Equitable Holdings: EQH

Overview of the Presentation

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1. Investment Thesis
2. Company Overview
3. Industry Overview
4. Shareholder Structure
5. Competitors
6. Recommendation

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Equitable Holdings: EQH

Investment Thesis

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Recommendation: 8 Shares Current price: $30.09

Current Wacc: 6.02 Current ROE: 33.8%

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Catalysts for Investment

Equitable Holdings, Inc, was founded in 1859 and is headquartered in New York. It operates as a diversified financial services company worldwide. The company operates through offering their clients advice, products and services across four segments: Individual Retirement, Group Retirement, Investment Management and Research (AB) and Protection Solutions. The company was formerly known as AXA Equitable Holdings and changed its name to Equitable Holdings in 2020.

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With a diverse and resilient source of income and leadership equipped for change, MPW is positioned for exponential growth in the coming years.

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• During a period of inflationary pressure, alternative investments specifically in the insurance sector can be seen as a hedge against inflation
• It has an significantly diverse source of income, each business sector contributing roughly equally to the business
• The business still is relatively small with lots of room for expansion to grow in the 3 year hold period of the fund.
• With a diverse board, lack of major scandal, and major commitments to ESG, a serious competitor to other firms

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Equitable Holdings: EQH

Company Overview

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Q3 2022 Performance:

• Assets under Management : $716bn
• Non-GAAP operating earnings: $498m
• Net Income: $273m

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2021 Performance

• Assets under Management : $908bn
• Non-GAAP operating earnings: $2.8bn
• Returned to shareholders: $1.9bn

Equitable Holdings: EQH

Share Price Performance

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Stock Performance (YTD)

Equitable Holdings: EQH

ESG Considerations

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Environmental

ESG Rating

ESG Initiatives

Social

Governance

EQH have a programme focussing on adaptive leadership, dynamic people enablers, and learning and development whilst ensuring to create an environment focussed on holistic diverse well-being

EQH integrates sustainability into their investments and ownership issues opting to pursue sustainable financing initiatives. They also assess the operational footprint of their own business practices

EQH is looking at upholding their stakeholder trust but having sound risk management and foster a culture based on trust, integrity and maintenance of high ethical standards

EQH released their first ESG report in Decmeber 2021 and it aims to harness the company’s “big systems” to deliver a sustainable impact in the communities in which the company operates and its people live and work.

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They are leading the founding of the Coalition for Equity in Wholesaling which is leading insurance companies across the financial service industry. They have formed CEO Taskforce to Advance Racial Equity to advance Black financial professionals. It has enhanced its Equitable Excellence to help address college affordability and college access.

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Equitable Holdings: EQH

Management Structure

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Mark Pearson, Chief Executive Officer

Robin Raju, Chief Financial Officer

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Jeffrey J Hurd, Chief Operating Officer

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Joan Lamm-Tennan, Chair of Board of Directors

Joan has been a Director on the Board since 2020. She is the founder of insurtech firm, Blue Marble Microinsurance and has held numerous leadership roles in financial institutions.

Mark has been a director since January 2011 and prior to working at EQH he spent approximately 20 years in the insurance sector in senior management professions.

Robin is a 17 year veteran with the company and was appointed CFO in 2021. He helped prepare the company for their successful IPO in 2018.

Jeffery joined EQH in 2018 after previously serving as COO for 20 years at AIG.

Equitable Holdings: EQH

Shareholders

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Shareholders

Institutional Investors

Equitable Holdings: EQH

Quantitative Analysis

Key Financials

Effective Tax Rate:

Analysis

Ratios

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• Increasing ROE due to increasing net profit
• Dividend yield of 2.82% is in the top 75% of all US listed companies
• Increasing cash ratio and low net debt in comparison to competitors
• These strong financials will ensure the company remains strong in the current volatile economic conditions and is adherent towards rate hikes
• Very high tax rate and extreme drops in their cash flow - specifically FY2021 (reported a drop of -393%)
• Exponential growth in their tax rate over past 3 years - causes an inaccurate DCF model
• Higher deferred taxes than current taxes - pay taxes at a later date.

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Digitisation

Geopolitical Tensions

Recession Risk and Inflationary Pressure

• There is an ongoing digital transformation in the financial services sector. Customer expectations are driving this change and there is a change in the way transactions are performed through using increased AI and data opportunities.

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• The unstable political situation with Russia’s invasion of Ukraine will continue to dominate for months to come means that economic activity and financial markets will continue to be affected by these events.

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• There has been a meteoric rise inflation and tightening of monetary policy across the globe. This has meant the potential for a recession or stagflation in certain economies is high.
• The Fed has aggressively raised Fed funds rate six times by far this year from 0.25% to 4%. This further increase is an attempt to reduce inflation to the Fed’s longstanding 2% target.

Regulatory Changes

• Basel III will be implemented in January 2023 which will require new government regulations and will change the way that banks account for base capital, credit risk and mandatory disclosures.

