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Unum: A Core Business Perspective

Jun. 08, 2020 9:23 AM ETUnum Group (UNM)21 Comments
Carlton Getz, CFA profile picture
Carlton Getz, CFA


  • Unum has an attractive core employee benefits business which is highly consistent and has been increasingly profitable.
  • The long-term care insurance reserves continue to represent a valuation overhang for the company which impacts multiples.
  • Our analysis suggests the company's premium income is closely related to employment trends but not as sensitive as may be expected in the current cycle.
  • Our valuation models indicate the potential for significant compound appreciation in coming years even if GAAP loss reserve additions exceed the statutory reserves required by the Maine Bureau of Insurance.
  • Unum represents a long-term holding across our portfolios.

Unum (NYSE:UNM) is a major employee benefits insurer serving various markets with a focus on accidental death, disability, group life, supplemental, and related product lines. The company operates primarily in the United States with subsidiaries serving the United Kingdom and Poland. Unum's product lines are, for the most part, attractive businesses in stable markets despite intense competition and moderate growth trends. The employer-based nature of the core employee benefits business results in stickiness of customers.

Our previous article presenting a broad perspective on the company's long-term care liabilities represented an initial take on the company's position. In this article, we set aside the long-term care issue for a moment to examine the company's core operating business, the sensitivity of premium income and operating costs to unemployment rates, and the impact of changing benchmark interest rates on the company's profitability.

We conclude that while Unum's business will be impacted by the economic downturn the company has a record of emerging from recessions in decent condition despite the interest rate challenges. In addition, even if the company were to determine moderate additional reserves for long-term care insurance were required on a GAAP basis, the company would be able to support the dividend (or at worst a reduced dividend) although not share repurchases. In any event, Unum's core businesses represent an extremely stable and increasingly profitable line of business that should warrant a premium valuation relative to peers absent the long-term care insurance reserve issues.

We project forward valuations of between $22.00 and $26.00 assuming moderate annual additions to loss reserves (beyond those recently required on a statutory basis by the Maine Bureau of Insurance) and, in the absence of any material future reserve additions, a valuation between $27.00 and $34.00. The potential compound annual returns, including dividends, thus fall into a range of 10%-15% under an ongoing loss reserve scenario. However, should additional long-term care insurance

This article was written by

Carlton Getz, CFA profile picture
The author writes on behalf of Winter Harbor Capital, a private fund, and oversees private portfolios for individual and institutional clients. The author founded an investment company in 1995 with the view that a value oriented investment philosophy focused on intrinsic value and long term opportunities could generate superior absolute returns over time, leading to portfolios with unusual investment tenure sometimes exceeding 10 years. In addition to stints in micro and small capitalization research at Wasatch Advisors in Salt Lake City and in private banking with J.P. Morgan Private Bank in New York City, the author is a registered investment advisor, licensed professional engineer, and graduate of the Darden School at the University of Virginia.

Analyst’s Disclosure: I am/we are long UNM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (21)

Random Logic profile picture
As a newbie insurance investor and newbie UNM stockholder, I found this piece educational. Thanks!

One thing I do not understand is the recording of reserves in the biz. More must be involved than just a general ledger entry because the underlying funds must still be invested and generating income. And if management proves correct in that additional reserves are not needed, the reserves can be easily reversed into income. And over the course of this, there's no net cashflow impact. What am I missing? And thanks again, in advance.
Carlton Getz, CFA profile picture
Speaking on a very general level this is generally accurate although financial versus statutory accounting can create restrictions within the cash and investments position.
Alfred Galli profile picture
I am more bothered by the strong downward price trend since late 201. Is that, prior to Covid, due to falling interest rates?
Carlton Getz, CFA profile picture
Primarily long term care insurance risk concerns.
As a professional actuary who regularly values insurance enterprises using actuarial methods, I do not fully subscribe to the comments by the author. If you want to discuss let me know.
I sent you a private message.
I would love to hear the other side of the investment argument. I need to know why this looks so good on paper, but no insider buying is taking place. Thanks for offering.
BM Cashflow Detective profile picture
I'm not too worried about the care reserves and I'm assuming that they will be increased accordingly in the future with adequate coverage. Over the past ten years, Unum has increased its earnings per share by an average annual growth rate of 7.8%. It is very impressive that Unum grows with slow continuity even over temporary phases of recessions. It is difficult to build up moats in the insurance sector. Insurance products are of a similar raw material nature, but Unum has achieved a high level of awareness in this area. The free cash flow margins are particularly important to me and Unum has been doing well with 5% to 7 in recent years. With regard to the future prospects, a good value is offered due to its PEG ratio (0.8x). I've used some purchases over the past few weeks. But in my view, Unum is still attractive. However, market participants have also noticed this in the past few days and have found more trust in. Nevertheless, I think that the entire uncertainty regarding the care reserves will not go away so quickly and hopefully there will be still more entry opportunities.
Otherwise very good analysis. I liked it. Thank you.
Carlton Getz, CFA profile picture
BM Cashflow Detective -

We agree that the long term care reserves will be an overhang for the company for some time barring some unexpected (and unlikely) shift in trends.

We appreciate the comment!
This is one of the most comprehensive and thorough reports on a company I have ever read. Excellent work. Much appreciated. I will follow for future posts. Thank you!
Carlton Getz, CFA profile picture
MAinLA -

Great, we appreciate the comment and hope you will find our future commentaries as valuable.
Really nice positive article. Got lucky enough getting into this stock about 8 weeks ago. Good company from my home State. For us this is a good play in this sector. Long UNM.
Carlton Getz, CFA profile picture
RAKJ99 -

We concur and appreciate the comment.
smurf profile picture
Stock's doubled since it's March low.
Pablo profile picture
Yeah that has helped. I kept thinking of bringing the cost basis down, when the other devil on my shoulder said: "..........can't catch a falling knife......"
I also bought too early, and the valuation numbers look very promising. My doubts are centered on the lack of insider buying. No insider is buying the stock with their own money. If the valuations are what we think they are, why are they not buying? This tells me they know something we do not.
Carlton Getz, CFA profile picture
Roke6362 -

A number of insurers did not see any material insider buying at the lows although our experience is that insider activity at insurers generally tends to differ from that at other companies. In any case, we don't necessarily take a lack of insider purchases as a negative sign as a standalone indicator; on the positive side, there has also not been any material insider selling for some time.

We appreciate the comment!
Ted Waller profile picture
There are many possible reasons for insider buying, and I have found That insiders often think shares are a good deal when they are not.
Donald Smith increased his holdings in March and has got 6m worth of shares now. This makes him 7th biggest shareholder and 1st among HNW folk. I follow his moves as it seems the guy knows what he is doing. Hence I am not worried by the lack of insiders' buying.
Pablo profile picture
I unfortunately bought UNM too early, but did some better buying when the scare was on. Will continue to hold long term. Good article, good company. Thanks.
Carlton Getz, CFA profile picture
Pablo -

We appreciate the comment!
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