Public reinsurance companies periodically find themselves defending securities fraud claims based on a drop in stock price or losses that affect the company’s bottom line. In a recent case, a fraud claim was based on the failure to disclose historical loss ratios when reporting the reinsurer’s performance.
In Wigglesworth v. Maiden Holdings, Ltd., No. 1:19-cv-05296 (D. N.J., Dec. 19, 2023), a securities fraud claim and related claims were brought against a reinsurer based on the reinsurer’s failure to disclose historical loss ratios when reporting on the financial condition of its business.
It was alleged that the reinsurer set loss reserves for certain accident years by estimating loss ratios in the 50% to 60% range, while historical loss ratios for other accident years fell between 70% and 80%. Multiple statements were made that mentioned the reinsurer’s loss reserves and financial performance, among other details of the company’s business, but did not disclose that, for years 2008-2012, actual loss ratios exceeded 70%. Apparently, during this period certain executives disposed of stock.
The reinsurer and the other defendants moved to dismiss the complaint (second amended complaint) or to convert the motion into one for summary judgment. The court denied the motion to dismiss, but treated the motion as a summary judgment motion and granted the motion in favor of the reinsurer and the other defendants.
In granting the motion for summary judgment, the court concluded that “there can be no genuine dispute as to whether Defendants’ statements regarding loss reserves were false because of their omission of details regarding actual loss ratios in recent years, and thus, Defendants are entitled to judgment as a matter of law regarding Plaintiffs’ Section 10(b)and Rule 10b-5 claims.” The court found nothing in the record to support the claim that the reinsurer’s financial statements were misleading “because any description of Defendants’ financial performance or loss reserves necessarily implied the adequacy of loss reserves.” The court found that the record indisputably showed that the reinsurer engaged in a complex actuarial process that considered historical losses and that this was not evidence about which “reasonable minds could differ.”
Additionally, the court found that there was also no genuine question of material fact as to whether the revelation of historical loss reserves during the Class Period would have overshadowed the many other factors involved in the actuarial process. The court noted that the plaintiffs pointed to no evidence, and none was found in the record, to suggest that the revelation of lower historical loss ratios would totally “eclipse the balance of the numerous other considerations used to set reserves” if revealed to investors (citation omitted).
Finally, the court viewed the allegations as a backward-looking challenge to the reinsurer’s reserve-setting process in an attempt to “second-guess inherently subjective and uncertain assessments” involved in setting loss reserves (citation omitted).
