LAWPRO 2004 annual report

About LAWPROLawyers’ Professional Indemnity Company (LAWPRO®) is licensed to provideprofessional liability insurance and title insurance in numerous jurisdictionsacross Canada.

In 2004, LAWPRO provided liability insurance to more than 20,400 membersof the Law Society of Upper Canada. Through its TitlePLUS® operation,LAWPRO also provides comprehensive title insurance and legal servicescoverage for residential purchase and mortgage-only/refinance transactionshandled by lawyers.

Our mission “To be an innovative provider of insurance products and services thatenhance the viability and competitive position of the legal profession.”

contents

1

Remarks of the Chairman . . . . . . . . . . . . . 2

Remarks of the President and CEO . . . . . . 3

Underwriting/Customer Service . . . . . . . . . 6

Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

practicePRO . . . . . . . . . . . . . . . . . . . . . . . 14

Technology . . . . . . . . . . . . . . . . . . . . . . . . 16

TitlePLUS . . . . . . . . . . . . . . . . . . . . . . . . 18

Financial ReportManagement Discussion & Analysis . . . 21

Management Discussion of Risk . . . . . . 22

Auditors’ Report . . . . . . . . . . . . . . . . . . 23

Actuary’s Report . . . . . . . . . . . . . . . . . . 23

Balance Sheet . . . . . . . . . . . . . . . . . . . 24

Statement of Income . . . . . . . . . . . . . . . 25

Statement of Cash Flows . . . . . . . . . . . 26

Notes to the Financial Statements . . . . . 27

Board of Directors . . . . . . . . . . . . . . . . . . 31

Committees of the Board . . . . . . . . . . . . . 31

Management Team . . . . . . . . . . . . . . . . . . 32

chairman

2

As chairman of the LAWPRO® Board ofDirectors and one of the legal profession’snominees on this Board, I am honoured tocongratulate our insurer on a remarkabledecade of success and service to theprofession.

Collectively we have much to celebrate.LAWPRO today is acknowledged as aleading North American bar-related insurer.Our operational excellence is regularlyaffirmed by external bodies, including A.M.Best Company which in 2004 awardedLAWPRO its fifth consecutive “A” rating.Our risk management expertise – as evidenced in both the practicePRO andTitlePLUS progams – not only benefitsthe profession but is widely recognized asleading edge.

In 1995, when I was first elected a Bencherand appointed to the LAWPRO Board, thesituation was quite different. The LawSociety’s insurance program had a $200million deficit to wrestle to the ground;claims numbers had climbed to over 6,600.Base premiums soared to $5,600. Theprofession’s confidence in its insurer’sfuture was shaken.

The rescue plan that a Task Force ofBenchers implemented has proven to bevisionary. LAWPRO was revamped to runas an independent insurance companywith a mandate to operate using marketprinciples (risk rating the program) whilealso ensuring all lawyers had access to aminimum level of coverage – thereby

protecting the public interest. Therelaunched company has been profitableevery year, including 2004, in which itposted a net income of $6.1 million. It hasassets of $430 million, and shareholder’sequity stands at $102 million. Claimsnumbers are down more than 50 per centfrom 1994, and premiums have fallensteadily to levels of only $2,500 in 2004.

None of these successes would havebeen possible without the strong leadershipof Malcolm Heins (President, 1995 to2001) and Michelle Strom (our currentPresident and CEO), and the commitmentand energy of the entire LAWPRO team.The success we celebrate is very muchtheir success.

Also to be commended are the membersof the Board, present and past: Theybring to the table a stellar collection ofinsurance, financial and legal expertisethat is of tremendous benefit to the entireorganization. They and the LAWPRO staff,make chairing LAWPRO a rewarding,enlightening experience. I thank everyonewho has contributed to the first decade ofLAWPRO and look forward to continuingto build this organization, for the benefitof the bar, into the next decade.

Kim A. Carpenter-Gunn

3

president and CEO

2004 was an important milestone forLAWPRO: We completed our tenth year ofindependent operation. In those ten yearsour key successes coalesce around teninterconnected themes. Together these 10themes, described below, create a self-rein-forcing cycle to allow us to serve the needsof the profession, now and in the future.

#1 – Financial strengthFundamental to our short- and long-termsuccess is a strong capital position. Our tenyears of profitable results have supportedthe growth of our programs, and theincreased assumption of risk. This in turnallows us to better maintain stable premiumsin the face of variable economic andexternal insurance market conditions.

#2 – Excellence in claims managementContributing to our financial success isour approach to claims management.Specialized expertise and experiencedstaff have a major bottom line impact.Despite the increased complexity of claims,we have continued to reduce our claimsinventory. The positive feedback fromlawyers on how their claims were handledassures us that we have appropriatelyaddressed the human costs as well.

#3 – Customer focusThe program has continued to evolve inresponse to the changing needs of theprofession and the practice environment.Improvements to the scope of coverageand to coverage options enable lawyers

to tailor their coverage to their circum-stances – reflecting LAWPRO’s commitmentto serve the profession. In turn, for firmswith 15 or fewer lawyers, where LAWPROcan offer the necessary coverage, LAWPROis the Excess insurer of choice.

#4 – Proactive risk managementIt is a truism that if you can reduce thenumber of claims, the cost of operatingthe insurance program will decline overall.Our practicePRO program is recognized asa leading source of tools and resourcesregarding practice-related risks, whetherthey are area of law specific, or deal withthe softer skills of lawyering such as clientrelationships and communication. OurTitlePLUS program is similarly recognized.The underwriting discipline inherent in theprogram and the broader coverage it pro-vides serves lawyers and their clients well.

Risk management is possibly the bestinvestment we can make in the professionand the continued cost efficiency of theprogram.

#5 – TitlePLUS®

TitlePLUS is not simply an insuranceproduct – it is a whole support system tosubscribing real estate practitioners. TheTitlePLUS model offers enhanced protectionfor lenders and consumers by building onthe pivotal role that lawyers play in the realestate transaction. We have expanded thistool nationally in 2004, customizing it foreach provincial jurisdiction.

4

#6 – Technology in actionEarly on, we realized we could add valueto our offerings if we could interpret tech-nology trends and help lawyers integratetechnology into their practices. We haveinternalized this by using technology tostreamline our own operations. Throughservices such as online policy applications,and our TitlePLUSWeb product, we havekept processing costs down while improving efficiency.

#7 – Communication, communication,communicationWhether your preferred method of gaininginformation is paper, electronic or thespoken word, we have made a point ofcommunicating regularly, and thoroughlyabout the insurance program, our plans,products and practice risks. We know that weare succeeding from the many requestsfrom near and far to reprint sections fromour LAWPRO magazine and our practicePROmanaging booklets, and to speak onclaims and risk management topics.

#8 – Aggregator and interpreter of informationLess visible, but no less powerful, is ourability to leverage the strengths that areresident in LAWPRO: varied and deep pro-fessional expertise, and rich databases.Mining these databases allows us to fore-cast trends and identify potential issues.

#9 – Building partnershipsThrough partnerships with other legal andindustry organizations we are poised tomonitor issues and influence changes. Ourparticipation in a multi-stakeholder taskforce on fraud is but one example of this.Our staff have a presence on industrycommittees and are in demand as speakers.

#10 – Expertise of the LAWPRO teamOur success at assembling a team of talented individuals who are recognizedfor their excellence is also your success.More than half of our staff has celebratedat least five years of service. Whether it isthe real estate expertise in the TitlePLUSstaff, the resolution skills in the Claimsdepartment or the problem solving skillsof the Customer Service group, theseindividuals reinforce that cycle for thebenefit of the legal profession.

On the occasion of our 10th anniversary,(and coincidentally my own 10th

anniversary), I thank them for their commitment to LAWPRO.

Michelle L.M. Strom

10 years of innovation

In each year since 1995, LAWPRO has introduced program coverage and paymentenhancements that reflect our commitment todeliver a customer-focused program that isboth cost effective and incorporates elementsof risk rating. These changes enable insuredsto tailor their coverage to their needs and preferences. They also ensure LAWPRO deliverson its mandate to deliver programs and servicesthat enhance the competitive position of thelegal profession.

underwriting/customer service

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

Keeping a pulse on changeMining our extensive database of claimsallows us to both monitor how the practiceof law is changing, as well as gauge therisk associated with certain practice areas.

