).

The rating actions reflect LAWPRO’s strong capitalization, commanding market profile, as well as its favorable operating and improved underwriting performance. Partially offsetting these positive rating factors are the company’s historically unfavorable loss ratio trends, the long-tailed nature of its claims and its inherent exposure to fraud-related claims.

LAWPRO, a wholly owned subsidiary of a not-for-profit regulator, The Law Society of Upper Canada (the Law Society), writes lawyers’ professional liability insurance and title insurance, exclusively, and is the Law Society’s program insurer for Ontario lawyers. As a dedicated insurer of the Law Society, LAWPRO’s purpose significantly differs from other companies. Its directive is to provide affordable legal liability coverage to Ontario lawyers. Due to this relationship, LAWPRO enjoys a guaranteed 100% coverage and retention of its base program, which is mandatory for all members of the Law Society engaged in private practice in the Province of Ontario. This business reflects 87% of the company’s total premiums. LAWPRO’s operating results are supported by consistent net investment income and an asset/liability matched portfolio.

The ratings also reflect LAWPRO’s access to additional capital sources held by the Law Society in its Errors and Omissions Fund for the benefit of the professional liability program.

Partially offsetting these positive rating factors are the considerations also inherent in LAWPRO’s mandate to provide its constituency affordable insurance. As a result, unfavorable development and combined ratio fluctuations will occur. In several of the prior years, underwriting losses reported by LAWPRO largely were due to refunds of premiums pursuant to retrospective premium rating terms in the professional liability insurance contract with the Law Society and LAWPRO’s conscious decision to provide low and stable premiums to its insureds. The company’s underwriting results may be further challenged by its inherent exposure to fraud-related claims. Results also are due in part to increases seen in loss frequency and severity trends. Recently, however, adverse developments have occurred due to a revaluation of existing reserves to reflect the impact of the implementation of a harmonized sales tax in Ontario and a significant decrease in the discount rate, resulting in an increase in claims liabilities. Going forward, LAWPRO is anticipated to be challenged to maintain the balance between operational profit and its mandate to its insureds.

A.M. Best will be disclosing for all rated entities, going forward, the potential rating factors that could in the near to mid-term cause rating movement. As a result, while A.M. Best does not expect to downgrade (or place a negative outlook on) the ratings of LAWPRO in the near to mid-term, such actions would ensue if: the group were to incur material losses in its capitalization; be unable to contain its underwriting to its budgeted levels with the current set of preventative measures that have been recently put in place; have its relationship with its parent change in a manner that effects the nature of the company’s exclusivity in reference to its lead product or have substantial adverse reserve development relative to LAWPRO’s peers, as well as the industry’s averages.

The principal methodology used in determining these ratings is Best’s Credit Rating Methodology -- Global Life and Non-Life Insurance Edition, which provides a comprehensive explanation of A.M. Best’s rating process and highlights the different rating criteria employed. Additional key criteria utilized include: “Risk Management and the Rating Process for Insurance Companies” and “Understanding BCAR for Canadian Property/Casualty Insurers.” Methodologies can be found at http://www.ambest.com/ratings/methodology.