CHICAGO (CN) – Allstate relaxed underwriting standards in 2013 to boost auto insurance sales but did not tell investors about the change – causing shares to fall more than 10 percent when the truth came out, a derivative lawsuit filed Thursday claims.
Shareholders, led by Donna Biefeldt, sued Allstate’s CEO Thomas J. Wilson, CFO Steven E. Shedbik and members of the insurer’s board of directors in Cook County Court.
In 2013, Geico passed Allstate to become the second largest auto insurer in the United States after State Farm.
In response, the shareholders say Allstate management decided to aggressively chase growth in auto insurance sales, which account for 90 percent of its business.
“The easiest way to achieve this growth was for Allstate to increase renewals and new policies by loosening underwriting standards. Lowering underwriting standards comes with risks, however. In particular, lowering underwriting standards can increase PIF [policies in force] but it can also increase the frequency and cost of claims,” the complaint says.
Unsurprisingly, relaxing underwriting standards improved Allstate’s sales. But by the fourth quarter of 2014, Allstate experienced a corresponding increase in claims, cutting directly into the company’s profits.
Its executives blamed the problem on external factors, according to the complaint, without acknowledging the change in underwriting practices.
When Allstate finally told investors in August 2015 that the new policies were the cause of declining profits for the past few quarters, Allstate’s share price fell more than 10 percent – from $69.38 per share to $62.34 per share.
“As a result of the individual defendants’ improprieties, Allstate disseminated improper, public statements concerning the cause of the problems in Allstate brand auto insurance business. These improper statements have devastated Allstate’s credibility as reflected by the company’s almost $29 billion, or 10 percent, market capitalization loss,” the complaint claims.
Allstate shares fell to a low of $57.04 in September 2015, but had fully recovered a year later. It closed Thursday at $93.93 per share.
Shareholders seek disgorgement of top executives’ salaries for 2014 and 2015, plus damages for breach of fiduciary duty and unjust enrichment. The complaint also demands shareholders be allowed to vote on proposals to strengthen controls over financial reporting and to strengthen the board’s oversight of underwriting standards.
They are represented by Charles F. Morrissey with Morrissey & Donahue in Chicago, and Brian J. Robbins with Robbins Arroyo in San Diego.
Allstate did not immediately respond to a request for comment.