Report of the board of directors at the 2004 annual general meeting of the Property and Casualty Insurance Compensation Corporation at the Board of Trade of Metropolitan Toronto, 1 First Canadian Place, Toronto, Ontario, presented by Mr. Alain Thibault, Chairman; and Paul Kovacs, President and CEO, Wednesday, May 12, 2004.

Remarks by Alain Thibault

The past year has been an active one for PACICC. Active in the sense that your compensation corporation embarked on a process of strengthening the strategic and financial capabilities that will enable the corporation to continue its record of success as the P&C insurance industry's self-regulatory compensation corporation.

Fortunately, the active year I'm referring to did not involve an upsurge in P&C insurance company insolvencies. In fact, the only insolvency that occurred was the Canadian branch of the Home Insurance Company, which was put into liquidation in June 2003. In view of the challenging financial circumstances facing our industry during 2003 - especially in automobile insurance - it is remarkable that the incidence of insolvency was not greater.

By comparison, the recent experience with P&C insurance company insolvencies in the United States has been considerably worse than in Canada. During the period of 2001 to 2003, total liquidation assessments in the United States for P&C insurance company failures averaged just over $1 billion dollars per year (note that this is $1 billion US dollars). In rough terms, if Canada's performance had paralleled that of the United States, our industry would have received annual bills of nearly $150 million dollars or so for insolvencies in each of the last three years.

I'm pleased to say that PACICC hasn't had to bill its members for anywhere near $150 million dollars per year at anytime in its history. In fact, the largest annual insolvency-related assessment we've ever had to make was about $11.5 million dollars.

We have a sound system of insurance regulation in Canada. Standards of capital adequacy are high. The risk of failure - especially for P&C insurers who are federally licensed and regulated - remains relatively low compared to other countries. But it is interesting to note that PACICC's experience shows that solvency problems have been encountered primarily among provincially-licensed and regulated insurers. In fact, 8 of the 12 insurer insolvencies that PACICC has dealt with involved provincially-regulated companies.

What the recent experience in the United States does tell us is that PACICC needs to be prepared for the possibility that larger - and possibly more frequent - failures of P&C insurers could occur in the future. This is something that PACICC's management is carefully studying right now, and on which your Board will be taking decisions later this year.

While the risk of insolvency remains higher than we at PACICC would like to see, it is starting to come down and we are cautiously optimistic that the improved financial health we're beginning to see for many P&C insurers will bring a further reduction in the risk of insolvency.

PACICC's President, Paul Kovacs, will talk further about the financial outlook in a few minutes. Let me first highlight for you some of our significant achievements during the past year.

•  Early in 2003, PACICC launched a debate about its future role and mandate. This was done by way of a member survey to which about 90 percent of the membership responded.
  
  
•  While the member survey affirmed the need for PACICC to become more proactive, it also clearly conveyed two important member expectations for PACICC's future: first, that the corporation should not get into the business of trying to rehabilitate troubled insurers, and second, that member P&C insurers of PACICC should primarily continue to govern the organization.
  
  
•  PACICC appointed a new President, Paul Kovacs, in the latter part of 2003 to succeed Alex Kennedy upon his retirement. We owe Alex our sincere thanks for the significant role he played in building PACICC into a successful organization - first as Secretary-Treasurer and later as PACICC's President. Alex is truly one of the corporation's "founding fathers" and we are still fortunate to have his advice and counsel available to us on a part-time basis. Paul Kovacs now has his team in place and working on initiatives that will have a big impact on PACICC's future - including issues of corporate governance and financial capacity.
  
  
•  Last November, the Board approved a new three-year strategic plan and budget for PACICC. The plan will guide the corporation's activities for the period of 2004 to 2006. This was the first strategic plan ever approved for PACICC. The new plan focuses on three key strategic goals: 1) proactive operations, 2) effective governance, and 3) relevant research. A copy of the PACICC plan was sent to all member CEOs in February, along with the circular for this annual meeting.

Improving PACICC's corporate governance is a key part of our plan. Although PACICC has had 15 years of success with its original approach to corporate governance, our membership and Board of Directors recently concluded that the corporation should re-examine how it is governed - mainly to ensure that PACICC is following the best and most effective practices for an organization of its type.

