The Long and Short
An improving credit profile at Equitable Holdings
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Spun out of AXA three years ago, Equitable Holdings Inc. (EQH) is a well-diversified standalone insurance company, specializing in individual life and retirement offerings. The biggest credit risk with EQH has traditionally been on the liability side of their legacy variable annuity portfolio with guaranteed benefits, though they are taking steps to mitigate this risk and have been establishing better risk management policies since their spin-off. Both Moody’s and S&P recently raised their outlook on EQH as the actions taken significantly improve capital adequacy. The EQH 48s offer good risk compensation in the long-end of the insurance curve.
Exhibit 1: EQH vs investment grade life insurance comps
Source: Amherst Pierpont Securities, Bloomberg/TRACE Indications
Bond recommendation
EQH 5.0% 04/20/48 @ +131 10-year; ~G+136; 3.63%; $123.19
CUSIP: 054561AM7
Amount outstanding: $1.50 billion
Senior holding company rating: Baa2/POS, BBB+/Stable
Insurance financial strength rating: A2/POS, A+/Stable
Global deal
- The company is among the top competitors in variable universal life and variable annuities. EQH is well-capitalized at the AA level by the rating agencies, and maintains solid risk-based capital metrics.
- EQH recently had its outlook raised to positive from stable at Moody’s and to stable from negative at S&P following its announcement of a variable annuity transaction to transfer risk to Venerable, which will reinsure $12 billion of reserves of the variable annuities. The rating agencies view this transfer as a significant improvement in EQH’s capital adequacy. The transaction is scheduled to close in the second quarter of 2021. Management anticipates the transaction will reduce risk in the portfolio by 64%.
- EQH just reported earnings on 2/23/21, recording a sizable beat on earnings expectations. 4Q20 adjusted operating EPS was $1.65 versus the analysts’ consensus estimate of $1.21, a 20% increase over the prior year. The company booked a small operating loss of $59 million in the quarter, an improvement over 4Q19 on lower operating expenses. Assets under management reached a record of $809 billion as of year-end, which represented a 10% increase over the prior year.
EQH has a solid liquidity profile. The company has $8.7 billion in cash on the balance sheet as of 3Q20, plus its entire $2.725 billion credit facility through 2023 and an additional $600 million facility through 2024. There are no other maturities due prior to 2023, when $1 billion is coming due through parent debt and FA-backed maturities.
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