A federal judge in Chicago has cleared a group of investors to continue their class action against insurer Allstate for allegedly hurting the company’s value by allegedly lowering underwriting standards to add higher-risk customers.

In an opinion issued Feb. 27, U.S. District Judge Robert W. Gettleman said Carpenters Trust Pension Fund for Northern California and Carpenters Annuity Trust Fund for Northern California met the threshold to state a claim under the Private Securities Litigation Reform Act in their complaint against The Allstate Corporation, as well as former Allstate CEO Thomas Wilson and his successor, Matthew Winter.

Louis Ludwig
Louis Ludwig | Pomerantz LLP

The investors accused all three parties of violating the Securities Exchange Act, and also seek to hold the executives personally liable. They say Allstate skirted rules starting in 2013 by secretly reducing underwriting standards so as to qualify customers who otherwise would have been deemed too risky. They say the gambit led to a spike in claims frequency starting in October 2014, ultimately hurting the company’s bottom line and investment value. The class would include anyone who bought Allstate common stock between Oct. 29, 2014, and Aug. 3, 2015.

The complaint also accuses Allstate of making false statements to cloud the real reason for the claim increase. In his opinion, Gettleman explained the plaintiffs’ position that “these misstatements convinced initially skeptical securities analysts to view Allstate’s financial outlook favorably despite the fact that its competitors were not experiencing similar increases in auto insurance claims frequency.”

The Aug. 3 date coincides with an Allstate release detailing second-quarter financial results, leading to shares tumbling 10 percent that day. The plaintiffs said Winter that day linked the underwriting standards to the claims spike and, during an earnings call the next day, admitted the financial hit was expected. They also raised concerns about Wilson liquidating $33 million in Allstate stock — 85 percent of his direct holdings — n November 2014, and another $6.2 million in May 2015.

In arguing for dismissal, Allstate said the complaint cited company statements that were opinions, not determinable facts. Gettleman disagreed, noting the investors provided “numerous allegedly misleading factual statements,” such as earnings call remarks, and press releases in which officials blamed the claims uptick on “external factors such as adverse weather.”

Allstate said reasonable investors would have inferred the company’s conclusions were somewhat uncertain and therefore not misleading, but Gettleman sided with plaintiffs’ contention that even if that were the case, that doesn’t address the allegations that Allstate knew claims went up — in part, at least — because of relaxed underwriting standards.

The company said Wilson’s stock sales were typical estate planning and investment diversification moves, but Gettleman said the allegation “they are indicative of insider selling is both cogent and equally compelling, particularly in light of the other allegations in the complaint.” He also agreed that allegations “Winter’s statements attributing the increase in claims frequency to external factors were made with an intent to deceive investors” are as plausible as Allstate’s counterargument.

Gettleman also rejected Allstate’s claim that because it partially disclosed the underwriting expansion in May 2015, the investors couldn’t say the company’s conduct directly caused shares to lose value. He explained they only needed to allege suffering economic loss when the stock price fell after the truth became known in the marketplace, and said the single-day drop of more than 10 percent is sufficient evidence.

With the motion to dismiss denied on all counts, the judge directed Allstate to answer the complaint no later than Tuesday, March 27. A status hearing is set for Wednesday, April 11.

The plaintiffs are represented in the action by attorneys Thomas A. Dubbs, Christopher D. Barraza and Thomas G. Hoffman Jr., of the firm of Labaton Sucharow LLP, of New York, and Louis C. Ludwig, of Pomerantz LLP, of Chicago. 

Allstate is defended by attorneys Raja S. Gaddipati and John J Clarke Jr., of the firm of DLA Piper LLP (US), with offices Chicago and New York.

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