Such is life for a stockpicker.
Travelers Companies Inc (NYSE:TRV) reported results, and investors weren't pleased, sending the stock down nearly 4% following the announcement. Is this an overreaction from Wall Street, or a sign that things aren't going well for the Saint Paul, MN-based insurer?
By the numbers
In focus today is Travelers' 26% decline in net income year-over-year. That's the headline number, and it's what gets the most focus from investors.
So, where did the decline come from? Catastrophe losses -- the most difficult to predict cost for any insurer. This segment cost Travelers $284 million this quarter after reinsurance, adding 7.3% to its combined ratio for the quarter.
Another, lesser-watched figure revealed some troubling signs. The company's business insurance has been under pricing pressure as the industry suffers from robust capacity. This quarter, the business insurance segment showed continued weakness.
The company reported an operating profit of $409 million from business insuarnce, but premiums failed to keep pace with insurance claims. Total claims and expenses exceeded premiums by $89 million. If it weren't for investment returns, this segment would have been unprofitable.
Investors don't like to see investment gains as the sole source of earnings, especially in an environment like today's, where interest rates are lower, and reinvested premiums will inevitably generate lower returns going forward.
But there's still something to like...
Travelers history as an excellent underwriter isn't exactly dead. Across the company, Travelers managed to operate with an underlying combined ratio (which includes prior year reserve developments and catastrophe losses) of 90.9%, meaning that it paid out roughly $0.91 for every $1.00 in total revenue. That was good enough to give the company an annualized return on equity of 11.4% for the period -- still satisfactory, despite headwinds in its business insurance and catastrophe segments.
Insurance isn't a business that makes investors rich overnight. Rather, it's a business that has, throughout its history, created enormous long-term wealth for patient shareholders.
Though the vital signs might not look so great this quarter, it's important to remember that over a period spanning decades, the best insurance underwriters can deliver spectacular returns for investors. Travelers has historically been an excellent underwriter.
Besides, at about 1.3 times book value, an 11.4% annualized return on equity is nothing to sneeze at.
Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.