Equitable: Transition To Higher Quality Earnings Continues

Equitable Holdings (EQH) shares have gained 33% over the past year due to the company's strategic shift towards recurring revenue streams and de-risking its business, including a reinsurance deal with RGA and increasing its stake in AllianceBernstein (AB) to 68.6%. Despite weaker Q1 results with an earnings miss of $0.18 primarily due to unfavorable mortality, the company's transformation efforts are viewed favorably, with expectations of a shift towards wealth and asset management contributing the majority of earnings next year. EQH is well-capitalized with a pro forma risk-based capital (RBC) ratio of approximately 500% and is expected to generate $2 billion of cash flow by 2027, supporting ongoing buybacks and dividend increases, leading to a price target of $62.50.

Analysis

Equitable Holdings (EQH) has demonstrated strong share performance, gaining 33% over the past year, driven by strategic de-risking and a reallocation of capital towards more predictable, recurring revenue streams, notably through an increased stake in AllianceBernstein (AB) to 68.6% and a significant reinsurance agreement with Reinsurance Group of America (RGA) slated for a midyear close. This RGA transaction is pivotal, expected to free up $2 billion in capital and facilitate EQH's pivot from capital-intensive insurance to capital-light asset management, a shift anticipated to support multiple expansion. Despite a Q1 earnings miss of $0.18 per share (reporting $1.30), primarily due to $0.20 of unfavourable mortality within the block being reinsured, the stock has rallied 5% since March, indicating investor confidence in the transformation. Post-transaction, EQH's risk-based capital (RBC) ratio is projected to be approximately 500%, significantly above its 425% year-end 2024 level and robust even under severe stress test conditions. The company maintains strong liquidity, with $1.1 billion at the holding company level, well above its $500 million target, and plans a $500 million immediate stock buyback post-RGA deal closure, alongside an expected $1.25 billion dividend to the holding company. This strategic shift will see wealth and asset management contribute the majority of earnings from next year, with assets under management and administration rising 3% to $1.0 trillion in Q1 and AB reporting $2.7 billion in net flows. While individual retirement and wealth management segments showed positive Q1 trends, a persistent concern remains the underperformance of alternative investments, which earned 6% against an 8-12% target. However, the core investment portfolio remains conservative with 98% investment grade assets. EQH's commitment to capital returns is further evidenced by $261 million in Q1 buybacks, a planned 13% dividend increase to $0.27, and an adjusted book value significantly higher than reported when valuing AB at market levels. The company projects $2 billion in cash flow by 2027, supporting a $5 capital return capacity per share and a fair value estimate of approximately $62.50, underpinned by the transition to a more predictable, fee-based earnings model.

Key Decisions for Investors

• Investors should closely monitor the successful completion of the RGA reinsurance transaction around midyear and the subsequent effective deployment of the $2 billion in freed-up capital, particularly towards the announced $500 million share repurchase and strategic growth initiatives.
• Attention should be paid to the earnings contribution and margin development from AllianceBernstein and the broader wealth management operations, as these are critical drivers for the anticipated shift in EQH's earnings mix towards more stable, fee-based revenues and potential valuation re-rating.
• The persistent underperformance of the alternative investment portfolio, which missed targets again in Q1 and reduced EPS by $0.05, warrants continued scrutiny as it could temper overall financial results despite other positive developments.
• Consider the company's enhanced capital return potential, including a planned 13% dividend increase and ongoing share buybacks, which are well-supported by a pro-forma RBC ratio of ~500% and strong holding company liquidity, when assessing the investment thesis.