Real estate and civil litigation, for example,consistently generate the highest percent-age of claims, while immigration andcriminal law account for fewer claims thanother practice areas. Part-time practitionersand lawyers who have been recently calledto the bar also report fewer claims thanother groups. LAWPRO has addressedthese trends by offering discounts forlawyers who restrict their practice to lowerrisk practice areas, while lawyers in realestate and civil litigation pay a transactionlevy surcharge of $50 per transaction. Inaddition, lawyers with one or more claimspay a claims history levy surcharge thatranges from $2,500 to $35,000 and up,depending on the number of claims paid.These measures ensure that lawyers whopractice in statistically higher risk areas paya premium that more closely correlateswith the risk they represent, as the graphon this page illustrates.

Monitoring claims trends along with thechanging practice climate also enables us

to adapt the program to changing circum-stances. We constantly assess the marketplace in which lawyers practise toensure coverage reflects current realities– while also guarding against the increas-ing trend to stretch the boundaries of the“professional services” definition. Forexample, claims arising out of mortgagebrokering activities have been excludedfrom coverage since 1995.

underwriting/customer service

6

0

5

10

15

20

25

30

35

Comparison of claims and expenses to premiums and levies, by lawyer’s primary area of practice

Litigation*

* Includes defence and plaintiff litigation, family law and criminal law

Real estate Corporate, bankruptcy,

securities, tax, IP

Wills, estates All other

Claims & expenses Premiums & levies

in m

illion

s of

dol

lars

• LAWPRO assumes administration of insuranceprogram

• transaction & claims historylevy surcharges introduced

• premiums & coverageadjusted for new lawyers,lawyers working with others,lawyers no longer in practice

• application process developed

• 16,700 application & optionselection forms processed

• options introduced fordeductibles, areas of practice, sub-limit and premium payment options

• exempt lawyers offeredbasic coverage and limitbuy-up options

• Mandatory Innocent PartyCoverage premium substantially reduced

• part-time practice discount,enhanced coverage for in-house corporate coun-sel, and early payment discount introduced

• 10,500 lawyers use onlinefiling & receive $50 e-filingdiscount

• volume levy surcharge discontinued

• $50 CLE premium creditintroduced

• LAWPRO retains all of therisk for the Ontario program

• enhanced coverage forlawyers in approved probono legal programs, andfor lawyers’ estates

• new defence cost protectionagainst certain statutorytax penalties

• amendments to facilitatelawyer mobility underNational Mobility Protocol

• claims arising out of business ventures andinvestment advice and/orservices, not related to themember's practice of law,excluded from coverage

• definition of insuredexpanded to include lawcorporations & MDPs

• Innocent Party Coverageexpanded

• Optional Excess InsuranceProgram introduced

• title-insured transactionsgenerally exempted fromreal estate surcharge

7

Program changes implemented in 2004exclude from coverage:

• claims arising from investment adviceand/or services; and

• claims related to business ventures orinvestments not directly related to thepractice of law.

Excluding these higher-risk activities minimizes the program’s exposure toclaims for services that are not generallyconsidered to fall within the scope of legalservices.

LAWPRO also tracks the changing practiceenvironment to ensure that the insuranceprogram responds to meet the profession’schanging needs. To facilitate the Pro BonoLaw initiative, for example, in 2003 weenhanced coverage for lawyers providingpro bono legal services. Additional cover-age changes provided limited defencecost protection for insureds who weresuccessful in defending themselvesagainst certain penalties assessed underthe Income Tax Act or Excise Tax Act.Enhanced coverage was offered to theestates of lawyers who were practising atthe time of their death in order to allow theestate to assess ongoing liability for thedeceased’s law practice. In 2004, further

changes were implemented to reflect theNational Mobility Agreement, whichenables lawyers to practice in differentjurisdictions more easily.

The increased use of title insurance hasprompted the Law Society to require thattitle insurers have in place Law Society-approved release and indemnity agreementsprotecting lawyers against claims arisingout of titled-insured transactions beforethe $50 transaction levy will be waived.Formalizing these agreements will betterprotect lawyers against claims arising outof title-insured transactions, and will betterclarify under which circumstances lawyerscan claim exemption from paying the realestate transaction levy surcharge. LAWPROsupports these measures to better protectthe program’s risk exposure.

Stabilizing the premium Since 2001, insurance markets haveexperienced much upheaval and change,including significant increases in premiums.Through effective management of claimscosts, implementing risk rating, and othermeasures, we have insulated ourselvesfrom these forces; in fact, we have beenable to reduce premiums consistentlyfrom a high of $5,600 in 1995, to a low of$2,500 in 2003 and 2004. While therewas a significant increase in fraud-relatedclaims in 2004, premiums increased justfive per cent for the 2005 program.

Retaining the riskIn LAWPRO’s early years, reinsurance wasan important component in helping us movetoward solid financial ground. As a newlyre-minted company in 1995, LAWPROretained about half the risk of the program,while reinsuring the other half in the com-mercial reinsurance market. Reinsuranceallowed us to focus on developing infra-structure, operations efficiency and soundclaims management strategies in a stableenvironment. Reinsurance also afforded us

$2,000

$3,000

$4,000

$5,000

$6,000

Base premium per lawyer

5,600

5,150 5,150

4,650

3,650

3,150

2,800 2,7002,500 2,500 2,625

1997 1996 1998 1999 2000 2001 2002 2003 2004 20051995

8

a measure of credibility as our practisesand pricing were scrutinized by reinsurers.

As LAWPRO retired the deficit and built upits capital, it was eventually positioned toassume all of the risk of the Ontario pro-gram, and has done so since 2003. Thishas allowed us to cushion the premiumfrom the effects of fluctuating insurancemarkets and keep the premium increaseto just five per cent in 2005.

As a result of our underwriting and operat-ing performance, favourable loss reservedevelopment and strong capital position,A.M. Best Co. has awarded LAWPRO the“A” rating every year since 1999.

Ensuring adequate coverageIn 1998, LAWPRO strengthened its line ofinsurance products by offering excessprofessional liability insurance. At the time,excess insurance was difficult for some toobtain in the commercial market, and wasoften costly. Moreover, many smaller firmswere operating without adequate coverage,likely due to a lack of awareness of theirpotential risk exposure and their need forexcess insurance. Through stringentunderwriting, LAWPRO was able to provideexcess insurance at affordable rates toour target market of firms of 15 or fewerlawyers. In the six years since it was introduced, the Excess program has grownfrom 80 firms to 1,152 firms insured in2004. Also impressive is our 95 per centrenewal rate: Despite a 10 per cent increasein premiums in 2004 and 2005, our ratesremain very competitive and interest inthe program has continued to grow. In2005 we increased the number of lawyerswho are insured in our Excess program to3,165 lawyers in 1,168 firms, reaching closeto saturation levels in our target market.

Online servicesSince 1995, communicating the programchanges and enhancements to Ontario’slawyers on a day-to-day basis has beenthe domain of the Customer ServiceDepartment. In 2004, our customer serviceteam made 6,879 outbound calls andhandled 34,619 inbound calls, with 94 percent of calls responded to within 24 sec-onds. The number of calls made andreceived decreased 35 per cent and 12

per cent respectively from 2003. Writtencorrespondence has similarly decreasedeight per cent in 2004 to 16,726 from19,255 pieces received in 2003.

The decrease in call and correspondencevolume is a result of ongoing efforts byour customer service team to provideinsureds with alternative ways to accessand obtain information. The focus of thisenhanced communication is the LAWPROWeb site: Through posting clear, easy-to-access information about the insuranceprogram, and the development of a moreinteractive, intuitive e-filing applicationprocess, the number of calls from insuredsrelating to the application process andprogram has decreased, along with theneed for follow-up calls from our customerservice team to clarify discrepancies andmissing information.

In 1996, when LAWPRO first introducedindividual application and option selectionforms, 16,700 lawyers submitted thepaper forms by mail, fax and in person.Launching an online application processin 1999 was a major breakthrough: almost10,000 lawyers chose to e-file that year.While the number of lawyers insuredunder the program has risen steadily toabout 20,340 in 2004, the ease of onlinefiling prompted just over 17,000 lawyersto e-file, representing 85 per cent ofinsured lawyers.

