Equitable Group outlook revised to negative by S&P due to increased leverage

Investing.com -- S&P Global Ratings has revised its outlook for Equitable Holdings (NYSE:EQH) Inc. (EH) to negative from stable due to increased financial leverage. The ratings agency affirmed its ’A+’ financial strength and issuer credit ratings for EH’s operating companies and ’A-’ issuer credit rating for EH itself.

The revised outlook comes after EH announced on February 24, 2025, an agreement to reinsure a closed block of life insurance with Reinsurance Group of America (NYSE:RGA). This transaction is expected to generate over $2 billion of capital, which EH plans to primarily use to increase its ownership in Alliance Bernstein (AB) through a cash tender offer. This move will push EH’s financial leverage above the 40% threshold, a level that S&P Global Ratings views as elevated.

The negative outlook reflects increased financial risk for EH over the next 18-24 months due to the higher leverage resulting from the reinsurance transaction and the reduction of its GAAP equity through the purchase of additional Alliance Bernstein units. The final impact on the leverage ratio will depend on market conditions at the time of transaction close and the level of participation in the tender offer.

EH’s plans to reinsure on a 75% quota-share basis approximately $32 billion of statutory reserves from its operating subsidiaries. Alliance Bernstein will continue to manage 70% of the general account assets being reinsured. The reinsurance transaction is expected to close in mid-2025.

The proceeds from the transaction will be used in part to increase EH’s ownership stake in Alliance Bernstein through a cash tender offer, purchasing up to 46 million units for $38.50 a share for a total price of approximately $1.8 billion. This could increase EH’s stake to 77% from 62%. EH also plans to use $500 million of the proceeds for share repurchases after the reinsurance transaction closes.

The increased ownership in Alliance Bernstein and the share repurchases are part of EH’s overall strategy to own all parts of the value chain for its core product offerings: retirement, asset management, and wealth management. However, these actions will result in a realized loss on the close of the reinsurance transaction and a decrease in GAAP equity. Financial leverage is expected to rise to approximately 43%–47% depending on the final terms of both events, from 38% as of December 31, 2024.

S&P Global Ratings forecasts that financial leverage could remain above its 40% threshold for longer than 24 months if EH does not take deleveraging actions, such as increasing retained earnings or reducing debt. This risk is reflected in the revised outlook to negative from stable.

The ratings agency may lower the ratings in the next 18-24 months if financial leverage exceeds its tolerance level, earnings fall short of expectations, or capital adequacy becomes and remains deficient at the 99.95% confidence level. Fixed-charge coverage falling below 4x could also trigger a ratings downgrade. However, the outlook may be revised back to stable from negative if financial leverage falls under 40% or if the company takes actions that materially reduce leverage in the near future.

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