This is not investment advice. Do your research before taking a position in any of the securities mentioned in the post below.
It has been a while between posts and although I prefer to wait until my content is polished/complete before sharing… I wanted to share my general thoughts on a company as its share price continues to fall. This is helpful for a number of reasons:
Prices indeed may move beyond the point it is attractive
Unlike a simple consumer/industrials business - this is a Life Insurer; so I do not profess to be an expert in this space
When a business is getting cheaper... sometimes there is a good reason for this
In short - I am very open to hearing counterarguments to whether this is a good company
Equitable Holdings - Why this came up in my screening
One of Buffett’s preferred fund managers is Greg Alexander of Conifer, The largest holding of Conifer is in Life Insurer/Pension manager. EQH also has a 61% holding in Alliance Bernstein the fund manager
The basic premise of the life insurer is to manage the risks associated with a variable annuity which include
Balance the need to grow AUM vs. keeping high adequacy ratios
Earning a return from credit securities (majority of their capital) and an element of direct investment or equities (meaningful part of P&L/risk)
Positioning the firm to sustain investment returns in changing interest rate environment
Why do I believe Conifer may have invested in EQH?
Firstly I am quite sure Conifer invested pre-IPO, so their price point may have been even more compelling. However, even at today's price, below are some reasons why this might appeal to Conifer is:
EQH have a long operating history in life insurance, and when it comes to pricing extreme events (e.g. tail risk) this is helpful
EQH has a goal of returning 50-60% of operating earnings to shareholders. Plus they tend to implement/suspend buybacks depending upon whether shares are trading at lows (i.e. they do not buyback at ANY price)
In terms of pricing, given over half of the company’s earnings come from variable annuities, investors have recently sold off the stock because it could be vulnerable to adverse macro conditions
In terms of earnings, the Investment and Group Retirement part of the business is where the real "upside" is and this is where most of the growth has come from
What do their financials look like?
EQH business is organized in four segments: Individual Retirement, Group Retirement, Investment Management and Research, and Protection Solutions:
Individual Retirement—Individual variable annuity products
Group Retirement—Tax-deferred investment and retirement services for everyone (charities/SMEs etc)
Investment Management and Research—Diversified investment management, research and related services to a broad range of clients around the world.
Protection Solutions—Life insurance products variable and indexed life cover
Since the below data is quarterly; it's not worth reading into it too much but EQH are not particularly over-earning at the moment because
Investment flows have been particularly strong but Individual retirement earnings have offset these because it includes the Venerable transaction costs
Generally - these inflows are not super volatile compared to say a Blackrock or some other Pension funds
So whilst, I do not have a detailed valuation for EQH; because it is actually a pretty complicated business to value. I can conclude the following:
Their stake in AllianceBernstein is worth $3bn
Their stated hedging liabilities are $(1.5)bn
Overall they are anticipated to make c.$2.5bn of Op profit which capped at a 6-7x multiple = $15-17.5bn. This is broken down, with run-rate profit of:
At a high-level this would mean a market cap of $16-18bn vs. today's market capitalisation of $12bn
Conclusion
I consider the valuation of EQH quite compelling but it will not grow earnings at significant rates (e.g. 5% p.a. or so) and the business ROE is generally <10%
The variable annuities business is justifiably the "ugly duckling" of the insurance space - so sentiment towards this business is weaker than big fixed annuity players
The AllianceBernstein business can be impacted by equity markets - not in the same way as a Magellan - but it is still a threat to the business
There are regulatory factors to get your head around with investing in insurers in the US (e.g. Reg 213)
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