We continue to streamline our onlineinteractions with lawyers. In 2003, lawyerswere offered online access to policy andinvoice documents and the premium payment authorization form. This pastyear, we expanded this capability: Manysole practitioners were able to takeadvantage of instant electronic policy andinvoice issuance, allowing them to filetheir application and access their policiesand invoices in the same online session.

As lawyers become more familiar with thee-filing process, the focus of correspon-dence received by LAWPRO has shiftedfrom questions about the applicationprocess to requests for account information,including payment details, payment optionsand amounts owing. As a result, makingthis information available on the lawyer orlaw firm’s dedicated page in the securesection of the LAWPRO Web site will be acustomer service priority for 2005.

Whether the measure is the level of satisfactionexpressed by lawyers whose claims we havedefended, or the hard financial benchmarks ofclaims management, LAWPRO is consistentlyat the top of the ratings when it comes to managing a changing and increasingly complexclaims portfolio.

1010/ claims

Ten years ago, our focus was on buildingthe infrastructure and expertise needed tomanage a sizeable claims portfolio. Withinthe first few years, we whittled the numberof open files from over 6,600 to about3,500, and reduced incurred claims costsby approximately 40 per cent from theirpeak, bringing an element of stability tothe program.

Equally important was the need to put aframework to the scope of coverage pro-vided under the policy – and specifically tothe scope of what constitutes “professionalservices” provided by lawyers. To thatend, certain activities – such as mortgagebrokering – were excluded from coverage.

A decade later, the issues are increasinglycomplex. A changing practice environmenthas led to challenging claims that aretime-consuming and costly to defend andresolve. Clients today are more demanding,and have higher expectations of what theirlawyer can deliver. As well, the courts areholding lawyers to a higher standard ofcare. Yet we continue to register impres-sive results.

The number of open claims files in ourportfolio at the end of 2004 fell to a newrecord low of 2,728, even though thenumber of claims reported in 2004 wasup marginally to 1,874 from 1,830 theprevious year. Total claims payments forthe year fell by nine per cent to $56 million,reflecting both lower legal costs andreduced indemnity payments in 2004.

Active, strategic file managementWe attribute our successful track record inmanaging claims to several inter-relatedfactors: the expertise of LAWPRO’s 20-person claims team; our innovativeapproach to working with defence counsel;and a focus on actively and strategicallymanaging all aspects of each and everyclaims file.

claims

10

0

20

40

60

80

Gross claims paid

1995 1997 1996 1998 1999 2000 2001 2002 2003 2004

in m

illion

s of

dol

lars

7670

6760 61

53

6368

6256

2,000

3,000

4,000

5,000

6,000

7,000

Number of open claims files

1995 1994 1997 1996 1998 1999 2000 2001 2002 2003 2004

6,681

5,261

4,434

3,514 3,430 3,279 3,187 3,056 2,954 2,798 2,728

This strategic guidance involves bothshort- and long-term strategies. If wedetermine that there is liability on the partof the lawyer, we will act quickly to resolvethe matter cost effectively. Alternately, if theclaim is without merit, we will not makeeconomic settlements, defending ourinsured through the trial process, if required.We will take to trial those claims that onlya trial can resolve.

11

Certain claims have far-reaching implica-tions for the profession. We carefully consider the impact of claims that could seta precedent for the bar or impinge on thereputation of the lawyer involved and/orthe bar.

Our approach to working with defencecounsel is equally principled: We set outclear cost guidelines and reporting expectations for counsel, and ensure theLAWPRO examiner assigned to the fileactively guides the claim file at each step in

payment, and 83 per cent without anyindemnity payment.

We were successful on 13 of the 16 mattersthat we took to Superior Court, and on allthree matters taken to the Court ofAppeal. We won four of the six mattersthat went to trial in small claims court; andwe were successful on 12 of 15 summaryjudgment applications.

As in past years, lawyers who have hadLAWPRO manage their claim again gaveus high marks for the services providedby both our examiners as well as thedefence counsel on the file; as the following illustrates:

A changing mix in the claims portfolioOur proactive approach to managingclaims has yielded impressive results. Butclaims management is, by its nature, alsoreactive: Factors over which we have nocontrol can and do have a significant affecton the program. Over the past decade, forexample, we have seen a significant shiftin the proportion of claims attributed tovarious practice areas. As the chart to theleft indicates, where real estate onceaccounted for the majority of claims costs,litigation practice now holds that position.

Similarly, the cost of claims arising out ofcorporate and bankruptcy practice haveconsistently increased to the point wherethey are almost 60 per cent higher than adecade ago.

Both of these trends reflect notablechanges in the practice environment. Theincreased lack of civility within the bar, amore litigious consumer public, and the

0

10

20

30

40

50

Distribution of claims by area of practice

Litigation* Real estate Corporate, bankruptcy

Wills, estates All other

* Includes defence and plaintiff litigation, family law and criminal law

1995-98 1999-2003 2004

(% o

f gro

ss c

laim

s co

sts)

the resolution strategy. To ensure long-termconsistency in the quality of representationgiven under our program, defence counselfirms subscribe to the concept of mentoringup-and-coming lawyers by their ownrespected veterans.

The success of our strategic approach toclaims management has been corroboratedon several fronts.

In 2004, we closed about 45 per cent offiles without any defence or indemnity

YESWere you satisfied with the way LAWPRO handled your claim? 96%

Would you ask the same defence counsel firm to represent you again? 87%

Were you satisfied with the process of selection of counsel? 88%

75

100

125

150

Number of claims per thousand lawyers

1995 1997 1996 1998 1999 2000 2001 2002 2003 2004

129126

116121

112

99102 103

93 93

12

increased complexity of certain practiceareas have contributed to this realignmentof claims in the portfolio. They have alsoresulted in more complicated, difficult claimsand claimants; liability is often less clearthan in the past, and coverage issues areoften extraordinarily difficult to resolve.

In the longer term, these trends will affectour bottom line: We have already seen anincrease in the average cost of claims onwhich we incur defence or indemnity coststo more than $53,500 in the last four yearsfrom $41,000 in the 1997-2000 period.Moreover, the inventory of complex claimsthat we expect will ultimately cost us$100,000 or more to resolve, is todaylarger than it has ever been.

A major contributing factor has been theincreased incidence of claims with a fraudcomponent. In the last year alone, forexample, the number of fraud-related claimsreported has increased 60 per cent to morethan 100 claims, and our projected cost toresolve these claims is up 80 per cent tomore than $5 million. Because most ofthese files have not yet reached the resolution stage, their ultimate cost to theprogram is still uncertain. However, wehave already seen the first signs of theimpact that fraud-related claims will have.In 2004, the cost of claims arising out ofreal estate practice increased to 30 per centfrom 23 per cent in 2003, with most of thisincrease attributable to fraud-related claims.

As a result, we have stepped up both ourunderwriting and investigative measures,and our efforts to better inform lawyersabout the types of frauds being perpetrated,and how they can better equip themselvesto protect against being victimized byfraudsters. The June 2004 issue of ourLAWPRO Magazine was dedicated to thesubject of fraud, and provided practicaladvice and checklists for lawyers to incorporate into their practices. We arealso participating on an industry/governmenttask force that is working to fight realestate fraud at all levels.

TitlePLUS claimsAlthough the incidence of fraud-relatedclaims in our TitlePLUS program remainsrelatively low, fraud has had an impacthere as well. In 2004, the number ofTitlePLUS claims with a fraud componentmore than doubled to three per cent ofclaims reported from less than one percent a year ago. Stringent new underwritingprocesses and more rigorous proceduresfor becoming a TitlePLUS subscriberhave helped minimize the impact of fraudon our title insurance program when compared to other title insurers, who arereporting that fraud claims accounted forone-quarter to one-third of losses in 2004.

As in the past, the majority of claims ariseout of minor permit, survey and search-related issues and utility arrears, and areresolved for $1,000 or less. The averagecost to resolve TitlePLUS claims hasremained relatively stable.

top 10 practicePRO

Whether it is the hands-on tips in the popular“managing” series of booklets; or the insightsshared in presentations at CLE and other legalevents; or the practical discussions of technologyand risk issues in articles in legal publications;practicePRO is today recognized as a leadingsource of quality risk management tools andresources in legal and technology circlesacross North America.

