Two reinsurance companies have prevailed on motions to dismiss in shareholder securities law putative class actions involving restatements of loss levels from cat events. In these cases, the courts essentially acknowledged the practical difficulties of precisely forecasting ultimate cat loss levels.

In In re PXRE Group, Ltd., Securities Litigation, PXRE prevailed in a suit alleging a scheme to understate losses after it restated several times the amount of losses arising out of a series of hurricanes that devastated the Gulf Coast in 2005. The court granted PXRE’s motion to dismiss, finding that plaintiffs “failed to plead that defendants were reckless in not knowing about the flaws in PXRE’s calculation of its loss estimates.”

In Zirkin v. Quanta Capital Holdings Ltd., Quanta issued several estimated loss projections relating to Hurricanes Katrina and Rita that ranged from $42 to $68.5 million, resulting in multiple rating downgrades, and forcing Quanta to cease writing new insurance and reinsurance business and to sell its remaining insurance and reinsurance portfolios.

Noting the conjectural nature of insurance reserves established for losses that have been incurred but not yet reported, the court ruled that the complaint did not put forth sufficient factual allegations such that it could plausibly find that the loss estimate included in the offering documents was a material untruth at the time it was made, especially since the adjusted estimate was based on a single business interruption claim. The court also held that the complaint did not meet applicable heightened pleading requirements, and that some of the claims failed because the $68.5 million preliminary loss estimate was protected by the “bespeaks caution” doctrine.