Equitable Holdings: EQH

Macro Trends

Equitable Holdings: EQH

Industry Analysis

Life Insurance: key to sustainable growth through transformation

M&A: uncertain economy slows activity

Reinsurance: healthy financial strength with improving profitability

• Global premiums are expected to have a turnaround in 2023 of an estimated 1.9% rise in real terms, due to eased inflation pressures and enhanced economic conditions.
• Through proposition customization and distribution innovation, life insurers will likely need to take initiative to seek out unique demands from unserved and underserved markets.
• Sales of legacy life insurance businesses will likely continue to advance the transformation of some life insurers from protection providers to fee-based asset gatherers, administrators, and employee benefit sellers.

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• Strong premium growth with underwriting profitability continue to be the global trend at the first half of 2022.
• Lower ROEs and capital levels due to rising rates and widening credit spreads (led to falling market value of bonds and equities).
• Ongoing influx of alternative capital (e.g. insurance-linked securities) remains steady in recent years. Future growth of alternative capital in shares of overall reinsurance capital will be supported by:

1. Demand for returns largely uncorrelated with major asset classes

2. Supply of risk to alternative capital structures will increase

3. Regulators will support innovation in the alternative capital space

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• Volatile markets hasten sales of market-linked assets such as variable annuities.
• Persistent high inflation pressures non-life insurer profitability, which may prompt more carriers to expand via M&A into non-standard lines.
• As anticipated future yields may improve product pricing and profitability, rising rates could turn life insurers into more attractive M&A targets. (e.g $2.8 billion acquisition of Allstate’s life insurance unit by Blackstone in Nov. 2021)
• Aggregators and private equity firms continue to be some of the most active players as brokers tend to be easier to acquire, scale up and sell.

Premium growth chart

Equitable Holdings: EQH

Competitors

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Prudential Financial, Inc. (NYSE:PRU)

• An American corporation whose subsidiaries provide insurance, retirement planning and investment management
• Rising interest rates and volatile stock markets battered the insurer: adjusted operating income slid 46% to $803 million from $1.49 billion in the year-earlier period
• Pre-tax losses at around $100 million came from divested and runoff businesses

The Hartford Financial Services Group (NYSE: HIG)

• The Hartford provides a range of insurance products include property and casualty insurance, group benefits, and mutual funds
• HIG beats Q3 earnings and revenue estimates, with quarterly earnings of $1.44 per share, represents an earnings surprise of 11.63%

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MetLife, Inc. (NYSE: MET)

• One of the largest global providers of insurance,annuities and employment benefits programs
• Third quarter results: Book value ( $27.00 per share) is down 65 percent from a year go ($77.24 per share)
• Net investment income was $3.6 billion, down 36 percent from Q3 2021, largely driven by lower private equity returns

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American International Group, Inc. (NYSE:AIG)

• Multinational finance and insurance corporation with operations in more than 80 countries and jurisdictions
• Property-casualty insurance operations, delivered higher underwriting profit; life-and-retirement unit, which is being gradually divested, enjoyed robust sales of annuities.
• $600 million for underwriting profit due to estimated catastrophe costs from Hurricane Ian,which struck southwest Florida in late September

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Main Competitors

Why EQH?

Comparable Share Price Performance?

• During a period of inflationary pressure, alternative investments specifically in the insurance sector can be seen as a hedge against inflation
• It has an significantly diverse source of income, each business sector contributing roughly equally to the business
• The company still is relatively small with lots of room for expansion to grow in the 3- year holding period of the fund.
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Pension fund crisis

Rate hikes

• Recent UK pension crisis has shown that pension schemes have been speculating–investing in equities, private equity and hedge funds, with disguised borrowings or leverage. By increasing leverage, many pension schemes increased risk for themselves and the entire financial system.

• EQH owns 64% shares of AllianceBernstein (AB), a global asset management firm
• Recent geopolitical risks combined with drastic rate hikes globally has peaked short-term interest rates (e.g. inverted yield curve, US2Y>US10Y), which reduces profitability for low-risk credit lending

Equitable Holdings: EQH

Risks

• Effective tax rate of 85.80% is very uncommon. In fact, their tax rates has almost grown exponentially from 3.75 in FY2017 to 85.80 in FY 2021. This leads on to build a very inaccurate WACC for a three year buy - particularly given the bear market conditions that also critically affect the WACC.

Inaccurate WACC

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Diversified Income

Market Confidence as an Inflation Hedge

Huge Potential for Growth

• The complementary mix of businesses means there is a diversity in the earnings source allowing the business to offset the greater economic fluctuations

• EQH as an insurance company is a profitable business model with a hedge against inflation as insurance will always be in demanded even in a harsh economic environment which allows them pricing power

• With the strong management board, lack of scandal and strong performance through continued market headwinds, the reasonably priced share allows lots of room for growth.

Equitable Holdings: EQH

Reasons to Buy