Third Circuit Reverses In Part Dismissal Of Putative Class Action Against Insurance Company And Holds That The Complaint Adequately Alleged Falsity With Respect To One Of The Challenged Statements Based On Confidential Witness Allegations
 

On June 13, 2023, the United States Court of Appeals for the Third Circuit affirmed in part and reversed in part the dismissal of a putative class action against an insurance company (the “Company”) and certain of its executives under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934.  City of Warren Police & Fire Ret. Sys. v. Prudential Fin., Inc., No. 21-1147, 2023 WL 3961128 (3d Cir. June 13, 2023).  Plaintiffs alleged that the Company misled investors by misrepresenting the adequacy of their reserves, which are funds to pay for anticipated benefit claims by their policy holders.  The district court had held that plaintiffs failed to plead falsity with respect to all the alleged misstatements.  The Third Circuit affirmed the dismissal on all but one of the alleged misstatements, holding that plaintiffs adequately alleged falsity with respect to that statement including through allegations attributed to a confidential informant, and remanded to the district court to consider the elements of loss causation and scienter.

Plaintiffs alleged that the Company misled investors in its statements regarding the reserves set aside to pay death-benefit claims as part of its life insurance business, which amounts were treated as a liability for future policy benefits on the Company’s balance sheets.  In January 2013, the Company acquired 700,000 life insurance policies (the “Policies”) from another insurance company and assumed the obligation to pay the death benefits owed under the Policies as they became due.  The life expectancy of the holders of these Policies proved to be shorter than expected, resulting in the Company paying death benefits sooner than expected.  In the second quarter of 2018, the Company announced a $65 million reserve increase and corresponding charge against the income on the relevant business segment (the “Business Segment”), which the Company attributed, in part, to updated mortality rate assumptions.  Over a year later, in a July 31, 2019 press release, the Company announced that due to unfavorable updates to its mortality assumptions, it would charge $208 million to the Business Segment’s income to supplement its reserves, which impact resulted in the Business Segment reporting an adjusted operating loss of $135 million for 2019 Q2.  Relying on confidential witness allegations from the Company’s former employees, plaintiffs challenged several statements made between 2018 Q2 and 2019 Q2, including (i) the Company’s descriptions of its reserve methodology; (ii) statements in the Company’s 2018 Form 10-K annual report and 2019 Q1 Form 10-Q quarterly report that disavowed any serious problems with the Business Segment and stated that the amounts of its reserves were adequate; (iii) statements by the Company’s vice chairman in an analyst meeting that there were no systemic issues with underwriting practices or mortality assumptions in the Business Segment; and (iv) a statement by the Company’s CFO at its investor day conference in June 2019 describing the Business Segment’s recent mortality experience as within the range of “normal volatility” or, at worst, only “slightly negative.”

The Court affirmed the district court’s judgment with respect to all but the last challenged statement, and dismissed the claims based on the first three statements described above.  First, the Court held that plaintiffs failed to allege that the Company’s description of its reserve methodology was false.  Second, the Court held that the statements in the Company’s SEC filings that the amounts of reserve were adequate were statements of opinion because “the setting of reserves reflects an insurer’s actuarial judgment, based on a variety of complex assumptions and considerations, of the amount it must set aside to pay claims by policyholders.”  The Court held that this opinion statement did not fall under any of the categories of a false or misleading opinion statement under the Omnicare framework because (i) there were no plausible allegations that the Company did not sincerely hold its opinion about the adequacy of the reserves; (ii) the challenged statement did not express any factual assertions that were untrue; and (iii) the confidential informant allegation that the Policies had a consistently negative mortality experience did not render the opinion statement misleading because the alleged negative mortality for the Policies was only one of the many factors considered in setting reserves.  Third, the Court held that plaintiffs failed to allege falsity with respect to the statement that there were no systemic issues with underwriting practices or mortality assumptions in the Business Segment, because the statement was about the Business Segment as a whole and not just for the Policies.

On the other hand, the Court held that plaintiffs had alleged falsity with respect to the last challenged statement made by the Company in June 2019 that the Business Segment’s recent mortality experience was within the range of “normal volatility” or, at worst, only “slightly negative.”  With respect to this statement, plaintiffs relied on a confidential witness allegation that the Company discussed the poor performance of the Business Segment and the need to take a significant charge to its operating income as early as May 2019, and that it attributed the cause to negative mortality experience in the Policies.  The Court found that the confidential witness allegations were credible because the complaint adequately alleged that (i) the witness was in a position that would have had access to the information alleged during the relevant period; (ii) regularly attended the Business Segment forecast meetings with the actuarial, capital, and financial teams; and (iii) learned as early as May 2019 that the Company was taking a significant reserve charge, and also because the confidential witness allegations could be corroborated by other confidential witnesses with dependable bases for knowledge.  The Court held that it could be reasonably inferred from these allegations that, as of June 2019 when the challenged statement was made, the Company knew about the significant reserve charge it would have to take and that the mortality experience was not in the “normal” range or just “slightly negative.”