This has been a tough year for many stocks, but some businesses have rocketed higher despite economic headwinds.
One thriving stock is Unum Group (UNM 0.35%), which provides employee life insurance and other benefits. Unum Group's stock has risen 60% year to date, crushing the S&P 500's 13% decline, and has been one of the best-performing financial sector stocks. Here's what you should know about the business before investing.
The pandemic was tough on Unum Group's business
Unum Group writes insurance policies, like group disability, life insurance, and other supplemental insurance like dental and vision products, for customers in the U.S., U.K., and Poland.
The COVID-19 pandemic that emerged in early 2020 hurt Unum Group's business in several ways. For one, the company faced higher payouts due to deaths from the pandemic.
It also felt pain from rising unemployment levels, which resulted in fewer employees receiving its supplemental insurance benefits. Unemployment in the U.S. peaked at 14.7% in April 2020. Finally, the Federal Reserve cut interest rates to historically low levels, hurting the insurer, which relies on generating investment income from its excess cash.
The insurer has turned things around in 2022
Unum Group has turned the ship around in the first half of this year. The company benefited from high employment levels and rising wages, which have helped the incremental premium earned from rising payrolls, grow by nearly 5% -- thereby benefiting its group lines of insurance. Through six months, the insurer's total premium income has increased about 1.4% from last year.
Where Unum Group has shined is with its expense management. While top-line revenue was mostly unchanged, benefit payouts have dropped sharply, and total benefits and expenses are down 6% compared with last year. The company benefited from fewer COVID-19-related mortalities across the U.S., which went from 155,000 in the first quarter nationwide to 35,000 in the second quarter.
Image source: Getty Images.
Higher interest rates have also benefited the insurer. This year, the Federal Reserve has raised its federal funds rate from near zero to 2.5%. Returns on Unum's investments are rising for the first time in years, and the company sees yields stabilizing after several years of declines. Yields on new investments are 4.8%, up from 3.2% in the same quarter last year. This helped miscellaneous investment income grow to $57 million in the second quarter, up $16 million from the previous quarter.
These factors have helped drive stellar net income growth, up 86% from last year to $624 million.
Investor takeaway
Unum Group has done a good job navigating the pandemic and its impacts, and now sits on a sound financial footing. Chief Executive Officer Rick McKenney estimated adjusted operating earnings growth of between 40% and 45% for the year -- double what it expected after its first-quarter earnings.
The company sits on $1.2 billion in cash, giving it the flexibility to grow its high-margin businesses and also reward shareholders with dividends and share repurchases. It has spent $94 million repurchasing shares in the first half and another $122 million paying dividends to its shareholders. The dividend works out to a a 3.4% dividend.
Unum Group continues to be cautious, with McKenney saying that "risks from the pandemic are still very real." He also cautioned investors about rising concerns about economic growth.
While Unum Group has gone on a tear this year, investors should be cautious about its biggest gains being behind it. The business is growing modestly with a decent dividend, but shifting trends and tailwinds to the business are likely priced in. Net income growth has been solid as claims decrease, but top-line growth over the last few years has been unimpressive. While Unum Group could be a decent dividend stock, investors probably shouldn't expect big stock moves for the insurer to continue.
