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(Article from Securities Law Alert, September 2015)

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On September 11, 2015, the Southern District of New York dismissed claims brought under Section 10(b) and Rule 10b-5 alleging that MetLife, Inc. had understated its reserves for incurred but not reported death benefit claims (“IBNR reserves”), which in turn allegedly impacted the accuracy of the company’s financial statements. City of Westland Police and Fire Ret. Sys. v MetLife, Inc., 2015 WL 5311196 (S.D.N.Y. 2015) (Kaplan, J.). The court determined that MetLife’s representations regarding its IBNR reserves were statements of opinion that were not actionable under the Supreme Court’s decision in Omnicare, Inc. v. Laborers Dist. Council Construction Indus. Pension Fund, 135 S. Ct. 1318 (2015).[1] The court found plaintiffs’ allegations insufficient to plead either that “(1) MetLife did not actually believe its IBNR reserves were adequate but nevertheless said (or implied) they were,” or  that “(2) MetLife’s (explicit or implicit) representations regarding the adequacy of its IBNR reserves did not rest on a meaningful inquiry, rendering them misleading to a reasonable investor reading MetLife’s financial statements in context.”

Background

Plaintiffs claimed, inter alia, that MetLife had misrepresented the company’s financial performance “because certain reserves underlying its financial statements failed adequately to take account of [IBNR] death benefit claims with respect to group life insurance policies.” Specifically, plaintiffs contended that MetLife’s IBNR reserves were insufficient because the company had failed to cross-check the Social Security Administration Death Master File (“SSA-DMF”), a database of recorded deaths in the United States, against its roster of group life insureds, even though a 2007 cross-check of the SSA-DMF to MetLife’s roster of individual life insureds had “allegedly uncovered $80 million in unclaimed individual life insurance benefits.”

In 2011, MetLife conducted “its first-ever cross-check of the SSA-DMF against its roster of group life insureds” and subsequently announced that it would take a $115-$135 million after-tax charge to adjust for increases to its IBNR reserves. Shortly thereafter, plaintiffs brought the instant securities fraud action. Defendants moved to dismiss plaintiffs’ IBNR reserve-related claims based on the Supreme Court’s decision in Omnicare. 

Court Finds MetLife’s Statements Concerning Its IBNR Reserves Were (1) Statements of Opinion (2) That Were Not Actionable Under the Supreme Court’s Decision in Omnicare

At the outset of its analysis, the court noted that “the accuracy of a company’s loss reserves —that is, the degree to which the loss reserves correspond to, or vary from, the insurance obligations that ultimately will be paid out in relation to the claims, known and unknown, covered by the reserve in question — implicates the accuracy of its financial statements.” The court explained that “[i]f loss reserves are too low and later must be increased,” then “earnings will have been overstated in SEC filings.”

The court stated that while loss reserves for known claims are “relatively easy to predict,” IBNR reserves are “extremely conjectural because they are set aside to cover losses for which claims have not been reported but must be estimated.” The court found that although IBNR “estimates involve some factual inputs, they necessarily require judgment and thus are statements of opinion or belief, not of fact.”

The court noted that “the securities laws do not impose an absolute bar to liability for statements of opinion or belief” (citing Virginia Bankshares v. Sandberg, 501 U.S. 1083 (1991)). However, the court found that under the Supreme Court’s decision in Omnicare, “it is substantially more difficult for a securities plaintiff to allege adequately (or ultimately, to prove) that [a statement of opinion] is false than it is to allege adequately (or prove) that a statement of pure fact is false.” The court explained that “[t]o allege adequately that a statement of fact . . . [was] false within the meaning of the securities laws, a plaintiff need plead only facts that, if true, would be sufficient to show, assuming materiality, that the statement [was], in fact, false.” A misstatement of fact is “‘untrue’ for purposes of Rule 10b-5 regardless of whether the speaker knew it was false or thought, mistakenly, that it was correct.” However, “[t]o allege adequately that a statement of opinion or belief . . . [was] false within the meaning of the securities laws,” a plaintiff must allege facts sufficient to show either that “(1) the opinion or belief ‘constitute[d] a factual misstatement’ in itself, or (2) the opinion or belief [was] ‘rendered misleading by the omission of discrete factual representations’” (quoting Omnicare, 135 S. Ct. 1318). The court explained that “while there are two ways for a plaintiff who challenges a statement of opinion or belief to state a legally sufficient claim under Rule 10b-5, . . . each of these methods is tied to a separate and distinct provision of the Rule.”

