Unum Group

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 4/5

Unum Group, a Fortune 500 company, is a prominent provider of financial protection benefits and insurance products, primarily operating in the US, UK, and Poland, focusing on group and individual disability insurance, life insurance, and other employee benefits.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Unum Group operates in a complex and often overlooked sector of the insurance industry, focusing primarily on disability insurance (both group and individual) but also offers life, accidental and critical illness insurance and other employee benefits. Understanding their core business requires a grasp of the intricacies of insurance policies and how they generate revenue and profit.

Here’s a breakdown:

  • Core Operations: Unum’s primary focus is on disability insurance, which protects individuals from lost income due to illness or injury, which is a more complex and cyclical product. They offer both short-term and long-term disability policies. They also have other coverages like life, accident, and critical illness.
  • Revenue Distribution:
    • Premium income: Generates revenue from insurance premiums collected from policyholders. In 2023 the premiums were 10.15 billion USD which accounts for 85% of the revenue.
    • Net investment income: Earnings from investing the premiums collected. In 2023, the company generated a net investment income of 1.34 billion USD which is about 11% of the revenue, highlighting its importance as a source of income to the company.
    • Other income: A combination of fees, service charges, and other miscellaneous sources. Other income in 2023 accounted for just 4% of the total revenue which is less important, still accounts for some revenue.
  • Industry Trends:
    • Increased Regulations: The insurance sector is highly regulated, creating barriers to entry and operational compliance complexities.
    • Technological Advancements: There is increasing importance of technological integration for efficient operations and improved customer service.
    • Economic Uncertainty: Economic downturns may create higher claims and reduce sales of insurance, while lower interest rates and volatile equity markets would put pressure on profitability.
    • Aging Workforce: A growing older population increases the demand for disability coverage.
    • Increased Focus on Benefits: Companies are increasingly investing in employee benefit plans to attract talent and promote employee well-being.
  • Competitive Landscape:
    • The market is characterized by a few large players, such as MetLife, Prudential, and Lincoln Financial, alongside smaller, specialized companies. The landscape is generally competitive, though with varying degrees of concentration in different product lines. It appears to be quite concentrated with the leading players holding large market shares, particularly in the group-life and disability space, making it a quite competitive industry, with significant pressure on pricing.
  • What Sets Unum Apart:
    • Its long history and established presence in disability insurance
    • Its large scale, diverse product portfolio, and financial strength.

Financial Analysis

Key Financial Metrics are derived from Unum’s consolidated financial statements for the year ended December 31, 2023 (Form 10-K for 2023), and the three months ended September 30, 2024 (Form 10-Q for Q3 2024):

  • Revenue: In 2023, the total revenue was $11.8 billion (Premium income $10.15 billion, Net investment income $1.34 billion, and Other income $0.47 billion) showing consistent growth with higher operating margins. The first three quarters of 2024 show that the company has managed to grow total revenue to $9.7 billion versus 9.07 billion at the same period of 2023. The majority of revenue came from premiums on long-term care which increased to $1.3 billion during the third quarter.
  • Profitability: The company shows decent profitability. In the first nine months of 2024, net income was $1.65 billion and adjusted operating income was $1.48 billion, showcasing the strong business model. However, the adjusted operating income showed a decrease in YOY terms.
  • Return on Invested Capital (ROIC): Unum has a decent average ROIC, which increased to 9.1% in 2023 after dropping 7.1% in 2020.
  • There has been improvement in ROIC to 13% in Q3 of 2024.
  • Capital Structure: The company has a moderate amount of debt. The debt is mostly long-term, and the capital structure has remained fairly stable.
  • Cash Flows: Unum has a very healthy operating cash flow at $1.35 billion in the first 9 months of 2024. It has been fluctuating in past years depending on expenses related to claims, but the company is able to generate sufficient cash flow to conduct operations and invest in its business.