Since its launch seven years ago,practicePRO has provided lawyers withtips by the ten-fold. Its focus is on the “soft”skills, such as improved client communica-tion, better planning and time management(which analysis of our claims data indicatesare among the principal underlying causesof loss); and on equipping lawyers to adapttheir practices to the changing times.

The cornerstones of practicePRO’s riskmanagement arsenal are a series of booksthat address specific practice managementissues or risks. In 2004, we published theseventh in this series: “managing thesecurity and privacy of electronic data in alaw office” which not only provides practicaltips on the subject, but also reflectspracticePRO’s other focus: Helping lawyersintegrate technology into their law practices.

To this end, practicePRO maintains anextensive Web site that features articlesand links that put risk management contentat the lawyers’ fingertips. In 2004, close to27,000 visitors logged on to the site – anaverage of about 150 a day. Visitorsdownloaded close to 36,000 documents.

practicePRO’s influence is evidenced in theshift that has occurred in CLE programmingas a result of the LAWPRO CLE PremiumCredit Program. CLE programs, which in thepast focused primarily on substantive lawtopics, now incorporate risk managementand claims prevention content (oftendelivered by LAWPRO staff or defence

counsel). More than 12,000 lawyersattended one of the 87 CLE programsthat qualified for the premium credit in2004 – an increase of more than 50 percent from the previous year. CLE providersare now proactively seeking to have theirprograms approved.

We have forged strong working relationshipswith all of the major law-related associations,regional, national and international. Thesepartnerships provide us with opportunitiesto access the risk management expertiseof others, as well as raise the visibility ofour program among key stakeholders andin their publications. Our risk managementcontent, for example, is now frequentlycited or republished in leading legal publications in the United States.

Reinforcing this higher visibility was anactive calendar of speaking engagementswhich saw us present at 30 law firms,associations, exhibitions and conferencesin 2004.

Rounding out the roster of tools frompracticePRO is the risk management content practicePRO contributes to bothour own publication, LAWPRO Magazine,as well as to other leading print and onlinepublications, including The National (thepublication of the CBA), OBA and CBAsection newsletters, and US-based publications issued by the ABA.

practicePRO

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Top 10 practicePRO downloadsItem No. of downloads

1. The Dangers of Metadata (from LAWPRO Magazine) 2,7702. Transition Rules Chart for New Limitations Period Act 2,6573. Dealing With Difficult Clients paper 1,7984. General Retainer Letter Precedent 1,4645. Law Office Business Plan Precedent 1,4096. Sample Law Office Privacy Policy 1,2917. Criminal Law Retainer Letter Precedent 1,0878. New Privacy Legislation (from LAWPRO Magazine) 1,0609. Dealing with Difficult Clients (from LAWPRO Magazine) 91410. Family Law Retainer Letter Precedent 898

L A W P R O01001100 01000001 01010111 01010000 01010010 01001111

Whether you’re sending an e-mail, typing a letter,or storing data on your hard drive, the informationyou work with must be converted into binarycode – a sequence of simple 1s and 0s – beforeit can be sent, stored or otherwise used.

Making the complex simple has also been animportant focus at LAWPRO over the past decade.Whether we’re streamlining the insuranceapplication, making information more accessible,or developing new ways of doing business, ourunderlying goal is to make it simple. And ourmost important ally in this task: technology itself.

101010 technology

In 1995, it took lawyers an hour or more tocomplete the 24-page paper application,which then was mailed or faxed to ouroffices where data entry personnel inputapplication information. Another teamthen spent weeks assembling packagesthat contained invoices, Declarationpages and copies of the actual insurancepolicy, all of which had to then be mailed.

Over the last 10 years, the process hasbeen fully computerized: It now takeslawyers an average of less than 10 minutesto complete their application in a securesection of our Web site. Firms find it equallyfast and easy to complete the online filing forall lawyers in their firm. From the comfortof their home or office, they can validateinformation on their pre-populated appli-cation, authorize payments from bank orcredit card accounts online, or update theirpersonal or firm information.

In 2004, we further simplified our onlineservices with the introduction of instantpolicy issuance: Within seconds of complet-ing the online application filing, the lawyer’spersonalized invoice, Declaration pagesand a copy of the insurance policy areaccessible online.

Lawyers have been quick to capitalize onsavings in time and costs that onlineservices provide: The number of lawyerswho opt to e-file has increased steadilyfrom a base of just under 10,000 onlinefilers in 1999 to a record 17,000 e-filers(85 per cent of the practising bar) in 2004.About 25 per cent of eligible lawyers optedfor instant policy issuance – a facility that willbe available to even more lawyers in 2005.

Our Web sites recorded more than 1.6million hits representing 107,000 uniquevisitor sessions in 2004 – an increase of 25per cent from the previous year. Similarly,e-mail is becoming the profession’s pre-ferred communication tool, accounting formore than 40 per cent of correspondencethat we now receive annually.

Promoting technology use by lawyersDeveloping technology-based services alsooffers us an opportunity to demonstratehow business can be done differently andkeep lawyers competitive. Our TitlePLUSprogram, for example, is delivered almostentirely over the Internet, providing lawyerswith a viable example of the potential ofelectronic conveyancing. RealtiPLUSWeb®,which offers lawyers a Web-based filemanagement, document production andtitle insurance application system (seepage 19) provides further evidence of thebenefits of online real estate practice.

Technologies to improve internal operationsallow us to also improve services to ourexternal customers. The launch in 2004 of a“virtual claims file” allows us to electronicallystore the reams of documents related to aspecific claims file – providing quick, secureand centralized access to claims documents.Testing new technologies on our intranet,which is an information and knowledgemanagement tool for staff, has helpedidentify opportunities for upgrading ourexternal LAWPRO Web site in mid 2005.Similarly, developing remote access capa-bilities that enable our staff to work offsitesupports our goal of ensuring businesscontinuity in the event of weather-relatedor other emergencies.

Technology educationLAWPRO is actively involved in educatinglawyers about how to make better use oftechnology in their practices. Our newbooklet, “managing the security and privacy of electronic data in a law office”details the steps lawyers should take toprotect their electronic data. At ourTechnology Breakfasts we demonstratehardware and software solutions at work.

LAWPRO Magazine not only includes apractical TechTip column, but also fea-tures in-depth articles on issues such ashidden metadata in computer files, phish-ing schemes and how to make better useof various features in commonly usedsoftware products.

technology

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1 2 3 4 5 6 7 8 9 10 TitlePLUS

With our TitlePLUS program firmly establishedin Ontario, in 2004 we focused on makingTitlePLUS title insurance more accessiblenationally.

By year-end, we were issuing TitlePLUS policiesin 9 of Canada’s 10 provinces, and workingwith hundreds of lawyers and lenders acrossthe country to further expand its availability intheir jurisdictions.

Lawyers, lenders and consumers acrossthe country recognize the significantadvantages that the TitlePLUS programoffers each participant in the conveyancingprocess. The enhanced protection weprovide, by combining title and legal services coverage under one policy, betterprotects both consumers and lenders.Lawyers can feel secure knowing they haveprovided a quality product that protects theirclients’ interests. Lenders take comfortfrom knowing they have protected theirown interests in the transaction, as wellas ensuring their clients have the mostcomprehensive protection available.

For lawyers, the TitlePLUS program offersyet another advantage: We are committedto supporting the pivotal role that the realestate bar plays in conveyancing. Wesupport the bar through educational activ-ities and by putting our in-house legalexpertise at their fingertips – whether it isthrough the tips and legal content availableon the TitlePLUS online application, throughour publications, or through our expert teamof consultants, analysts and underwriters.

At the same time, we have forged strongerties with the lending community, anddeveloped services that meet the needsof financial institutions in real estatetransactions.

