CHICAGO (CN) – Allstate concealed that the expansion of its car insurance business significantly reduced its profit margin, keeping its share price artificially high while its CEO sold $33 million in stock, a securities class action claims.
Allstate is the largest publicly traded personal insurance company in the United States. Personal insurance includes homeowner, renter, motorcycle and car insurance.
Car insurance is a low-margin business, according to Allstate CEO Thomas J. Wilson. He is quoted in a Nov. 10 complaint as saying, “It’s not like a software business, where you lose five points of margin and you don’t really care that much. We care a lot because it’s sort of like everything.”
Therefore, Allstate meticulously tracks the ratio of claim losses to revenues from insurance policies, and investors rely on this metric to evaluate the company’s profitability.
It also monitors on a daily or even hourly basis the frequency of auto claims, as a spike in claims might require tightening underwriting methods or an increase in policy prices, court records show.
In October 2014, Allstate allegedly embarked on a new plan to increase its market share in the car insurance business while maintaining profitability.
But according to a class action filed by the City of St. Clair Shores Police and Fire Retirement System, the plan failed.
“Allstate’s new business was of lower quality and carried increased risk, which caused, in substantial part, Allstate’s largest increase in frequency of auto claims in nearly five years,” according to the complaint, which was filed Thursday in Chicago federal court.
The lawsuit says Allstate publicly denied that the spike in auto claims was related to its business expansion.
“Rather than admit that Allstate’s auto policy growth and increased revenues had caused a spike in auto claims and reduced profit margins, defendants claimed the spike in claims frequency was caused solely by external events beyond Allstate’s control – namely weather and increased miles driven. This was false,” the complaint states.
While investors remained in the dark and Allstate continued to trade at then all-time highs, Wilson allegedly cashed out $33 million in stock options, which represented 88 percent of his stake in the company.
Allstate did not admit that its new business model was responsible for the losses until August 2015, the class claims.
Allstate President Matthew Winter ultimately contradicted his earlier statements, and admitted that new business growth contributed to the higher auto claims and “shockingly conceded that this impact ‘was expected,’” the complaint says.
The disclosure caused Allstate’s stock price to drop more than 10 percent from $69.38 per share to $62.34 per share, eliminating $2 billion in market capitalization and causing losses to class members who invested in the company from October 2014 to August 2015, according to the lawsuit.
Given Allstate’s decades of experience in underwriting and analysis of claim trends, the complaint alleges Allstate must have known the true cause of the increase in claims and deliberately misled investors by attributing it solely to external factors.
It also claims Wilson’s liquidation of $33 million in stock options – an unusual trade, given that Wilson had not sold any shares for 10 years prior – amounts to insider trading.
The proposed class is represented by James E. Barz with Robbins, Geller, Rudman & Dowd in Chicago.
Allstate spokesperson Laura Strykowski said, “We have reviewed the complaint and the allegations are without merit.”