Equitable Holdings

Moat: 2/5

Understandability: 4/5

Balance Sheet Health: 3/5

Equitable Holdings, Inc. is a diversified financial services provider, offering a range of products and services across individual retirement, group retirement, investment management, and protection solutions, with a focus on retirement planning and asset management.

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The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview: Equitable operates through three key segments: Individual Retirement, Group Retirement, and Investment Management and Research.

  • Individual Retirement: This segment provides a wide range of variable annuities, fixed indexed annuities, and fixed annuities for individuals, helping them accumulate wealth and generate income for their retirement needs.

  • Group Retirement: This segment provides retirement savings plans, primarily 401(k)s and other defined contribution plans to employers and their employees.

  • Investment Management and Research: This segment includes the firm’s institutional asset management and retail wealth management business which are delivered by its subsidiary, AllianceBernstein (AB).

Competitive Landscape: Equitable operates in highly competitive industries, facing competition from other large insurance and financial services companies, as well as from smaller fintech firms. Major players include MetLife, Prudential, Principal Financial, Lincoln National, and Global Atlantic. The main aspects of competition are pricing, product features, brand recognition, and distribution capabilities.

Financial Overview: Equitable’s most recent 10-Q (for the quarter ending September 30, 2023), indicates a challenging period, but improvements were made through restructuring, cost management, and focus on products with stable economics. Here are some insights: * Operating revenues declined to 3,976M in Q3 2023 compared to 4,519 in the same period in 2022. * Net income available to shareholders was 400M this quarter (Q3 2023) compared to 1,334 in the same period of 2022. * Adjusted operating earnings (non-GAAP) decreased to $400M from $625M last year. The decline in adjusted earnings was primary the result of lower revenue growth in asset management.

* The company noted a significant adjustment on its income statement related to a review of deferred tax assets and liabilities. After adjusting for tax benefits, net income available to shareholders fell to 0.25B from 1.17B in Q3 2022.

* The financial health is a key element of this business, so it has to be evaluated with that mindset.

Moat Assessment: Equitable’s moat is narrow, and here’s the detailed breakdown: * Limited Brand Recognition: While Equitable has a long history, its brand isn’t quite as powerful as other insurance companies like Prudential, which means it is not a key value driver. * Moderate Switching Costs: The switching costs for customers are not high. Customers can relatively easily switch to a new provider with minor penalties or inconvenience. * Lack of Proprietary Product: While Equitable sells a variety of products, they are not unique in that they can all be replicated by competitors. * Low Distribution Advantage: Equitable sells products via a variety of distribution channels including financial advisors, institutions, and retail outlets. They don’t have a material distribution advantage over peers. * Economic of Scale: Scale does enable some operational efficiency and cost cutting, allowing Equitable to be more competitive but there is no specific advantage due to scale of operations.

Given these characteristics, a moat rating of 2 out of 5 seems appropriate, with no single structural advantage protecting it in the long term.

Legitimate Risks to the Moat: Equitable faces several risks that could harm its moat and business resilience:

  • Competition: The financial services industry is fiercely competitive and subject to rapid technological and regulatory changes. Failure to adapt would erode profitability.
  • Interest Rates: Lower interest rates can reduce a company’s profits by reducing the margin between interest expenses and the return they get on debt instruments. If interest rates drop considerably, EQH could face pressure on its earnings.

  • Capital Markets: Equity markets are volatile, and downturns in the market are bound to occur. This can negatively impact the profitability of an asset manager like Equitable.

    • Regulatory Changes: Increased regulation of the financial services and insurance industries could also increase the compliance burden on the company, affecting its cost.

    • Economic Cycles: Given the nature of this industry, recessions and market downturns might greatly affect its revenue, and that might damage its profits considerably.

Financial Health Analysis: Based on the most recent financials, the balance sheet has some areas of weakness which makes it not too strong. Here’s a summary:

  • Liquidity: The company’s high percentage of holdings in Level 3 assets raises concerns about the liquidity profile. Such assets are often complex and illiquid, and thus difficult to sell to cover obligations.
    • Leverage: Total liabilities exceed total assets, resulting in negative equity. This limits the company’s ability to grow, and makes it more risky.
  • Stability: While the total debt is relatively low for this company, they have high nonoperating liabilities, such as insurance liabilities and other guarantees.
    • Other Points There is a $10B commitment from AXA. Given AXA’s credit rating being A+ it is highly likely to be paid out. Management is actively de-risking their business. The portion of riskier assets has declined.

Given these points, a rating of 3 out of 5 is suitable for the balance sheet health, with issues in liquidity and high amounts of non-operating liabilities, though that is partially offset by low debt.

Understandability: The core concept of the business—providing insurance and financial services—is relatively simple, so a rating of 4 out of 5 seems to be fair. Understanding the intricacies of their various financial products, however, needs more expert knowledge and so it does not receive a perfect score.

Recent Controversies and Problems:

  • A recent report flagged concerns about some of Equitable’s opaque financial operations including complex insurance product designs. These concerns include a large amount of Level 3 assets that may have low liquidity and could be impaired during a distressed financial situation.
  • During the last quarter, the company’s operating income declined significantly due to lower revenue growth from management services and higher expenses.
  • CEO Mark Pearson has stepped down on May 1. No permanent replacement has been named yet which is causing some disruption among investors and the company.