Moat Analysis

Moat Rating: 3/5

Unum has a narrow but substantial moat. Here’s why:

  • Intangible Assets (Brands and Relationships): Unum benefits from its long-standing reputation in the insurance sector. However, it’s not a consumer-facing brand that customers are loyal to, instead of it providing value through brand loyalty. It also benefits from long-standing relationships with employers that offer employee benefits. However, this is a fairly low moat as it can be overcome by new contracts with similar employee base.
  • Switching Costs: While not very high, some switching costs are at play. When a customer leaves Unum, for example, to find another provider, there might be some cost associated with understanding new coverage plans and claims procedures that discourages some consumers from switching providers often.
  • Regulation: The insurance industry is heavily regulated, creating barriers to entry. While this helps create a moat, it also puts pressure on pricing and can influence profitability. The high number of state regulators also increases complexity and adds to the costs.
  • Scale: A big part of maintaining its competitive edge comes from the scale benefits, as Unum is a large company that can handle large accounts and their claims better, also this ensures its large operating expenses are spread across many different sources of income.
    • However, this also limits the ability for other companies to quickly compete without a similar scale.

Risks to the Moat and Business Resilience

While Unum possesses some competitive advantages, the business faces several threats:

  • Economic Downturns: An economic downturn would reduce new policies and increase benefit payouts, directly impacting profitability. The most recent result indicates this trend.
  • Regulatory Changes: Any changes in regulation could severely impact premium structures and force the company to increase their administrative expenses, and reduce the value of a previously established moat in some cases.
  • Interest Rate Risk: Changes in interest rates could negatively affect the investment income and subsequently the profitability. This effect will most likely be pronounced in the future, with more pressure from the macro environment.
  • Competition: The competitive nature of the industry, along with other new competitors emerging in different niches of insurance, may erode Unum’s dominance and lead to loss of market share.
  • Uncertainty on Claims: Disability claims are difficult to predict, which creates financial uncertainty and variability.
  • Negative Investment Returns: The returns from their investments are subjected to market trends. Any large-scale unexpected downfall in the markets can make Unum’s profit less predictable.
  • Integration Risk: Any new major acquisitions should have potential to bring synergistic benefits, but it must be successfully integrated into Unum’s existing business to create value, otherwise it will be just a drag to the financial structure and their competitive position, since acquisition brings more debt.
  • Pandemics and Public Health: Like other insurance providers, Unum is susceptible to global pandemics. As a new virus emerges and spreads across the globe, this can create unexpected claims and put downward pressure on profits, that will continue to have an effect in the next coming years.
  • Technology: Disruption from the changing technology sector might hurt the margins by making operations more expensive, or making their product obsolete.

Understandability Rating: 2/5

  • Complexity of Operations: Insurance, particularly disability insurance, is intricate. The calculations and regulations surrounding insurance are complex. It requires a deeper understanding of actuarial science, risk management, and financial products in order to fully understand their core business.
  • Financial Complexity: The financial statements of an insurance company can be difficult for an average person to follow. This complexity makes it harder to get the overall picture of the company without deep knowledge.
  • Multi-faceted Operations: A lot of the operations have different dynamics, creating an additional layer of difficulty.

Balance Sheet Health: 4/5

  • Adequate Liquidity: Unum maintains sufficient cash and marketable securities to meet short-term obligations. The amount of their operating cash flow also allows them to maintain stability.
  • Moderate Leverage: The company’s debt-to-equity ratio is a bit higher but is manageable. They should prioritize lowering the debt or increasing the equity to a more healthy level.
  • Solid Asset Quality: The company holds a diversified portfolio of assets which will ensure they can meet their liabilities.
  • Future Pension Liabilities: Any negative adjustments to the pension plan can harm overall balance sheet health and put future strains on the cash flow, although this can be adjusted to provide the correct view.
  • In summary: Unum’s balance sheet is in good health, showing stability and sufficient resources to operate and meet their liabilities while providing enough flexibility.