Genworth Financial Inc. has settled a class-action lawsuit alleging misrepresentations over its long-term-care insurance business for $219 million.
Genworth, the largest long-term-care insurance carrier, announced after the market close on Friday that it had reached the preliminary settlement with plaintiffs.
The class-action lawsuit, In re Genworth Financial, Inc. Securities Litigation, alleges securities law violations by Genworth; its chief executive Tom McInerney; and former chief financial officer Marty Klein. Over a specified period between 2013 and 2014, the company and its officers allegedly misrepresented the profitability of Genworth's long-term-care insurance business — its core business — and reported false financial results by understating necessary reserves.
Those false disclosures ultimately led to a dramatic collapse in the price of Genworth shares, leading to damages for shareholders, according to plaintiffs.
“The Company believes that the Plaintiffs' claims are without merit, but is settling the lawsuit to avoid the burden, risk and expense of further litigation,” according to the Genworth settlement announcement. The case was scheduled to go to trial in May.
Genworth spokeswoman Julie Westermann declined additional comment beyond the announcement.
Preliminary approval of the settlement by the court should occur around mid-April, with final approval coming around late summer or early fall, according to Joseph Fonti, partner at Bleichmar Fonti & Auld, a securities litigation law firm representing co-lead plaintiff Her Majesty the Queen in Right of Alberta.
The province of Alberta had purchased more than 1.2 million shares of Genworth common stock during the class period, which is from Oct. 30, 2013 to Nov. 5, 2014. Fresno County Employees' Retirement Association, the other lead plaintiff, bought nearly 200,000 shares over that period.
“I think this settlement represents a historical recovery for investors damaged as a result of alleged misrepresentations around this core [long-term-care insurance] business,” Mr. Fonti said. “By pushing the case effectively to the eve of trial, we demonstrated we had the ability to win at trial on the facts we alleged.”
The suit was originally filed in 2014 in the U.S. District Court for the Eastern District of Virginia, Richmond Division.
In October 2013, Genworth began reporting results of a review of its long-term-care insurance reserves — money set aside to fund future benefits payable on policies — and announced to shareholders that the firm had “adequate long-term-care reserves, with a margin for future deterioration,” according to the complaint.
Carriers of traditional long-term-care insurance policies carriers have struggled the past several years under the weight of low interest rates and increasing longevity, both of which strain insurers' ability to pay claims. That's led some insurers to increase premiums on in-force policies and others to exit the business entirely.
Genworth is the largest provider of traditional long-term-care insurance, with approximately 18% market share when measuring the number of insured, according to the American Association for Long-Term Care Insurance.
However, Genworth allegedly used outdated information, from 2010 and earlier, when making the disclosures to shareholders at the end of 2013.
“Genworth had secretly used out-of-date claims data, including a claim duration of 2.2 years, when setting reserves, though meanwhile Defendants had used a longer, more accurate duration of approximately three years when it suited them for other purposes, such as marketing or lobbying regulators to increase rates,” the complaint alleges.
Genworth ultimately had to take a charge of $531 million in November 2014 to boost reserves, and the insurer's share price dropped by 55%, erasing more than $4.25 million in market capitalization, according to the suit.
“All these revelations resulted in stock price basically getting cut in half,” Mr. Fonti said. “It was a very significant shock to the market.”
In February this year, Genworth announced a restructuring plan in which the firm would double down on its long-term-care insurance business in order to address issues in its legacy block of business. The firm also plans to suspend sales in traditional life insurance and fixed annuity products in the first quarter as part of the restructuring.