AmTrust Financial Services and its former CFO have agreed to pay $10.5 million to settle charges of accounting malpractice related to the insurance company’s estimates of loss reserves.
According to the U.S. Securities and Exchange Commission, former finance chief Ronald Pipoly failed to properly disclose the company’s process for reporting management’s best estimate (MBE) of loss reserves from March 2010 through February 2016.
While Pipoly disclosed the company’s general actuarial process for estimating loss reserves, he failed to disclose that he made consolidated accounting adjustments that did not properly consider the actuarial analyses and diverged from the company’s actuarial estimates, the SEC said in a civil complaint.
Pipoly’s total adjustments exceeded $300 million by the end of 2015, resulting in lower loss reserves and expenses being reported in AmTrust’s financial statements, the commission alleged.
As part of a settlement, AmTrust and Pipoly to pay penalties of $10.3 million and $75,000, respectively. Pipoly also agreed to disgorge $140,000 and pay $22,499 in prejudgment interest.
“Disclosures regarding an insurance company’s loss reserve process allow investors to judge the reliability of the company’s numbers,” David Peavler, director of the SEC’s Fort Worth Regional Office, said in a news release. “As we allege, 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.”
The settlement came two years after AmTrust disclosed it had been under investigation by the SEC over its accounting practices. The investigation included “a review of its accounting for its loss and loss-adjustment reserve estimates for major business lines and segments,” AmTrust said at the time.
GAAP requires insurers to disclose their basis for estimating loss reserves, including major risks and uncertainties concerning these estimates.
Pipoly served as AmTrust’s CFO from 2005 to 2017. “Pipoly was the only person who fully understood his MBE process, and he did not maintain any supporting documents for his MBE process and determination of MBE,” the SEC said.
AmTrust became a private company in 2018.