The global pandemic made 2020 a very tough one for Unum Group (UNM 1.17%). The life insurer struggled from increased deaths from the coronavirus combined with high levels of unemployment, which hurt its sales of employee benefits. The company's earnings suffered as a result, leading to the insurer's stock price becoming heavily discounted.
Unum's management sees short-term pain continuing in the months ahead as it continues to deal with the effects of the pandemic. However, with the employment situation improving and vaccine distributions underway, management has good reason to be optimistic about the second half of this year and beyond.
With that being said, is Unum Group a good value stock to add to your portfolio?
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A tough year for the insurer
Unum Group, a provider of life insurance and other insurance benefits for employees, including disability, accident, and dental and vision coverage, faced unique challenges from the pandemic that weighed down its business.
The global pandemic hurt the life insurer in three specific ways. First, historically high unemployment levels put a big dent in the growth rate of employees and wages during the year, resulting in fewer voluntary employee enrollments in its offerings. While the company is used to seeing core business premiums increase 5% annually, those premiums were only up 0.6% in 2020, and actually declined 1.4% in the fourth-quarter reporting period.
Second, the pandemic hit older individuals the worst, with the Centers for Disease Control reporting that 80% of COVID-related deaths were in people 65 years of age or older. This same group represents 50% of Unum's group life insurance deaths, resulting in increased life insurance payouts during the year.
Finally, low interest rates were a headwind to the insurer and the industry in general. As a result of low rates and tight credit spreads, Unum found it challenging to find attractive yielding investments for its portfolio. As a result, investment income during the year was down 3.1% from the year before, and down 3.7% during the fourth quarter compared to the same quarter last year.
As a result of the above factors, Unum Group saw its net income on the year decrease 28% from the year prior, and net income in the fourth quarter was down 54% from the year prior.
The result? A heavily discounted stock
A tumultuous 2020 caused Unum Group's stock to fall 21% during the year. However, we seem to have put the worst of the pandemic behind us, barring any new variants of the virus emerging. For this reason, Unum Group looks like an attractive value stock with a price-to-earnings ratio of 7.4 and a forward price-to-earnings ratio of only 5.3.
Looking to 2021, the company expects the first half of the year to be a continuation of its struggles, given January was the worst month for mortality during the pandemic. For this reason, CEO Richard McKenney cautioned investors about short-term headwinds to the company's earnings.
However, McKenney is optimistic about a recovery in the second half of 2021, with normal growth expected to return fully in 2022. This is because mortality rates related to COVID-19 will drop with wide-scale vaccinations, and the economy will recover, increasing the number of employed individuals. This should be a tailwind for the insurer, as more employees entering the workforce will result in more signups for life insurance coverage and other voluntary benefits.
In addition, a steady increase to interest rates would yield better performance from its invested assets. The good news for Unum Group is that it has a strong balance sheet, with cash on hand of $1.5 billion ready to deploy on investments, which should benefit from a rising interest rates environment.
A great company at a good price
While Unum Group was beaten up a bit in 2020, the life insurance company looks set to bounce back, with improvements to its top and bottom lines becoming more evident in the second half of this year. Despite its stock price gaining 65% since November, it is still at a very cheap price-to-earnings ratio and near its lowest multiple in years, making Unum Group a great value stock for investors to add to their portfolios for the long haul.
