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From Securities Regulation Daily, September 14, 2015

No showing that MetLife did not believe reserves were adequate

By Rodney F. Tonkovic, J.D.

Exchange Act fraud claims brought against MetLife, Inc. were dismissed by the district court sitting in Manhattan. The complaint alleged that MetLife repeatedly overstated its financial condition and performance as a result of its failure to have adequate reserves for death benefits owed to certain beneficiaries. The court said that the requirement that the plaintiff adequately allege that MetLife made a material misrepresentation or omission proved to be insurmountable, and this was fatal to the complaint's Exchange Act claims (City of Westland Police and Fire Retirement System v. MetLife, Inc., September 11, 2015, Kaplan, L.).

Background. This action was brought against MetLife, Inc. and involved incurred but not reported (IBNR) death benefit claims with respect to group life insurance policies. GAAP requires insurance companies like MetLife to maintain loss reserves and make "a reasonable estimate of IBNR liabilities" in their financial statements.

At issue in this case was MetLife's use (or non-use) of the Social Security Administration's Death Master File (SSA-DMF), which is a database of recorded deaths, when paying life insurance benefits to beneficiaries. According to the complaint, MetLife used the SSA-DMF to identify deceased annuity recipients, and halt payments to them, but did not use it to identify deceased persons who were insured by MetLife

The complaint alleged that in 2007, MetLife cross-checked its records of individual life insureds against the SSA-DMF and discovered $80 million in benefits that were due to beneficiaries but had not been paid on individual policies because no claims were submitted. MetLife, however, did not perform a cross-check against its roster of group insureds, which, the plaintiff argued, would have exposed its IBNR reserves as inadequate.

The plaintiff alleged that, since 2007, MetLife repeatedly materially overstated its financial condition and performance as a result of its failure to have adequate reserves for death benefits due to the beneficiaries of group life insurance policies for insureds identified as deceased by the SSA-DMF but for whom MetLife had not received claims. As a consequence, MetLife's stock traded at artificially inflated prices that dropped after the alleged misstatements came to light in 2011 following MetLife's disclosure of various state regulatory investigations into its death benefits practices and its announcement of an after-tax surcharge to increase its reserves to account for additional payments owed to beneficiaries.

For more background, please see our coverage of an earlier stage in this action in the Securities Regulation Daily Wrap Up for March 4, 2013.

Prior proceeding. In February 2013, the court dismissed the complaint's Exchange Act fraud claims for failure to adequately allege loss causation. The plaintiff filed a second amended complaint, but the court chose to wait until the Supreme Court decided Omnicare. The court noted that Omnicare dealt with Securities Act Section 11, but the reasoning applied with "equal force" to other provisions of the securities laws, including fraud claims under the Exchange Act. Post-Omnicare, the plaintiff elected not to amend its complaint, and MetLife moved to dismiss.

No misrepresentations or omissions. This time around, the court found that the plaintiff was unable to clear the hurdle of showing that MetLife had made any material misrepresentations or omissions. The court noted, as it had in the February 2013 opinion, that MetLife's explicit or implicit representations about the adequacy of its IBNR reserves were statements of opinion or belief. Post-Omnicare, the court explained a plaintiff must show either: (1) if the statement of opinion or belief constitutes a factual misstatement in itself, that the speaker did not actually hold the stated belief; or (2) if the statement is misleading due to an omission, that the statement did not rest on some meaningful inquiry, rendering it misleading to a reasonable investor.

Continuing, the court said that it was true that MetLife's IBNR reserves were insufficient to meet its obligations. What was at issue here, however, was whether MetLife did not actually believe its reserves were adequate while stating otherwise or if its statements did not rest on a reasonable inquiry, rendering them misleading to a reasonable investor reading MetLife's financial statements in context. The answer to these questions, the court concluded, was "No."

The court pointed out that its 2013 opinion accepted the plaintiff's reasoning that the 2007 cross-check of the SSA-DMF against its individual life insured revealed a shortfall of $80 million. From this, the court inferred that a trier of fact could reasonable conclude that MetLife's reserves would be inadequate for other types of policies. In this case, MetLife argued that there was no indication that the payment of $80 million had any impact on MetLife's reserves or financial statements—that is, there was no shortfall, but merely $80 million in unpaid benefits that MetLife's reserves were adequate to cover. The complaint, MetLife said, identified no facts going to the basis for its opinion.

Critically, the court found, the plaintiff failed to allege facts sufficient to make out a plausible claim that MetLife did not believe that its IBNR reserves were adequate. There was no indication, the court added, that the stated basis for the IBNR reserve estimates did not comply with the customs and practices of the life insurance industry (or that there even are such practices for fixing IBNR reserves), or that the reserves did not align with the information MetLife had at the time. The court accordingly found that the plaintiff failed to adequately allege that MetLife omitted any facts necessary to prevent its representations concerning its IBNR reserves from misleading reasonable investors.

Mortality ratios and Regulation S-K. Next, the complaint made interrelated claims that MetLife misrepresented its mortality ratios, underwriting practices, and risk management. These ancillary claims, the court said, were mostly derivative of the claims regarding the IBNR reserves and, consequently failed. The complaint also alleged that MetLife failed to disclose the state investigations into its practices, and their effect on MetLife's IBNR reserves, in violation of Item 303 of Regulation S-K. This claim failed as well due to the unravelling of the main arguments concerning the IBNR reserves.

Securities Act Claims. Finally, the court found that the complaint's claims under Securities Act Section 11 that were premised on MetLife's IBNR reserves failed for the same reasons as the Exchange Act claims. The court, however, did find liability under Section 11 for claims concerning the allegedly misstated mortality ratios. While a lack of scienter doomed these claims under the Exchange Act, Section 11 has no such requirement. According to the court, the mortality ratios were based on determinate and verifiable facts, and the complaint adequately alleged that MetLife's reported mortality ratios were inaccurate.

The case is No. 12-cv-0256.

Attorneys: Darren J. Robbins (Robbins Geller Rudman & Dowd LLP) for City of Westland Police and Fire Retirement System. Elliot Greenfield (Debevoise & Plimpton, LLP) for Metlife, Inc.

Companies: Metlife, Inc.

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