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Unum shares plunge as concerns mount over insurers' long-term care businesses

Unum Group's weakened first-quarter long-term care results were the driving force behind a plunge in the company's stock price, several industry analysts said.

The life and health insurer posted an interest-adjusted loss ratio for its runoff long-term care business of 96.6% for the first quarter, deviating from management's prior, and more favorable, guidance for an interest adjusted loss ratio in the low 90s.

Insurers have struggled for several years now to curb losses in their long-term care businesses. In January, General Electric Co. recorded an after-tax GAAP charge of $6.2 billion for the fourth quarter of 2017 after reviewing its reserve testing for the business line. Resolving issues in the long-term care business will be more of a "long, slow boil," CFRA analyst Cathy Seifert said.

"Investors have now come to the realization that when it comes to an erosion in long-term care underwriting trends, these are rarely a one-quarter event," Seifert said in an interview. "There's a series of events that are building here that investors are becoming a little alarmed over."

Unum recorded the largest share-price decline over the last five trading days among insurers tracked by S&P Global Market Intelligence with a drop of 19.32% to $39.05 per share. As insurance companies continued to report earnings for the first three months of the year, stocks in the space and broader market fell as well.

The SNL Insurance Index dropped 3.11% to 976.56 during the five-day stretch, while the S&P 500 posted a decline of 1.40%, ending the period at 2,629.73.

For the first quarter, Unum posted after-tax adjusted operating income of $275.1 million, or $1.24 per common share, which was up from $236.1 million, or $1.02 per common share, a year earlier. But Unum's first-quarter earnings struck a different tone than the company's historically stable results, Morgan Stanley analyst Nigel Dally wrote in a May 2 research report.

The company pinned the increase in its long-term care interest adjusted loss ratio on a two-week period in February when new claim incidences spiked. The specific reason behind the "claim aberration" remains unclear, but the jump was partially offset by more favorable mortality levels during the quarter, Unum CFO John McGarry said during a first-quarter earnings conference call.

Moving forward, Unum executives project the ratio will likely be higher than 91%, McGarry said. But because ratios tend to sway on a quarter-by-quarter basis due to the volatility in factors like mortality rates and claim incidences, McGarry said he "wouldn't venture to predict exactly where it's going to be."

CFRA's Seifert and Morgan Stanley's Dally, among other analysts, expected the drop-off in Unum's shares following the release of its results, but Seifert called the reaction "a bit harsh."

Unum was far from the only insurance company to see its share price drop during the five trading days. After fellow life-and-health insurers American Equity Investment Life Holding Co., Prudential Financial Inc. and MetLife Inc. all reported earnings May 2, the companies saw their share prices fall the following day at the market's open.

American Equity Life's shares fell 8.74% over the five-day stretch, ending at $28.09; Prudential saw its stock fall to $97.56, down 8.98% during the period; and MetLife posted a 7.29% share-price decline for the period, ending at $44.66.

Property and casualty insurance giant American International Group Inc. also saw its share price drop during the period after reporting its first-quarter results.

The company, which saw its shares fall 6.48% to $51.94 during the period, recorded adjusted after-tax income of $963 million, or $1.04 per share, for the first quarter, which was down from adjusted after-tax income of $1.37 billion, or $1.36 per share, in the prior-year quarter. The company's commercial insurance line recorded net premiums written of $1.31 billion for the period, down from $1.61 billion a year earlier, a decline that CFRA's Seifert said could place pressure on AIG President and CEO Brian Duperreault.

"Turning around that ship is going to take longer than I expected," she said. "Time is going to run out. Investors have been patient, but I think their patience is wearing thin."