Will Catastrophe Losses Impact Travelers' (TRV) Q3 Earnings?

The Travelers Companies, Inc. (NYSE:TRV) is slated to report third-quarter 2017 results on Oct 19, before the market opens. Last quarter, the company delivered a negative earnings surprise of 7.25%. Let’s see how things are shaping up for this announcement.

We expect a high level of losses arising from catastrophic events like Hurricanes Harvey, Irma and Maria and Mexico earthquakes. These calamities are likely to leave a significant impact on the underwriting results of the company, which in turn is anticipated to weigh heavily on the property and casualty (P&C) insurer’s overall performance.

Travelers has projected a pre-tax catastrophe loss between $375 million and $750 million or $245 million and $490 million after-tax. This will weigh on underwriting profitability and lead to deterioration in the combined ratio. The Zacks Consensus Estimate is currently pegged at 96%.

Further, the company is expecting to witness a fall in net investment income in the soon-to-be-reported quarter, owing to the still low interest rate environment. Travelers estimates about $15-$20 million of lower after-tax net investment income on a quarterly basis compared with 2016. Travelers has provided this estimate on the basis of the current interest rate environment and the specific securities, scheduled to mature in 2017. The Zacks Consensus Estimate for net investment income is currently pegged at $558 million, a 6.7% decline on a sequential basis.

Nonetheless, the company expects to see improvement in its premiums to drive its top-line growth. The Zacks Consensus Estimate for the third quarter of 2017 is $7.1 billion that represents an increase of 1.5% from the prior-year quarter.

Business Insurance segment, which contributes majorly to the overall premiums, have likely witnessed higher premiums primarily fueled by strong production results in select and middle markets, thereby boosting the company’s revenues. The Zacks Consensus Estimate for Business Insurance revenues is $4.1 billion, which comes in line with that of the previous quarter.

Further, Travelers’ premium growth will primarily be fueled by improving premiums across each business segment. The Zacks Consensus Estimate for net written premiums is currently pegged at $6.41 billion, indicating nearly 1% rise on a sequential basis.

Additionally, the company expects to experience improved profitability in auto business at its Personal Insurance segment owing to implementation of favorable pricing and underwriting actions. Also, the company is on track to achieve a double-digit renewal premium change on a written basis in the third quarter.

Earnings Whispers

Our proven model does not conclusively show that Travelers is likely to beat on earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Travelers has an Earnings ESP of 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at 60 cents. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Zacks Rank: Travelers carries a Zacks Rank #4 (Sell), which decreases the predictive power of ESP. Hence, we caution against all Sell-rated stocks (#4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions. Further, combined with a negative ESP, confidence about an earnings surprise is visibly ruled out.

Stocks to Consider

Some stocks worth considering from the insurance industry with the right combination of elements to surpass estimates this quarter are as follows:

Torchmark Corporation (NYSE:TMK) is set to report third-quarter earnings on Oct 24 with an Earnings ESP of +0.14% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.

CNO Financial Group, Inc. (NYSE:CNO) has an Earnings ESP of +1.70% and also carries a Zacks Rank of 3. The company is set to report third-quarter earnings on Oct 25.

Reinsurance Group of America, Incorporated (NYSE:RGA) has an Earnings ESP of +0.32% and flaunts a Zacks Rank #1. The company is slated to report third-quarter earnings on Oct 26.

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