The success of this approach is measuredin many ways. Again in 2004, an increasingnumber of lawyers opted for TitlePLUSinsurance: About 400 lawyers in Ontarioordered TitlePLUS insurance for the firsttime, helping increase our TitlePLUS subscriber base to close to 2,400 – anincrease of more than 30 per cent overlast year’s totals. This strong interest inusing the TitlePLUS program helped usgrow the TitlePLUS business by more thansix per cent and exceed our premium targets for 2004. We estimate that one in10 purchases in Ontario is now insuredwith a TitlePLUS policy.

At the national level, the TitlePLUS programalso has momentum. More than 300 lawyersin the western provinces and AtlanticCanada have signed on to use theTitlePLUS program for their real estatetransactions. As well, we have increasedour presence in the lending community:All major financial institutions acceptTitlePLUS policies nationally, and hundredsof smaller institutions – many of themregional lenders – use TitlePLUS coverageon transactions that they finance.

Our commitment to both consumers andlawyers has also been recognized by amajor international organization. In 2004,LAWPRO became the first and onlyCanadian company to be granted membership in the National Associationof Bar-Related Title Insurers (NABRTI).Admission to NABRTI represents a milestone for our TitlePLUS program, asmembers have to demonstrate a long-termcommitment to key principles such asworking with the real estate bar in thepublic interest, delivering the title productonly through lawyers, and evidence ofeducational initiatives that inform both thepublic and lawyers about the role of thelawyer and title insurance in real estatetransactions.

Proudly CanadianFrom the outset, we have made ourCanadian identity a cornerstone of ourpromotional activities. In 2004, we developeda new advertising campaign that reinforcesthis “made in Canada” branding. The“Proudly Canadian” theme, along withindigenous wildlife, were featured in ads thatran in all major legal, consumer, real estateand lender publications across the country.

An equally important TitlePLUS trademarkis the personal service we provide: In 2004,our team of consultants visited close to1,000 lawyers and law firms across Canada,

titlePLUS

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to introduce them to the TitlePLUS programand demonstrate first-hand how it canbenefit their real estate practices. As well,we sponsored and/or participated in morethan 150 events to promote the programto lawyers and their staff, as well as toconsumers and real estate professionals.

Technology-based real estate practiceThe technology platform that lawyers useto access TitlePLUS insurance has evolvedsignificantly over the past seven years.The desktop software in place at itslaunch in 1997 has been replaced by aleading edge, Web-based system thattakes just minutes to use, and also providesvalue-added tips and legal content thatreflect the depth of the TitlePLUS team’slegal expertise.

In 2004, we expanded technology initiatives for lawyers, in conjunction withLawyerDoneDeal Corp. (LDD), a technology developer.

RealtiPLUSWeb™ is a one-stop, fully integrated document production, file management and title insurance applicationsystem that is delivered to lawyers’ desk-tops over the Web. With more than 1,000lawyers eligible for RealtiPLUSWeb withinthe first six months of launch, it is fastbecoming a preferred way to do business.

Working with LDD, we also began devel-opment of a Web-based process that willlet lawyers outside Ontario apply for

TitlePLUS coverage online rather thanhaving to phone or fax us the requireddocumentation. As of January 2005,lawyers in British Columbia, Alberta,Saskatchewan and Manitoba were able toapply online for TitlePLUS coverage fortheir mortgage-only/refinance transactions.We expect to be able to expand our onlinecapabilities for both the western provincesand Atlantic Canada later in 2005.

Equally important is our support for technology initiatives for the lender community. The Virtual IntermediaryProgram (VIP™) launched to the financialservices community in early 2004 provideslenders and lawyers with a centralized Website from which they can work, creating,distributing and exchanging data on anautomated basis; for example, lenderscan post mortgage information for lawyersto retrieve, as well as generate any numberof reports at a keystroke. We are currentlyworking with a major national lender toexpand the data transfer capabilities ofthe VIP initiative to facilitate the movementof funds in a real estate transaction.

Impact of fraudIn 2004, all title insurers reported anincrease in fraud-related claims, withmany reporting that fraud claims accountedfor one third or more of their losses.

Although not immune to the impact of fraud,the TitlePLUS program has not beenaffected to the same extent as other titleinsurers, largely because of the morestringent underwriting requirements that arean integral part of TitlePLUS underwriting.Additional safeguards implemented in2004 further mitigated the impact of fraudclaims. However, the number of claimswith a fraud component has more thandoubled to about three per cent of allclaims reported in 2004.

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10 financial report

md&a

21

Income StatementIn 2004, the Company generated net income of$6.1 million, a decrease of $1.4 million over 2003.Income before taxes decreased by $1.8 million to$9.1 million. Underwriting income decreased by$9.0 million but was largely offset by an increaseof $7.2 million in investment income.

Premiums earnedTotal premiums decreased by $7.1 million to $79.3million in 2004. While both the optional excess andTitlePLUS programs experienced growth in the year,premiums from the core professional liability programdecreased substantially because no premium sub-sidies were drawn in 2004 from the Law Society($6.1 million in 2003). Additionally, the Companyreturned $5.1 million to the Law Society for futureinsurance purposes pursuant to policy terms.

Reinsurance cededNo reinsurance was purchased in either 2004 or2003 for the core Ontario professional liability andTitlePLUS programs.

The optional Excess program continues to be fullyreinsured, removing exposure to the Company fromclaims in this program. The Company assumes 10%of the risk from the program it manages for the LawSociety of Newfoundland.

Net claims and adjustment expensesOverall, incurred claims are consistent with the prioryear. An improvement in prior year loss estimatesin the amount of $8.0 million offset an increase inthe number of claims reported in 2004.

General expensesPersonnel related costs and external consulting feesaccount for the bulk of the increase in 2004 generalexpenses over 2003.

Commissions earned The Company earns base commissions on thatportion of premiums ceded to reinsurers plus additional commissions for profitable results. Whilebase commissions are comparable between the2004 and 2003 years, profit commissiondecreased by $0.4 million.

Investment incomeIncome generated from investments increased by$7.2 million over 2003. Investment income includes netcapital gains of $4.3 million realized on dispositionof assets ($0.6 million loss in 2003). At December

2004 the market value of the investment portfolioexceeds book value by $12.6 million (2003 – $9.0million).

Provision for income taxesCombined corporate tax rates dropped by 0.5%from 2003, and this change is reflected in the 2004tax expense.

Balance SheetShareholder’s equity increased by $6.1 million, thenet income earned during the year.

InvestmentsInvestment assets, inclusive of cash and cashequivalents, increased by $43.0 million to $306.7million at December 31, 2004. The increase wasprimarily the result of cash provided by operations,and investment income generated by the portfolio.Investment assets are invested, in accordance withinvestment policy approved by the Company’s Boardof Directors, in a diversified, high-quality portfolioconsisting largely of fixed income securities andpreferred shares which are matched for maturity toexpected claims payments.

That part of the Company’s portfolio which is surplusto the claims liabilities includes equity investmentsin publicly traded companies, the values of whichare subject to market volatility.

Provision for unpaid claims and adjustmentexpenses and reinsurers’ share of provisionThe provision for unpaid claims represents theamount required to satisfy all of the Company’sobligations to claimants without offset for reinsurance.This has increased by $17.8 million. Reinsurancerecoveries have declined by $12.0 million andaccordingly the net change in provision is $29.8million. This change is the result of additionalclaims recorded in 2004, net of payments madeduring the year. The decline in the reinsurancerecoveries is mainly due to the continued transitionaleffects of ceding lesser amounts to reinsurers onthe Ontario program. The percentage cededdropped in stages from 57% in 1995 to nil in 2003,where it remained in 2004.

The estimation of claims liabilities introducesprocesses that generate measurement uncertaintyand are subject to variation. The Company attemptsto ensure these estimates are prudently conservative.

management discussion & analysisLawyers’ Professional Indemnity Company

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md&amanagement discussion of riskLawyers’ Professional Indemnity Company

The Company is exposed to various risks in itsbusiness activities. Accordingly, we take care torecognize, assess and manage the risks taken bythe organization. The principal risks inherent in ouroperations are described below.

Product design and pricing riskInsurance industry and practice environmentchanges are regularly assessed to ensure appropriatecoverage and limits are available at an affordablecost for the insured and an acceptable return forthe Company.

