Aflac Incorporated (AFL Quick QuoteAFL - Free Report) is well-poised to grow on the back of a world-class investment platform, cost-curbing initiatives and a recovering U.S. business. Despite facing multiple constraints, shares of AFL climbed 7.5% in the past year.

Aflac — with a market cap of $37.5 billion — operates as a supplemental health and life insurance products provider. It has strong footprints in the United States and Japan. Based in Columbus, GA, AFL is likely to benefit from the rising interest rates. Courtesy of solid prospects, this presently Zacks Rank #3 (Hold) stock is worth retaining at the moment.

Trend in Estimates

The Zacks Consensus Estimate for AFL’s current-year earnings is pegged at $5.33 per share, which witnessed six upward estimate revisions in the past 60 days against one in the opposite direction. The estimate rose 1.1% during this period. Aflac beat on earnings in each of the last four quarters, the average being 9%.

The consensus mark for current-year revenues is $19.6 billion. Aflac anticipates improved sales within its Aflac Japan segment in the second half of 2022, with the expectation of moderation in pandemic-linked volatilities, productivity improvements at Japan Post, and continuous execution of product introduction and refreshment plans.

Key Drivers

AFL’s U.S. segment witnessed a 16.9% increase in sales in 2021 and 17.2% year over year in the first half of 2022, courtesy of growth investments and productivity gains. The U.S. business is recovering at a faster pace from the pandemic-induced volatilities than the Japanese business. The rebound can be attributed to a gradual recovery of the U.S. economy that led to increased face-to-face meetings and enrollments, which in turn, resulted in higher sales activity.

Aflac’s strategic moves to expand its product suite in the U.S segment are praiseworthy. The acquisition of Argus Dental & Vision has been a contributor to the growth of its U.S. segment. The buyout of Zurich North America's U.S. Corporate Life and Pensions (Group Benefits) business strengthened its position in the US broker distribution network. Aflac continues building out its dental network and readying the platform for increased volumes as it moves upmarket and introduces a direct-to-consumer individual product.

Factors like product innovations and new introductions, development of virtual sales channels, increase in face-to-face interactions and recruitment of agents are likely to drive the U.S. business’ sales going forward. Productivity improvements at Japan Post and other factors are also likely to drive its sales in Japan.

Its global investment expanding moves are noteworthy. AFL’s asset management subsidiary, Aflac Global Investments, bought a minority stake in Varagon Capital Partners, L.P., a leading direct lender to middle-market companies. It is expected to make a new multi-year investment commitment of up to $3 billion to Varagon to invest in middle-market loans. The investment platform will likely generate sustainable risk-adjusted net investment income despite any headwinds.

Moreover, it entered into an investment partnership with Denham Capital. Aflac has made a $2.1 billion multiyear general account commitment to launch a new debt platform focused on investing in the senior secured debt of sustainable infrastructure projects. Aflac holds a 24.9% minority interest in a newly created entity Denham Sustainable Infrastructure. The company is also making a $100 million commitment to Denham Equity Fund, focused on sustainable infrastructure investments.

Furthermore, its benefit ratio, which measures the amount paid in claims as a percentage of premium, witnessed an improvement in the first half of 2022 as hospital utilization in Japan remained at low levels. A fall in the benefit ratio might aid its margins. Also, its costs saving initiatives will drive the bottom line. The company offered a voluntary separation plan to eligible employees, which reduced its U.S. insurance and corporate workforce by approximately 9%. A more agile workforce will increase the segment’s efficiency over the medium to long term.

Key Concerns

There are a few factors that are impeding the stock’s growth lately.

AFL’s net cash from operations declined 24% year over year in the first half of 2022. In the trailing 12-month period, its free cash flow after dividends declined 14.9% year over year. Also, a higher price-to-book ratio (1.4X) compared to the industry average (1.3X) indicates stretched valuation. Nevertheless, we believe that a systematic and strategic plan of action will drive growth in the long term.

Better-Ranked Players

Some better-ranked stocks in the broader finance space are Employers Holdings, Inc. (EIG Quick QuoteEIG - Free Report) , Ares Capital Corporation (ARCC Quick QuoteARCC - Free Report) and Hannover Rück SE (HVRRY Quick QuoteHVRRY - Free Report) . While Employers Holdings and Ares Capital sport a Zacks Rank #1 (Strong Buy), Hannover carries a Zacks Rank #2 (Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Headquartered in Reno, NV, Employers Holdings provides workers' compensation insurance to businesses operating in hazardous industries. The Zacks Consensus Estimate for EIG’s 2022 earnings has increased 5.9% in the past 60 days.

Based in Los Angeles, CA, Ares Capital specializes in rescue financing of middle-market companies. The Zacks Consensus Estimate for ARCC’s 2022 earnings indicates 16.3% year-over-year growth.

Based in Germany, Hannover offers reinsurance products and services around the globe. The Zacks Consensus Estimate for HVRRY’s 2022 bottom line indicates 6.1% year-over-year growth.