Applying the First Prong of the Omnicare Test, Court Finds Plaintiffs Failed to Allege That MetLife’s Statements Concerning Its IBNR Reserves Were Untrue Statements of Material Fact

Under the first provision of the Omnicare test, the court explained that a plaintiff alleging that a statement of opinion was itself an “untrue statement of a material fact” “must do more than allege that the underlying fact [was] false.” The plaintiff must also “plead facts that, if true, would be sufficient to show that the speaker did not ‘actually hold[ ]  the stated belief’” (quoting Omnicare, 135 S. Ct. 1318). 

Here, the court found “the fact that MetLife’s IBNR reserves ultimately proved insufficient [was] not determinative” of actionability under Rule 10b-5. Rather, the court determined that the “critical question[ ]” was whether plaintiffs had adequately alleged that “MetLife did not actually believe its IBNR reserves were adequate but nevertheless said (or implied) they were.”

The court held that plaintiffs had “failed to allege facts sufficient to make out a plausible claim that MetLife did not believe, in advance of the 2011 SSA-DMF cross-check, that its IBNR reserves were adequate.” The court noted that plaintiffs did not allege, for example, “facts concerning the size of MetLife’s IBNR reserves; the size of those reserves relative to MetLife’s existing liabilities; [or] the relative sizes of MetLife’s group and individual life insurance pools and how the $80 million in unpaid individual life insurance benefits revealed as a result of the 2007 SSA-DMF cross-check might have affected what estimated reserves should have been preceding the 2011 SSA-DMF cross-check.” While the court found it “possible that the 2007 discovery of $80 million in unpaid benefits perhaps might have rendered MetLIfe’s IBNR reserves insufficient, or at least alerted MetLife to the fact that it might be under-reserved in the future,” the court determined that “it equally would be possible that the discovery had no such impact” based on the facts alleged.

Under the Second Prong of the Omnicare Test, Court Finds Plaintiffs Failed to Allege That MetLife’s Statements Concerning Its IBNR Reserves Did Not Rest on a Meaningful Inquiry

Pursuant to the second provision of Omnicare test, the court explained that a plaintiff alleging “that the speaker omitted to state a material fact necessary in order to make its opinion or belief not misleading cannot state a claim by alleging only that the opinion was wrong” (quoting Omnicare, 135 S. Ct. 1318) (internal quotation marks and alterations omitted). Rather, the plaintiff must allege that “the statement did not ‘rest on some meaningful . . . inquiry,’ rendering it ‘misleading to a reasonable person reading the statement fairly and in context’’ (quoting Omnicare, 135 S. Ct. 1318). To overcome this hurdle, a “plaintiff ‘cannot just say that the issuer failed to reveal [the] basis’ for the opinion,” “[n]or may the plaintiff merely ‘recit[e] . . . the statutory language’ or offer bare ‘conclusory allegation[s]’ that the issuer ‘lacked reasonable grounds for the belief it stated.’” Instead, a plaintiff “‘must identify particular (and material) facts going to the basis for the issuer’s opinion — facts about the inquiry the issuer did or did not conduct or the knowledge it did or did not have — whose omission makes the opinion statement at issue misleading to a reasonable person reading the statement fairly and in context.’’’  The court found that this was “no small task for an investor.”

The court determined that the “critical question[ ]” for purposes of Omnicare’s second prong was whether plaintiffs had adequately alleged that “MetLife’s (explicit or implicit) representations regarding the adequacy of its IBNR reserves did not rest on a meaningful inquiry.” Here, the court found that plaintiffs had “provided no indication that the stated basis for MetLife’s IBNR reserve estimates — namely, ‘actuarial analyses of historical patterns of claims and claims development’ — ran afoul of the customs and practices of the life insurance industry.” In fact, plaintiffs had “not alleged any facts suggesting that there is a particular custom or practice in the life insurance industry for fixing IBNR reserves.” The court further found that plaintiffs had not “allege[d] adequately that either (1) it was a custom or practice among life insurers to estimate IBNR reserves by conducting a cross-check of the SSA-DMF against all life insureds, or (2) the ‘foundation’ upon which MetLife did rest its IBNR reserve estimates did not comport with what a reasonable person reading the [c]ompany’s financial statements fairly and in context would have expected.” Finally, the court found that plaintiffs had not alleged any facts “tending to show that MetLife’s IBNR reserves did not fairly align with information it possessed at the time.”

Given “all the circumstances,” the court concluded that plaintiffs had “failed adequately to allege that MetLife [had] omitted to state a fact (or facts) necessary to prevent its representations regarding the sufficiency of its IBNR reserves from misleading reasonable investors reading the [c]ompany’s financial statements fairly and in context.”

The court therefore dismissed plaintiffs’ Section 10(b) and Rule 10b-5 claims based on MetLife’s alleged misstatements of opinion concerning its IBNR reserves.