The process of designing and pricing productsincludes the estimation of many factors includingfuture investment yields, claims experience, andexpenses. Product design and pricing risk is therisk that actual experience will not match theassumptions made at the time pricing was determined,and as a result, financial losses will occur. The riskis managed through detailed scenario analysis,and testing for acceptable results within a range ofpossible outcomes.

Claims liability managementClaims management is the procedure by which aninsurance company determines the validity andamount of a claim. Effective claims managementthrough prompt handling of files and use of expertiseis fundamental to the success of our business.Claims trends are monitored on an ongoing basis sothat timely and appropriate actions can be taken tominimize costs. Risk management efforts are alsoused to educate the profession and lower the riskof future claims.

The process of quantifying claims liabilities necessarilyrequires estimation of future costs and outcomes.Factors such as settlement patterns, litigationtrends, claims payment patterns, claims severityand claims frequency may have an impact on theactual claims experience.

Investment portfolio riskA significant portion of the Company’s assets isheld in the investment portfolio. Income generatedby the portfolio is used as working capital and con-tributes significantly to the Company’s bottom line.There is the risk that our investment objectives,which are affected by general economic conditionsbeyond our control, will not be achieved. In aneffort to limit investment risk, claims obligations arematched with investment assets which have matu-rities that roughly mirror their expected payment.

The Company engages professional asset managerswho manage the portfolio in accordance with specificinvestment mandates consistent with the goals ofthe organization. Performance is monitored on aregular basis.

Reinsurance risk The Company’s reliance on reinsurance hasdecreased in recent years. However, a significantportion of the existing provision for unpaid claimsis still shared with reinsurers. Reinsurance in itselfdoes not relieve us of our liability to insureds. Shoulda third party reinsurer become insolvent, theCompany’s results and financial position could benegatively affected. To minimize the risk of potentialdefault, reinsurers participating in our programsmust pass stringent financial quality thresholdsand are subject to annual reviews.

Regulatory and legislative complianceThe Company is provincially licensed to provideinsurance and subject to legislative rules and regu-lations. These regulations, designed to protect theinsured, are becoming increasingly complex, andcover a wide range of areas including complaintsresolution, privacy, solvency standards, investmentrestrictions, adequacy of reserves, and financialreporting. Failure to comply with applicable laws orregulations could result in the imposition of fines orsignificant restrictions on our ability to conductbusiness. Management keeps abreast of changesin regulatory requirements and has systems in placeto ensure compliance.

Capital management The Company has procedures to ensure that thereis adequate capital to meet statutory requirementswith appropriate safety margins. Forecasting modelsand sensitivity analysis are used to establish whetherexpected results will conform to industry norms. Allsignificant financial initiatives are subject to stresstests to ensure compliance with solvency and capi-tal requirements.

Operational riskOperational risk is the risk of loss resulting frominadequate or failed processes, technology, orhuman performance. We endeavour to minimizeoperational risk by ensuring that effective infrastruc-ture, controls, systems and individuals are in place.Internal controls, consisting of policies and proceduresestablished and maintained by management, arein place to ensure the orderly and efficient conductof our business.These controls are regularly reviewedand updated to follow best business practices andto minimize unintended practices or events fromtaking place.

ReputationThe biggest risk that any company faces is the lossof its good name. We strive to operate at the highestlevels of professionalism, integrity and good practice.

auditors’ reportLawyers’ Professional Indemnity Company

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To the Shareholder of Lawyers’ Professional Indemnity CompanyWe have audited the balance sheet of Lawyers’ Professional Indemnity Company as at December 31, 2004,and the statements of income and cash flows for the year then ended. These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audit.

We conducted our audit in accordance with Canadian generally accepted auditing standards. Those stan-dards require that we plan and perform an audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. An audit includes examining, on a test basis, evidence sup-porting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the over-all financial statement presentation.

In our opinion, these financial statements present fairly, in all material respects, the financial position of theCompany as at December 31, 2004, and the results of its operations and its cash flows for the year thenended in accordance with Canadian generally accepted accounting principles.

Toronto, OntarioJanuary 28, 2005 Chartered Accountants

actuary’s reportLawyers’ Professional Indemnity Company

Report for Financial Statements at December 31, 2003

Role of the Appointed ActuaryThe actuary is appointed by the Audit Committee of the company. With respect to the preparation of thesefinancial statements, the actuary is required to carry out a valuation of the policy liabilities and to reportthereon to the company’s shareholders. The valuation is carried out in accordance with accepted actuarialpractice, and regulatory requirements. The scope of the valuation encompasses the policy liabilities as wellas any other matter specified in any direction that may be made by the regulators. The policy liabilitiesconsist of a provision for unpaid claims and adjustment expenses on the expired portion of policies and aprovision for future obligations on the unexpired portion of policies.

In performing the valuation of the liabilities for these future events, which are by their very nature inherentlyvariable, the actuary makes assumptions as to future rates of claims severity, inflation, reinsurance recoveries,expenses and other matters, taking into consideration the circumstances of the company and the nature ofthe insurance coverage being offered. The valuation is necessarily based on estimates, consequently, thefinal values may vary significantly from those estimates. The actuary also makes use of management information provided by the company, and uses the work of the auditor with respect to the verification of theunderlying data used in the valuation.

Valuation Actuary’s ReportI have valued the policy liabilities of the Lawyers’ Professional Indemnity Company for its balance sheet asat 31 December 2004, and their changes in its statement of income for the year then ended, in accordancewith accepted actuarial practice, including selection of appropriate assumptions and methods.

In my opinion, the amount of the policy liabilities makes appropriate provision for all policyholder obligations,and the financial statements fairly present the results of the valuation.

Toronto, Ontario Brian G. PellyJanuary 28, 2005 Fellow, Canadian Institute of Actuaries

balance sheet Lawyers’ Professional Indemnity Company

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Stated in thousands of dollarsAs at December 31 2004 2003

AssetsCash and cash equivalents 27,721 9,203 Investments (note 3) 278,978 254,474 Investment income due and accrued 1,781 1,919 Due from reinsurers 12,145 12,570 Due from insureds 814 –Due from the Law Society of Upper Canada – 6,453Reinsurers' share of provisions for:

Unpaid claims and adjustment expenses (note 2) 97,663 109,661Other receivables 882 1,026Other assets 386 320Fixed assets (accumulated depreciation – 5,582; 2003 – 4,898) 729 1,076Income taxes recoverable 3,224 –Future income taxes (note 7) 5,495 4,230

Total assets 429,818 400,932

LiabilitiesProvision for unpaid claims and adjustment expenses (note 2) 315,845 298,047Due to reinsurers 815 603Due to insureds – 137Due to the Law Society of Upper Canada 5,976 –Expenses due and accrued 3,829 3,150Income taxes due and accrued – 1,470Other taxes payable 478 735Unearned premiums and commissions 589 592

327,532 304,734

Shareholder's EquityCapital stock issued and paid 5,000 5,000Contributed surplus 30,645 30,645Retained earnings 66,641 60,553

102,286 96,198

Total liabilities and shareholder's equity 429,818 400,932

See accompanying notes

On behalf of the Board _____________________________ _____________________________Director Director

statement of income Lawyers’ Professional Indemnity Company

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Stated in thousands of dollarsYear ending December 31 2004 2003

Premiums earned 79,342 86,435Reinsurance ceded 5,304 4,527

Net premiums earned 74,038 81,908

Net claims and adjustment expenses (note 2) 69,265 69,463Premium taxes 2,405 2,619General expenses 12,953 11,654Commissions earned (2,803) (3,073)

81,820 80,663

Underwriting (loss)/income (7,782) 1,245Investment and other income 16,836 9,652

Income before income taxes 9,054 10,897

Provision for income taxes – current (note 7) 4,231 7,191 – future (note 7) (1,265) (3,765)

Net income 6,088 7,471

See accompanying notes

statement of cash flowsLawyers’ Professional Indemnity Company

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Stated in thousands of dollarsYear ending December 31 2004 2003

Operating ActivitiesNet income 6,088 7,471 Items not affecting cash:

Future income taxes (1,265) (3,765)Depreciation 684 695Realized (gains)/losses (4,338) 614Amortization on bonds 101 (1,819)