The Board has received a comprehensive report and recommendations on corporate governance and will soon decide what actions to take. Among the changes being considered are adopting a new mission statement for PACICC; moving to a somewhat smaller Board of Directors that could include several "public directors" from outside of the insurance industry; clarifying the role of our committees; and conducting periodic evaluations of Board performance.

I would like to conclude by thanking a retiring member of our Board of Directors, Borden Voutt, for his six years of dedicated service to the organization. Bord actually agreed to remain a PACICC Director one year longer than he originally intended, so we thank him in particular for going that extra distance. In his insurance career, Bord was the President and CEO of the Hartford Insurance Company of Canada, and he also served as General Manager of the Facility Association. We extend our sincere thanks best wishes to Bord.

My thanks, as well, to our entire Board of Directors and to PACICC's staff for their excellent work over the past year. I will now turn things over to Paul Kovacs, who will tell you more about our plans for the year ahead.

Remarks by Paul Kovacs

I will focus my remarks on the operating environment and on the key initiatives that PACICC plans to undertake in the year ahead.

As you know, 2004 will likely be the second year of financial recovery for most P&C insurers. The industry's return on equity hit an all-time low in 2002 - and this followed four preceding years of relatively poor results. After several years of poor financial performance, it isn't surprising that we found a growing number of companies experiencing a higher risk of insolvency. While conditions are starting to improve - a trend I expect will continue for the next couple of years - the risk of insolvency will only diminish significantly after a sustained period of improved earnings. Many of PACICC's initiatives in the year ahead reflect the challenges we see in the P&C insurance operating environment.

Let me tell you about some of our plans under the three corporate goals that Alain referred to - effective governance, proactive operations and relevant research.

Plans to strengthen PACICC's corporate governance are well under way. One of the important benefits that PACICC is already seeing is a more active involvement of the Board in setting the corporation's strategic direction. For example, PACICC now plans to have two, regular Board meetings each year that are largely devoted to strategy:

•  our Spring meeting that will consider the state of the P&C insurance industry and developments in insolvency risk in particular, and
  
  
•  our Fall meeting that will be a broader strategy session, focusing in part on reviewing the plan and budget for the coming year.

Of course, the Board will also hold additional meetings during the year as required, to deal with other issues that may arise such as an insolvency of a member company.

As Alain indicated, PACICC is also in the process of developing a clear statement of its corporate mission. Having a mission statement will help to better define PACICC's goals and direct the corporation's future. I expect that our mission statement will become a key element in PACICC's corporate governance and public communications once it is approved by the Board.

Being proactive in our operations means building a better understanding of the financial health of PACICC's member companies, and ensuring that we have the financial capacity to respond if larger and possibly more frequent insurance company insolvencies occur in the future.

With respect to financial capacity, our early research suggests that PACICC would have difficulty responding to larger or more frequent insolvencies than we've experienced in the past. While the likelihood of this occurring is low, we believe that the risk is rising over time. That's why we'll be completing our research on financial capacity in the second half of 2004 and discussing our findings and recommendations with the Board, PACICC's membership and insurance regulators. We are assessing the adequacy of PACICC's $35 million dollar compensation fund - the fund that serves as our contingency reserve for insolvencies - and the annual limit on member assessments.

A key part of PACICC's commitment to relevant research is to gain a better understanding of the financial health of our member companies. As a starting point, we've stepped up our collection and analysis of publicly available insurance company financial data.

Another top research priority for us is to analyze and document why P&C insurers have failed. Some of this work will involve case studies of insurer insolvencies that required PACICC protection and compensation. Some of the work involves research that is under way in the area of insolvency prediction. And we plan to be more active in communicating our research findings to our various stakeholders - including PACICC members, insurance consumers, regulators and other financial compensation fund organizations like CompCorp and CDIC, where we can benefit from more frequent exchanges of information.

I would like to conclude by thanking Alain Thibault and the other members of PACICC's Board of Directors for their vision and consistent hard work over the past year in helping guide the organization through an important transition. My thanks, as well, to Alex Kennedy for ensuring a smooth transition from his leadership as the President of PACICC to myself assuming the role.

This is an exciting and challenging time for PACICC. The organization is well positioned for constructive change and continued success. It is a privilege for me to be working with the Board on your behalf to lead the corporation at this important time in its history.