- The Securities and Exchange Commission (SEC) this week charged international insurance company AmTrust Financial Services Inc., and its former CFO, Ronald Pipoly, Jr., with failing to disclose material facts about how the company estimated its insurance losses and reserves.
- The company and former CFO have agreed to pay $10.5 million to settle the charges.
- "AmTrust never disclosed that Pipoly repeatedly deviated from the reserving processes described in the company's filings, and changed the company’s actuarially determined reserves estimates," said David Peavler, director of the SEC’s Fort Worth Regional Office.
According to the SEC, AmTrust and Pipoly failed to properly disclose the company's process for reporting management's best estimate of loss reserves in its filings.
Although AmTrust and Pipoly disclosed the company's general actuarial process for estimating loss reserves, they failed to disclose Pipoly made consolidated accounting adjustments that did not properly consider the actuarial analyses and diverged from the company's actuarial estimates.
In addition, AmTrust failed to disclose the specific factors or assumptions supporting Pipoly's judgmental adjustments, and failed to maintain sufficient supporting documentation for management’s best estimate.
AmTrust and Pipoly also failed to disclose the loss contingencies created by Pipoly's judgmental adjustments to the company's historical experience. By the end of 2015, Pipoly's total adjustments exceeded $300 million and impacted all of AmTrust's reporting segments.
"Disclosures regarding an insurance company’s loss reserve process allow investors to judge the reliability of the company’s numbers," Peavler said, adding that Pipoly repeatedly deviated from the company's own reserving processes.
The SEC's complaint, filed in federal court in the Southern District of New York, charges AmTrust and Pipoly with violating the Securities Act of 1933 and violating or aiding and abetting violations of the reporting, recordkeeping, and internal controls provisions of federal securities laws.
Without admitting or denying the SEC’s allegations, AmTrust and Pipoly have agreed to permanent injunctions against future violations of these provisions and to pay penalties of $10.3 million and $75,000, respectively. Pipoly has also agreed to disgorge $140,000 and pay $22,499 in prejudgment interest.