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Aflac Expands in Middle Market Credit With Varagon Capital

Zacks Equity Research

Aflac Inc.’s AFL asset management subsidiary, Aflac Global Investments, will buy minority stake in Varagon Capital Partners, L.P., a leading direct lender to middle market companies. The unit will also make a new multi-year investment commitment of up to $3 billion to Varagon to invest in middle market loans.

This move reflects Aflac’s efforts to build long-term relationship with Varagon, which will manage its middle-market private debt portfolio investments. These loans will be on behalf of Aflac Japan and Aflac U.S. The deal reflects the significant commitment Aflac has to maintain a world-class investment platform that will generate sustainable risk-adjusted net investment income despite the headwinds of very low interest rates impacting its general account investment portfolio.

The deal allows Aflac to diversify its revenue streams and participate in growth of a leading asset manager in middle market credit, which is an important and growing segment of the private markets. Middle market loans are a strategically important asset class for the company. It also aims to leverage its capital to grow a quality asset management franchise.

Varagon’s expertise as an asset manager, disciplined credit underwriting, risk management and team-oriented approach to investment management makes it a perfect fit for Aflac.

The transaction, expected to close in the first quarter of 2020, does not have a material impact on Aflac’s recently disclosed 2020 capital deployment plans or overall capital and liquidity position. Expectations for 2020 include share repurchase of $1.3 billion to $1.7 billion, capital buffer and liquidity support of roughly 2 billion and leverage of 20-25%.

Prior to this, in 2017, Aflac bought minority interest in NXT Capital to manage its then newly funded $500 million portfolio consisting of direct investments in floating rate, senior secured loans to middle-market companies.

Aflac aims to make it big in the middle market lending, which has expanded dramatically over the past five years due to the onset of new funds. It comprises companies that are not big enough to receive large bank loans, yet are too large to receive small business loans.

Aflac carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the past year, the stock has gained 14.7% compared with its industry’s growth of 10.5%.

Some other stocks in the same space are Amerisafe, Inc. AMSF, Employers Holdings Inc. EIG and Unum Group UNM. While Amerisafe has gained 18.7%, Employers Holdings and Unum Group have declined by 1.5% and 10.4%, respectively, in the past year.

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