A Michigan police and fire pension fund has filed a class action securities lawsuit against insurance giant Prudential, and its CEO and CFO, for allegedly disseminating false and misleading statements that artificially inflated its stock price.
The suit alleges that the assumptions used by Prudential to establish reserves failed to account for adversely developing mortality experience in its Individual Life business segment. It said the reserves were inadequate to satisfy its future policy benefits liabilities. The action also accuses the company of materially understating its liabilities and overstating net income as a result of flawed assumptions in calculating mortality experience.
The legal action was filed in US District Court in New Jersey by the City of Warren Police and Fire Retirement System. Prudential declined to comment on the lawsuit.
According to the suit, Prudential reported second quarter earnings results in July that missed analyst forecasts. Prudential also announced it would take a pretax charge of $208 million as a result of its market experience update. The company said that the Individual Life business segment had lost $135 million. The suit says, however, that Prudential did not provide information concerning the impact of the revised mortality assumptions on the company’s financial future performance.
Following the earnings report release, investment bank UBS issued a report lowering its earnings expectations for Prudential. UBS said the company should have disclosed the new negative information at its Investor Day conference in June, which it said would have allowed investors to “reset expectations.”
The suit claims that as a result of the disclosures, Prudential’s stock price fell more than 10% to $91.09 on August 1 from $101.31 on July 31 on more than 7.6 million shares traded.
“When the true facts about the company were revealed to the market,” says the lawsuit, “the inflation in the price of Prudential common stock was removed and the price of Prudential common stock declined dramatically.”
The suit claimed that on August 2 Prudential provided the SEC with additional details concerning the company’s adjustments to operating income by segment during the second quarter. The firm revealed that its Individual Life business segment performed $178 million worse in the second quarter than during the same quarter of 2018. That was primarily because of the $208 million reserve charge from the annual review.
These additional negative disclosures caused Prudential’s stock price to drop another 5.6% to $88.56 on Aug. 2, and it then fell again on Aug. 5 to $85.95 per share, the suit contends.
The “defendants materially misled the investing public, thereby inflating the price of Prudential common stock,” said the suit, “by publicly issuing false and misleading statements and omitting to disclose material facts.”
The case is City of Warren Police and Fire Retirement System v. Prudential Financial, Inc. et al.