Pilot Senior Managers Axed on Reserve Shortfall

Several senior management members at Pilot Insurance Co. – the Ontario personal lines carrier for CGU Group Canada Ltd. – were recently removed from their positions following an audit investigation of the company’s books which uncovered a reserve shortfall totaling about $195 million. The combined shortfall equates to a 50% increase in Pilot’s reserves based on its 2002 financial return. A statement released by CGU Canada’s president Igal Mayer says Pilot’s policyholders will not be affected by the insurer’s financial troubles, and that “Pilot continues to meet its capital requirements and regulatory solvency guidelines on a pro-forma basis”.

The management shakeout saw three of Pilot’s senior managers removed from office, including president Stuart Kistruck, vice president of finance Colin Simpson, and assistant vice president of claims George Hamilton. Jim Hewitt, the current vice president of CGU Canada, has been appointed new CEO/president of Pilot. He is accompanied by Norm McIntyre, senior vice president and corporate secretary at CGU Canada, as the new senior vice president and CFO of Pilot. Both positions are effective immediately.

A quarterly business report released by London, U.K.-based parent Aviva plc. breaks down the reserve shortfall at Pilot to $169 million for prior year deficiencies and $26 million for “premium deficiency” based on price inadequacy on current covers. A statement released by Hewitt says that discussions are underway with the Financial Services Commission of Ontario (FSCO) to “expedite” an adjusted rate filing to bring Pilot’s pricing to appropriate levels. In a subsequent statement issued by CGU Canada to CU, the company says a rate increase on auto of around 15% is required. “The reserve deficiency relates primarily to personal auto. While the shortfall will not impact Pilot’s ability to take on or renew business, the inadequate rates that currently exist will cause Pilot to take a cautious approach to any growth of the book in the near term, until the rate inadequacy is resolved.”

The CGU Canada statement says that the reserve shortfall at Pilot will be covered by existing capital within the company. Pilot will restate its annual accounts and regulatory filings for the 2002 financial year. In terms of which periods resulted in prior year deficiencies and why the shortfall had not been identified earlier, the statement adds, “the restatement has not been completed and it is too early to comment on accident year splits”.

CGU Canada confirms that FSCO is currently engaged in an investigation of Pilot’s financial affairs, and that both companies are working closely with the regulator. “We are working closely with FSCO to assist them in their investigation, however, we are not prepared to comment on any specifics.” CGU Canada also declined to comment on whether any legal action has/or may be taken against the former management members of Pilot. “Matters of employee relations are strictly confidential.”

CGU Canada says it will also be meeting with the group’s rating agency Standard & Poor’s (S&P) “within the next 30 days” to provide information required by S&P to make an assessment of the Pilot operations. The rating agency placed Pilot on “credit watch” following discloser of the reserve shortfall. “Pilot has and will continue to be a leading player in the personal lines property and casualty insurance market in Ontario,” notes Hewitt.