The market value of Chattanooga's biggest company plunged by nearly $1.8 billion Wednesday over investor concerns about the cost of supporting products the company is phasing out.
Shares of Unum Group fell by nearly 17 percent to the lowest level since the fall of 2016 as investors remained concerned over losses in the company's long term care policies written in the past and whether the company will have to raise its reserve charges to cover expenses from such plans as the cost of coverage for those participants still insured by Unum continues to increase.
Among the 2,800 stocks listed on the New York Stock Exchange, Unum suffered the fourth biggest decline in value of any company during trading Wednesday after the company's quarterly earnings were released.
Unum's common stock price fell by $8.12 per share, or 16.95 percent, to $39.78 per share, despite reporting higher first quarter earnings Tuesday night.
The Chattanooga-based disability insurer, which had record profits in 2017, said its net income in the first three months of 2018 rose by 23 percent from a year ago to $273.5 million, or $1.23 per share. The after-tax adjusted results were a penny per share below Wall Street expectations. But the biggest concern among analysts who follow the company was about potential losses from Unum's long-term care policies, which the company quit selling six years ago but remain as part of its closed book of business.
Such concerns were heightened after General Electric Co. took a $6.2 billion after-tax charge during the fourth quarter and committed to contributing $15 billion over the next six years to bolster its legacy insurance portfolio.
Despite such concerns, Unum CEO Richard McKenney called the company's overall performance in the first three months of the year "a solid start to the year," with gains for the company from both the drop in the corporate income tax rate and a nearly 6 percent gain in premium income from its Unum U.S. segment.
"I remain encouraged by the growth we're seeing, plus the long-term value we're creating with the investments we're making to expand our geographic footprint," McKenney said Wednesday.
Thomas Gallagher, an anlyst for Evercore ISI Research, said concerns over Unum's long term care business "cast a shadow over otherwise solid underwriting results."
Claims on Unum's long term care policies were higher as Americans continue to live longer and require more expensive care than what the company originally anticipated when such policies were written in the past. Unum's premiums from its closed book of business, which includes both long-term individual disability plans the company quit selling in 2009 and long term care plans Unum stopped writing in 2012, comprise only about $640 million of its $7 billion of premiums from its core business, company spokesman Jim Sabourin said.
The interest-adjusted loss ratio for Unum's long term care business in the first quarter jumped from 88.6 percent a year ago to 96.6 percent in the first quarter of 2018. Gallagher said in a research note said Unum and other long term care providers are being hurt because of the "extension of claim durations with cognitive impaired claimants living longer."
By comparison, Unum's group disability benefit ratio improved slightly to 75.6 percent from a year ago.
Unum's Closed Block segment, which encompasses the run-off of the long term care business, saw premium income decline 4.7 percent from a year ago due to policy terminations and maturities for the individual disability line of business.
"Our core business lines continue to operate well, while our Closed Block results, particularly the long-term care line, remain volatile," Unum Chief Financial Officer Jack McGarry said in a conference call with analysts Wednesday. "We continued to see good overall trends with our long-term care rate increase program, which we believe is the most effective way to manage the long-term care block over the long term."
J.P. Morgan analyst Jimmy Bhullar expects Unum to continue seeking price hikes to offset margin deterioration in the closed book of business. But Bhullar said Unum's long term care reserves "are susceptible to deteriorating industry-wide claims trends due to increasing life expectancies and healthcare cost inflation."
McKenney told analysts the company "will have to watch how these trends continue," but he said "we're taking the actions necessary to manage these businesses over their longer-term duration."
McKenney also said Unum, which expanded its dental and life insurance business with acquisitions of the National Dental Plan in Great Britain and Starmount Life Insurance Co., over the past three years, "continues to look for ways to grow our business both organically and through targeted, strategic acquisitions."
Contact Dave Flessner at dflessner@timesfreepress.com or at 757-6340.