Skies Clearing for Unum Group

 | Aug 12, 2013 | 12:00 PM EDT
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Here is a good, cheap stock for you: Unum Group (UNM).

Based in Chattanooga, Tenn., the company is the largest U.S.-based issuer of group disability insurance and individual disability policies. It also sells group life insurance and administers some employee benefit plans.

Last week, Unum shares fell almost 7% after the company reported that second-quarter revenue had missed expectations. Revenue came to $2.6 billion, the same as in the previous six quarters, and the same as in eight of the past 10 quarters. Traders and analysts had hoped for a little more growth.

Wall Street analysts haven't much use for the stock. Out of the 18 analysts who cover it, only five rate it a Buy. But three large institutions -- Fidelity, Vanguard and Wellington -- have added recently to their considerable holdings in the name. (Among them, they own more than 18% of the outstanding shares.)

In my view, there are good reasons to buy Unum. One reason is the easing prospect of "moral hazard" in its main business of disability insurance.

If you've taken a course in insurance in college, you've probably encountered the concept of "moral hazard." The most familiar risks in insurance are outside the policyholders' control -- hurricanes, floods and the like. But sometimes the actions or morals of a policyholder boost the likelihood that an insurance company will have to pay a claim. For example, heavy drinkers and chronic philanderers have traditionally paid more for life insurance, because they are more likely to die or be killed.

In another form of moral hazard, some people try to take advantage of insurance companies by filing false or grey-area claims. Nowhere is this hazard greater than in disability insurance -- Unum's specialty. Moreover, when economic times are hard, the temptation rises to file such claims.

So it's not surprising that Unum shares fell more than 20% in 2008, during the heart of the financial crisis. The company also had a bad year in 2011, when its earnings declined and its stock fell close to 12%. But if you believe, as I do, that the worst of the economic clouds are now past, the moral hazard concern is reduced.

A second reason to buy Unum shares is that operating results have been good. The company has posted an annual profit eight years in a row, and last year it reported record earnings of $3.17 a share. Analysts expect earnings to rise gradually from here.

The third reason to buy -- and, to me, a compelling one -- is that Unum stock is very conservatively valued. At the recent price of about $30, the stock sells for only 9x earnings, and slightly less than tangible book value (corporate net worth per share).

That, in my view, has the smell of a bargain.

John Dorfman is chairman of Thunderstorm Capital LLC, a money-management firm in Boston. He can be reached via email here.

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