Trv
Source: Travelers.

On Tuesday, Travelers (NYSE:TRV) will release its quarterly report, and shareholders couldn't be happier to see that the insurance company's stock has soared to new all-time record highs. Yet much of the growth in earnings has come from a long stretch of favorable loss experience in its property and casualty segment, and eventually, storms and other catastrophic losses will put a dent in its earnings. Moreover, as AIG (NYSE:AIG), Allstate (NYSE:ALL), and other insurers seek to take advantage of the favorable conditions, competition will get fiercer as well.

Like so many other businesses, the insurance industry tends to be cyclical, undergoing periods of heavy losses but then often having more favorable conditions to help insurers recover from those losses. Right now, Travelers, AIG, Allstate, and their peers are in the upward-looking phase of the cycle, having recovered from Hurricane Sandy and used higher premiums to their advantage. But as the up-phase gets longer, pressure to reduce premiums increases, and Mother Nature's caprice is impossible for Travelers or its investors to predict. Let's take an early look at what's been happening with Travelers over the past quarter and what we're likely to see in its report.

Stats on Travelers

Analyst EPS Estimate

$2.08

Change From Year-Ago EPS

(2.3%)

Revenue Estimate

$6.16 billion

Change From Year-Ago Revenue

5.7%

Earnings Beats in Past 4 Quarters

4

Source: Yahoo! Finance.

Will Travelers earnings just keep rising?
In recent months, investors have boosted their views on Travelers earnings, raising second-quarter estimates by $0.13 per share and boosting full-year projections by more than $1 per share. The stock has jumped in response, with gains of 11% since mid-April.

For Travelers, the first quarter was business as usual, with the insurer seeing an almost 5% rise in net premiums written and earnings per share that beat estimates by more than 35%. Travelers has seen great success in being able to keep premiums up, and another season of relatively favorable loss experience helped improve margins and allow the insurance giant to keep more of those premiums as profit. Winter weather did have an impact on results, but AIG seemed to feel that effect more than Travelers did.

Trv

Source: Travelers.

Many forecasters wonder, though, whether Travelers' run of good results will end soon. On the weather front, meteorologists are predicting an El Nino event this year, with unusually warm water in the Pacific Ocean having had dramatic impacts on weather patterns in the past. Yet in this case, El Nino might actually be favorable for Travelers, as hurricane activity in the Atlantic Ocean tends to be below normal when the phenomenon is present. By contrast, though, the colder years in the Pacific that tend to follow El Nino events typically raise the chances of severe hurricanes in the Atlantic, and so Travelers needs to keep an eye on future trends and price its insurance protection accordingly.

For Travelers to grow, it needs to look beyond the weather and other uncontrollable factors and focus more on competing for profitable lines of business. Although Travelers has done a good job of getting its share of business from the commercial insurance market, the personal lines that Allstate specializes in have proven more difficult for Travelers to build a bigger presence. In addition, as the Fed contemplates higher interest rates, Travelers and its peers all have to assess their bond portfolios to reduce the risk of losses.

In the Travelers earnings report, watch to see whether the company has still been able to keep premium prices high even as loss experience has remained fairly benign. At some point, competitive pressures will hurt earnings even without a catastrophic loss, and Travelers needs to stay disciplined to avoid a race to the bottom that could devastate its financial results the next time a big storm hits.

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Dan Caplinger owns shares of Apple and warrants on American International Group. The Motley Fool recommends Apple and American International Group. The Motley Fool owns shares of Apple and American International Group and has the following options: long January 2016 $30 calls on American International Group. 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.