On January 15, BlackRock reported 4Q19 earnings of $8.34, 0.69 more than consensus. Revenue rose 16% to $3.98 billion, reflecting growth in investment advisory, increased administration fees, higher securities lending revenue, and more significant technology services revenue. Equities had $38.6 billion of inflows, while fixed-income had $38.3 billion. Market appreciation increased assets by $257.6 billion, with long-term $6.66 trillion in 4Q19, with 55% in equities, 34%.
EARNINGS & GROWTH ANALYSIS
BlackRock reported in 1Q21 $75.2 billion, about two-thirds of which came from equities, with most of the remainder from fixed-income. iShares continues to capture fixed-income products; we look for 6% average AUM growth in 2020, with solid flows to equities.
BlackRock is also taking steps to rein in expenses; in 4Q20, it took a restructuring charge of $60 million to ‘modify the size and shape’ of its workforce, reducing its headcount by about 3% (500 positions). The cuts spread across different geographic regions reflect the strong start for asset values this year and initiated a 2022 forecast of $34.44.
Hartford Financial Services Group Inc
We expect Hartford to generate a lower ROE than peers over the next few years despite management’s efforts to raise prices, improve margins, and lift profitability to industry-standard levels. HIG shares are trading below the peer average for P/E and price/book; however, the price/book multiple is high by historical standards, and the earnings outlook is weak. In 2021, management expects underwriting margins and earnings in P&C to improve. Assuming lower catastrophe losses, management expects Personal Lines to improve but looks for underlying margins to face modest pressure in the workers’ compensation business. HIG’s strategic priorities include maintaining core ROE well above its cost of equity capital. Operational goals include expanding product capabilities and deepening distribution relationships. In Commercial Lines, a top priority for 2019 is the integration of the recently acquired Navigators Group business. HIG has been rumored as a potential buyout candidate given its small size and below-industry-average profitability. However, even as a takeover target, it commands a significantly higher valuation.
RECENT DEVELOPMENTS
Revenue rose 10% to $5.3 billion, above our estimate and the consensus forecast of $5.2 billion. Book value 3Q19 was $43. $34.95 in 3Q18, reflecting higher net income. Net investment income rose 10% to $490 million, driven by higher assets under management and alternative investment returns. The annualized yield was 4.0%. In a bid to divest from fossil fuels, Hartford will cease insuring or investing in companies that make over 25% of their revenues from thermal coal mining or extraction of oil from tar sands. The company will sell its investments in such companies by 2023 and exit existing underwriting relationships. In 3Q18, Hartford sold Talcott Resolution, its life and annuity business, to a group of investors, including Atlas Merchant Capital, a private equity firm, for $2.05 billion. The payment consisted of $1.4 billion in cash, a 9.7% interest in the new company, transferred debt, and a pre-closing dividend.
EARNINGS & GROWTH ANALYSIS
Hartford organizes its operations into five segments, including P&C Other Operations, all of the Property and Casualty business. We summarize key third-quarter business trends and outlooks for the divisions below. Commercial Lines. This segment, which accounts for a $303 million in 3Q core earnings, up from $365 higher underwriting gains and investment income. Written premiums rose 28% to $2.2 billion, aided by new business across its Medium & Large and Specialty subsegments. Middle market is a competitive part of the business, and we expect to see Hartford generate mid-single-digit growth over time. The Commercial Lines underlying combined ratio is expected to be 91.0-93.0 in 2021.
Personal Lines segment, which includes car and home insurance, saw core earnings rise to $87 million from $47 million due to lower catastrophe losses, more favorable reserve development, and higher investment income. Written premiums declined 4%, to $822 million, mainly due to lower auto premium retention. The underlying combined ratio worsened by 0.3 98.8, reflecting lower premiums. Management has sought to improve profitability in this segment, particularly in homeowners, and has made progress in recent years. Auto insurance remains challenging, as accident frequency and bodily injury claims are at ten-year highs, partly due to texting while driving. Management is working to address this weakness through price hikes and underwriting initiatives. Looking ahead, we expect mid-single-digit growth in core earnings over the next year, likely driven by underwriting improvements rather than sales growth. Management expects a Personal Lines underlying combined ratio of 91.0-93.0 in 2019, versus 91.5 in 2018, with strong auto insurance results and new business growth in both auto and homeowners. P&C Other Operations. This segment includes P&C operations . The segment’s core earnings were $15 million in 3Q19, compared to $8 million in 3Q18. Group Benefits. This segment reported core earnings of $141 million, up from $101 million a year earlier. Earned premiums declined 1% to $1.3 billion due to lower group life premiums. 4.4 points from 3Q18 to 71.1%, with improvement in disability insurance. The expense ratio rose 1.0 point to 24.9%, due to technology investments and higher commissions paid. Although this business faces intense competition, we expect results to improve modestly over time with help from rising employment. Management expects a 6.0%-7.0% in 2019, versus 7.0% in 2018. Hartford Funds. This segment reported 3Q core earnings of $39 million, down 5% from 3Q18 due to lower investment management fees. Net outflows totaled $800 million, bringing Mutual Fund AUM to $120.0 billion.
MANAGEMENT & RISKS
Christopher Swift became Hartford’s CEO in 2014 after previously serving as CFO. We expect Mr. Swift to continue the company’s restructuring. The company distributes its insurance products and other financial services through independent agencies.
