What To Expect From Travelers’ Q2 Earnings

by Trefis Team
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The Travelers Companies (NYSE: TRV), the fifth-largest property and casualty insurer in the U.S., is scheduled to report earnings for the second quarter on Thursday, July 20, and we expect its margins to remain flat this quarter. Travelers’ Q1 income declined by nearly 12% due to catastrophe losses, largely driven by tornadoes. We expect that the company’s earnings will continue to see year-on-year declines this quarter as well due to higher catastrophe losses from hail, wind and other severe storm events in Florida, Georgia, Louisiana, and Texas. However, the losses are likely to be partially offset by higher investment income and the fact that Q2’16 saw significant losses due to hailstorms in Texas and wildfires in Canada, making an easier year-on-year comp.

Catastrophe Losses Will Continue To Put Pressure On Profits

In full year 2016, Travelers’ operating income dropped by nearly 14%, and the combined ratio (the ratio of claims to premiums earned) increased by 370 basis points to 92.0%. The decline in operating income was primarily due to higher non-catastrophe weather-related losses, lower net favorable prior-year reserve development, and lower investment income partially offset by higher net favorable prior year reserve development. With the exception of Q4’16, Travelers profits have been declining for the last year due to higher catastrophe and non-catastrophe weather-related losses. Due to hailstorms in Florida, Kansas, Louisiana and Texas and fire related events in California, Arizona, and Georgia, we expect Traveler’s profits to continue to decline. However, Travelers’ investment income has been increasing in the last few quarters due to better macroeconomic conditions, which should help partially offset this pressure.

Business Insurance To Benefit From Macroeconomic Conditions

The company’s business and financial division includes worker’s compensation, commercial automobile, and general liability products. The worker’s compensation line, which is one of the most important product lines for Travelers, is significantly affected by employment activity. The unemployment rate has declined over the last year in the U.S., from 4.9% in June 2016 to 4.4% in June 2017. This is a good indicator for growth in this line of business for Travelers. We expect the improving macroeconomic conditions to benefit the workers’ compensation insurance market, and Travelers – being the leader in this segment – should be able to benefit from that improvement.

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