In short: Harris Associates (U.S. Large Value Strategy): a new position on a business-mix change the market has not repriced. The industry "benefits from recurring, fee-based revenue, scale advantages in distribution, and structural demand from an aging population's growing reliance on annuity and advisory products." The specific attraction is "Equitable's repositioning away from spread-driven insurance earnings toward nonregulated fee businesses, which now places more than half of distributable cash flow in capital-light segments." They read the Corebridge Financial merger "as a merger of equals with the potential to add scale and to create a leading U.S. retirement, wealth, and asset management franchise… accretive to earnings and cash generation." Price: "less than 6x our estimate of 2027 distributable cash flow — a valuation we believe understates the earnings quality of the business."
Equitable sells retirement products, manages money and advises wealthy clients. Harris Associates started a position because the company has quietly changed shape.
Traditionally an insurer makes money on the spread — it invests your premiums and keeps the difference between what it earns and what it owes you — which requires holding a lot of capital and carries market risk. Equitable has shifted so that more than half its distributable cash now comes from fee-earning businesses that need little capital. Fees are steadier and worth more per dollar than spread income, but the shares are still priced as though it were an old-fashioned insurer.
They also read the pending merger with Corebridge as a genuine combination of equals that adds scale and should increase earnings. At under six times their estimate of 2027 distributable cash flow, they think the price understates the quality of what is now being earned.
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