1,270 3,196

Changes in non-cash working capital balances:Other taxes payable (257) (106)Net income taxes due and accrued (4,694) (868)Due from reinsurers and insureds (314) (2,278)Provision for unpaid claims and adjustment expenses 17,798 10,294 Reinsurers' share of provisions 11,998 22,209 Unearned premiums and commissions (3) (65)Expenses due and accrued 679 547 Investment income due and accrued 138 676 Other receivables 144 (56)Other assets (66) (186)Due to/(from) the Law Society of Upper Canada 12,429 (10,582)

Total funds provided by operating activities 39,122 22,781

Investing ActivitiesFixed assets:

Purchases of fixed assets (337) (317)

Investments:Purchases of investments (174,368) (661,654)Proceeds from sale of investments 154,101 646,660

Investment purchases, net (20,267) (14,994)

Total funds provided by investing activities (20,604) (15,311)

Net change in cash and cash equivalents 18,518 7,470

Cash and cash equivalents, beginning of year 9,203 1,733

Cash and cash equivalents, end of year 27,721 9,203

Cash and cash equivalents at end of year consist of:Cash 4,775 756 Cash equivalents 22,946 8,447

See accompanying notes

notes to the financial statements

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Stated in thousands of dollarsAs at December 31, 2004

Lawyers’ Professional Indemnity Company (“theCompany”) is an insurance company licensed to pro-vide lawyers’ professional liability and title insurance.

1. SIGNIFICANT ACCOUNTING POLICIESThese financial statements have been prepared inaccordance with Section 104 of the OntarioInsurance Act (the “Act”) which states that, exceptas otherwise specified by the Financial ServicesCommission of Ontario (“FSCO”), the financialstatements of the Company are to be prepared inaccordance with Canadian generally acceptedaccounting principles, including the accountingrequirements of FSCO. The significant accountingpolicies used in the preparation of these financialstatements, including the accounting requirementsof FSCO, are summarized below. These accountingpolicies conform, in all material respects, toCanadian generally accepted accounting principles.

Cash and cash equivalentsCash and cash equivalents consist of cash on handbalances with banks, and short-term investmentswith maturities of three months or less. The fairvalue of cash and cash equivalents approximatesthe amounts shown in the financial statements.

InvestmentsThe Company records its investments in debtsecurities at amortized cost. Premiums and discounts from par value are amortized on astraight-line basis over the term to maturity.Investments in term deposits and common andpreferred shares are carried at cost.

Gains and losses on investments are included ininvestment income when realized. Any losses invalue of an investment, which are considered otherthan temporary in nature, are recognized in income.

Fixed assetsFixed assets are presented at cost, net of accumu-lated depreciation and amortization. Depreciationand amortization are charged to expense on astraight-line basis over the estimated useful lives ofthe assets as follows:

Leasehold improvements Term of leaseFurniture and equipment 3 to 5 yearsSoftware 1 to 3 years

Premium related balancesProfessional liability premium income is earnedevenly over the terms of underlying insurance poli-cies; generally one year, except for policies for

retired members, which have terms of up to fiveyears. Most policies are written to follow the calendaryear. The portion of premiums related to the unexpired portion of policies at the end of the fiscalyear is reflected in unearned premiums.

Title insurance premiums are earned at the inceptiondate of policies.

Premiums receivable are recorded at amounts dueless any required provision for doubtful amounts.

Claims related balancesa) Provision for unpaid claims and adjustment

expensesThe insurance program covers claims madeagainst insureds in the policy period.

The provision is determined using case-basisevaluations plus an amount for future develop-ment and is an estimation of the ultimate costof all insurance claims to December 31, 2004.The estimates are regularly reviewed andupdated and any resulting adjustments areincluded in current income.

b) Reinsurers’ share of provisions for unpaidclaims and adjustment expensesExpected reinsurance recoveries on unpaidclaims and adjustment expenses are recognizedas assets using principles consistent with theCompany’s method for establishing the relatedliability.

c) Members’ deductiblesThe insurance policy calls for insured membersto pay deductibles ranging from nil up to twenty-five thousand dollars. Expected deductiblerecoveries on paid and unpaid claims are recognized net of any required provision foruncollectible accounts at the same time as therelated claims liability.

Employee future benefitsThe Company maintains a defined contributionplan for its employees as well as a supplementaldefined benefit plan for certain designated employeeswhich provides benefits to those employees inexcess of the benefits provided by the Companypension plan. The cost of the supplemental definedbenefit plan is actuarially determined using theprojected benefit method pro-rated on service andmanagement’s best estimate of the expected planinvestment performance, salary escalation andretirement ages of employees. Market values areused to value benefit plan assets. The obligationrelated to employee future benefits is measuredusing current market interest rates assuming a

notes to the financial statementsStated in thousands of dollars

As at December 31, 2004

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portfolio of Corporate long bonds with terms tomaturity in accordance with the requirements ofthe CICA standard ”Employee Future Benefits”.

Adjustments for plan amendments, changes inassumptions and actuarial gain and losses arecharged fully into income in the year they are realized.

Income taxesThe Company uses the asset and liability methodof accounting for income taxes.

Under this method of tax allocation, future incometax assets and liabilities are determined based onthe differences between the financial reporting andtax basis of assets and liabilities, and are measuredusing the tax rates and laws that are expected tobe in effect in the periods in which the future incometax assets or liabilities are expected to be settledor realized, where those tax rates and laws havebeen substantively enacted.

2. MEASUREMENT UNCERTAINTY The settlement of professional liability claimsinvolves processes the outcome of which is inherently uncertain. Consequently, the estimationof the ultimate settlement costs of claims made todate that underlies the provision for unpaid claimsand adjustment expenses and any related recoveriesfor reinsurance or deductibles, involves estimatesand measurement uncertainty. The amounts arebased on estimates of future trends in claim severityand other factors, which could vary as the claimsare settled. Variability can be caused by receipt ofadditional claim information, changes in judicialinterpretation, or significant changes in severity orfrequency of claims from historical trends. Ultimatecosts incurred will inevitably vary from current estimates, to some extent. Although it is not possibleto measure the degree of variability inherent in suchestimates, management believes that the methodsof estimation that have been used will producereasonable results given the current information.An actuary reviews estimates at least annually and,as adjustments to these liabilities become necessary,they are reflected in current operations.

To limit losses through the spreading of risks, theCompany cedes reinsurance to other insurers. In theevent that a reinsurer is unable to meet obligationsassumed under reinsurance agreements, theCompany is liable for such amounts. The Companyhas guidelines and a review process in place toascertain the credit worthiness of the companies towhich it cedes. Based on current information of the

financial health of the reinsurers, no provision hasbeen made in the accounts for doubtful collection.

Changes in provisions for prior year claimsChanges in provisions for prior year claims recordedin the balance sheet and their impact on net claimsand adjustment expenses amounted to an improve-ment of $7,960 in the year ended December 31,2004 (2003 – deterioration of $459).

3. INVESTMENT INFORMATIONThe company holds a diversified portfolio consistingof equities and fixed income debt securities withinvestment grades of “A” or better.

Estimated fair values and unrealized gains and lossesThe book values, estimated fair values, yields andunrealized gains (losses) on investments as atDecember 31 were as follows:

2004

Book Unrealized Unrealized Estimated YieldValue Gains Losses Fair Value %

DebtSecurities 240,247 6,042 (29) 246,260 4.5

CommonShares 36,132 7,255 (863) 42,524

PreferredShares 2,599 154 – 2,753

278,978 13,451 (892) 291,537

2003

Book Unrealized Unrealized Estimated YieldValue Gains Losses Fair Value %

DebtSecurities 221,078 4,100 (94) 225,084 4.1

CommonShares 28,540 5,224 (317) 33,447

PreferredShares 4,856 221 (42) 5,035

254,474 9,545 (453) 263,566

The estimated fair values of debt securities, common and preferred shares are based on quotedmarket values.

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notes to the financial statements Stated in thousands of dollarsAs at December 31, 2004

Liquidity and interest rate risk The maturity profile of debt securities as atDecember 31, 2004, is as follows:

Within 1 to 5 Over Book1 Year Years 5 Years Value

Debt Securities 415 131,671 108,161 240,247Percentof total 0.2% 54.8% 45.0%

The average duration of debt securities atDecember 31, 2004, is 4.4 years. The Companyattempts to match the maturity of these investmentsto the expected maturity of claims obligations.Shares have no specific maturities.

