Michigan Police Pension Files Securities Lawsuit Against Prudential

A Michigan police and fire pension fund has filed a class action securities lawsuit against insurance giant Prudential, and its CEO and CFO, for allegedly disseminating false and misleading statements that artificially inflated its stock price.

The suit alleges that the assumptions used by Prudential to establish reserves failed to account for adversely developing mortality experience in its Individual Life business segment. It said the reserves were inadequate to satisfy its future policy benefits liabilities. The action also accuses the company of materially understating its liabilities and overstating net income as a result of flawed assumptions in calculating mortality experience.

The legal action was filed in US District Court in New Jersey by the City of Warren Police and Fire Retirement System. Prudential declined to comment on the lawsuit.

According to the suit, Prudential reported second quarter earnings results in July that missed analyst forecasts. Prudential also announced it would take a pretax charge of $208 million as a result of its market experience update. The company said that the Individual Life business segment had lost $135 million. The suit says, however, that Prudential did not provide information concerning the impact of the revised mortality assumptions on the company’s financial future performance.

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Following the earnings report release, investment bank UBS issued a report lowering its earnings expectations for Prudential. UBS said the company should have disclosed the new negative information at its Investor Day conference in June, which it said would have allowed investors to “reset expectations.”

The suit claims that as a result of the disclosures, Prudential’s stock price fell more than 10% to $91.09 on August 1 from $101.31 on July 31 on more than 7.6 million shares traded.

“When the true facts about the company were revealed to the market,” says the lawsuit, “the inflation in the price of Prudential common stock was removed and the price of Prudential common stock declined dramatically.”

The suit claimed that on August 2 Prudential provided the SEC with additional details concerning the company’s adjustments to operating income by segment during the second quarter. The firm revealed that its Individual Life business segment performed $178 million worse in the second quarter than during the same quarter of 2018. That was primarily because of the $208 million reserve charge from the annual review.

These additional negative disclosures caused Prudential’s stock price to drop another 5.6% to $88.56 on Aug. 2, and it then fell again on Aug. 5 to $85.95 per share, the suit contends.

The “defendants materially misled the investing public, thereby inflating the price of Prudential common stock,” said the suit, “by publicly issuing false and misleading statements and omitting to disclose material facts.”

The case is City of Warren Police and Fire Retirement System v. Prudential Financial, Inc. et al.

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Tags: City of Warren Police and Fire Retirement System, Class Action, Lawsuits, Pension Funds, Prudential, securities

Martial talk has been in the air of late, in connection with Iran and the US’s drone killing of its top commander, General Qassim Suleiman. And despite lowered tension at the moment, questions are stirring about the level of Pentagon spending, which under President Donald Trump has burgeoned.

The current military buildup smells like victory for investors. Defense stocks have bested the market during the Trump Administration. Just compare the S&P 500 to the largest military-oriented exchange-traded fund (5.7 billion in assets), the iShares US Aerospace & Defense. In price terms, the defense ETF is up 54% versus the broad-market index’s 44.8% in the three years Trump has been president.

Whether that Wall Street trend continues depends on who the next Oval Office occupant is, Republican Trump or a Democrat. Among the leading Democratic presidential candidates are Senators Bernie Sanders and Elizabeth Warren, who are on the left side of the party. They think a lot of military spending is wasteful.

In a campaign statement, Sanders complained that “we should not be spending more on the military than the next ten nations combined.” Warren has decried “our bloated defense budget.” The more moderate Joseph Biden told the Washington Post that “we can maintain a strong defense and protect our safety and security for less,” by trimming wasteful outlays.

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Regardless, 2020 should be good for military contractors’ stocks. While the Trump presidency has been a golden time for investors in military-oriented equities, election years in general seem good for them, regardless of who wins. Defense shares have outperformed the market in nine of the last 10 election cycles, by 16 percentage points on average, according to UBS analyst Myles Walton.

Big winners nowadays are stocks in corporations like Northrup Grumman, Lockheed Martin, and Raytheon. Although their prices have run up, these contractors aren’t that expensive: Northrup has a price/earnings ratio of 16, Lockheed 17, and Raytheon 18—less than the S&P 500’s. One reason for the tame multiples is that their earnings have jumped, expected to grow from 9% to 15% yearly through 2021, well ahead of the overall market’s profitability.

A sweet spot for defense investors: Any time there is international tension, defense names usually surge, by Walton’s estimate, even when American forces aren’t triumphant. Take al-Qaeda’s October 2000 bombing attack on the USS Cole in a Yemeni harbor, which killed 17 sailors and wounded 39. Defense stocks rose 6% in the following three months.

The military buildup under Trump has been remarkable. The defense budget authorization he recently signed, for federal fiscal year 2020, is $733 billion, up 22% from Barack Obama’s last Pentagon spending blueprint.

With a leftward tilt among Democrats, though, the party’s traditional preference for domestic spending over the military kind surely will come to the fore. Post-Vietnam, Democratic presidents (Jimmy Carter, Bill Clinton, and Barack Obama) have reduced defense appropriations, although not by an enormous amount. A Sanders or a Warren might be more ambitious in their cuts. Not a good thing for defense industry investors.