4. STATUTORY INSURANCE INFORMATIONa) The Company is the beneficiary of a trust

account in the amount of $7,483 (2003 – $7,393)which is held as security for reinsurance cededto unregistered reinsurers. This trust balance isnot reflected in these financial statements butis considered in determining statutory capitalrequirements.

b) In accordance with licensing requirements, theCompany has deposited securities with the regulatory authorities having a market value of$334 (2003 – $403).

5. RELATED PARTY TRANSACTIONSPursuant to a service agreement implementedJanuary 1, 1995, the Company administers theErrors and Omissions Fund of the Law Society ofUpper Canada (Law Society), which owns theCompany’s share capital, and provides all servicesdirectly related to operations and general adminis-tration in consideration for the Law Society insuringits mandatory professional liability insurance programwith the Company.

For the year ended December 31, 2004, 92% of thepremiums written related to mandatory insurancecoverage provided to the Law Society and itsmembers. Under the insurance policy in forcebetween July 1, 1990 and December 31, 1994, theCompany is responsible for claims in excess of LawSociety and member deductibles. The provision forunpaid claims and adjustment expenses is net ofamounts relating to policies for years prior to 1995that are payable by the Law Society.

Commencing January 1, 1995, there is no longer aLaw Society deductible and 100% of the risk overthe individual member deductible is insured

through the Company. The annual policy limits forthe period January 1, 1995 to December 31, 2004are $1 million per claim and $2 million per memberin the aggregate.

In 2004, the Company refunded $5.1 million (2003– $0.7 million) in premiums to the Law Society pursuant to the retrospective premium rating provisions of the insurance contract. These fundsare held by the Errors and Omissions Fund of theLaw Society for future insurance purposes.

6. SHAREHOLDER’S EQUITYa) Common Shares: Par value of

$100 each-authorized, issuedand outstanding 30,000

Preferred Shares: Par value of$100 each, 6% non-cumulative,redeemable, non-voting,authorized, issued andoutstanding 20,000

b) Reconciliation of earned surplus

2004 2003

Beginning of year 60,553 53,082

Net income for the year 6,088 7,471

End of year 66,641 60,553

7. INCOME TAXESThe Company’s effective tax rate does not differsignificantly from the applicable Canadian statutoryincome tax rate of 36.12%.

The Company’s income tax expense has the following components:

2004 2003

Current 4,231 7,191

Future (1,265) (3,765)

Total income tax expense 2,966 3,426

Reconciliation to Statutory Tax Rate

2004 2003

Income taxes at Canadianstatutory tax rate 3,270 3,991

Increase (decrease) resultingfrom:

Changes in tax rate applicable to future income taxes – (636)

Other (304) 71

Income tax provision 2,966 3,426

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notes to the financial statementsStated in thousands of dollars

As at December 31, 2004

The Company’s future income tax asset is theresult of temporary differences between the carry-ing amounts of assets and liabilities for financialreporting purposes and the amounts used forincome tax purposes. The sources of these tempo-rary differences and the tax effects for each yearare as follows:

2004 2003

Investments 987 581

Actuarial liabilities 3,940 3,402

Other 568 247

Total 5,495 4,230

During the year the Company made payments of $5,955 and received refunds of $234 from taxauthorities.

8. FUTURE EMPLOYEE BENEFITSThe Company has a defined contribution pensionplan which is available to all its employees. Eachemployee is required to contribute 4.5% of yearlymaximum pensionable earnings and 6% in excessthereof, of an employee’s annual base earnings.Under the plan, the Company matches all employeecontributions. The Company made payments of$345 in 2004 (2003 – $322) and recorded pensionexpense of $353 (2003 – $351).

The Company also has a supplemental definedpost-retirement benefit plan. Funding for the supplemental plan has not occurred as at the lastactuarial valuation date, December 31, 2003.Accordingly, there are no plan assets. For reportingpurposes, all assets and liabilities associated withpension benefits or obligations have been measuredusing values as at December 31, 2004.

The following tables describe the Company’s commitments and costs for these employee futurebenefits, presented in accordance with the standardsdefined in Section 3461 of the CICA Handbook“Employee Future Benefits”.

2004 2003

Accrued benefit obligations

Balance, beginning of year 697 439Current service cost 103 58Interest cost 69 –

Actuarial loss/(gain) 140 –

Plan amendments 255 200

Balance, end of year 1,264 697

The accrued benefit asset /(liability) is presentedas follows in the Balance Sheet:

2004 2003Accrued benefitasset/(liability)in “Other Liabilities” (1,264) (697)

The significant assumptions used by the Companyare as follows:

Discount rate 5.75%

Expected long termrate of return on plan assets 6.00%

Rate of compensation increase 3.50%

Estimated average remainingservice life 12.0 years

The total net expense for the plan was as follows:

Current service cost 103

Interest cost 69

Expected return on plan assets –

Amortization of net actuarial loss/(gain) 140

Amortization of past service costs 255

Net defined benefit plan expense 567

9. COMMITMENTSThe Company is committed to monthly lease payments in effect until January 31, 2008. Leasepayment obligations are as follows:

2005 $1,3622006 $1,3622007 $1,3622008 $ 114

board of directors

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1 Kim A. Carpenter-Gunn*Chairman, LAWPRO Board ofDirectors; Partner, Waxman,Carpenter-Gunn

2 Ian D. CroftVice-Chairman, LAWPRO Board ofDirectors; Chartered Accountant

3 Constance B. Backhouse*Professor, Faculty of Law, University of Ottawa

4 Abdul A. Chahbar*Councillor, City of London

5 Douglas F. CutbushInsurance Consultant, Arbitrator & Mediator

6 Lawerence A. EustacePrincipal,Lawrence A. Eustace

7 Malcolm L. HeinsCEO,Law Society of Upper Canada

8 Rita HoffVice-President & Director, Canaccord Capital Corporation

9 William G. HolbrookPresident, W.G. Holbrook & Associates Inc.

10 Vern Krishna, Q.C.*Counsel, Borden Ladner Gervais LLP

11 Frederick W. GorbetPrincipal,Strategy Solutions

12 Laurie H. Pawlitza*Partner,Goodman and Carr LLP

13 George D. AndersonRetired President and ChiefExecutive Officer,Insurance Bureau of Canada

14 Michelle L.M. StromPresident & CEO,LAWPRO

15 Gerald A. Swaye, Q.C.*Principal,Gerald A. Swaye & Associates

1 4 7 10 13

15

148 11

129

5

63

2

(* Bencher, Law Society of Upper Canada)

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committees of the board

ExecutiveKim A. Carpenter-Gunn*Ian D. CroftDouglas F. CutbushMalcolm L. HeinsMichelle L. M. Strom

Audit Ian D. Croft*Abdul A. ChahbarDouglas F. CutbushFrederick W. Gorbet**Malcolm L. HeinsWilliam G. HolbrookVern Krishna, Q.C.

Investment Rita Hoff*George D. Anderson**Ian D. CroftLawrence A. EustaceMalcolm L. HeinsWilliam G. HolbrookRobert J. McCormick

GovernanceIan D. Croft*Kim A. Carpenter-GunnMalcolm L. HeinsRita HoffWilliam G. HolbrookVern Krishna, Q.C.

* Committee Chairman

** As of April 27, 2005

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1 Michelle L.M. StromPresident & CEO

2 Craig A. AllenVice-President & Actuary

3 Duncan D. GosnellVice-President, Underwriting

4 Young KimVice-President, Finance

5 Kathleen A. WatersVice-President, TitlePLUS

6 Caron E. WishartVice-President, Claims

7 B. Mark FarrishDirector, Sales & Marketing,TitlePLUS

8 Straughn InmanDirector, Human Resources

9 Dagmar KanzlerDirector, Communications

10 Daniel E. PinningtonDirector, practicePRO

11 David M. ReidDirector, Information Systems

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management team

Lawyers’ Professional Indemnity CompanyAssurance de la Responsabilité Civile Professionnelle des Avocats

One Dundas Street West Suite 2200, P.O. Box 75 Toronto, Ontario M5G 1Z3www.lawpro.ca