Assessing Another Queensland Flood

This story features INSURANCE AUSTRALIA GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: IAG

-Insurers can withstand this flood
-Flood impact worst for Suncorp
-Minimal impact so far on mines
-Some coal haulage delays

By Eva Brocklehurst

Whatever the weather we'll weather the weather, whether we like it or not.

A rhyme from schooldays sums up the outlook of insurers for the first month of 2013, replete with fires and floods. This week's Queensland floods are somewhat of a problem for coal miners and haulage companies too, given the coal-intensive Bowen Basin has copped it again.

For insurers it looks like a 'modest' impact for Insurance Australia Group ((IAG)) and QBE ((QBE)) and 'significant' for Suncorp ((SUN)), with its heavier Queensland exposure. Nevertheless, Goldman Sachs believes, for Suncorp the impact will be less than 2011 because the capital, Brisbane, was greatly affected back then. Suncorp's worst case net cost is $250 million and while this may not be reached the broker expects the large claims will come in over budget in the second half, countering a benign first half. Deutsche Bank concurs, noting 22% of Suncorp's gross written premium comes from Queensland.

On FNArena's database Suncorp has five Buy ratings, although many of these have not been re-evaluated since the flood. Nevertheless, BA-ML, which has re-visited the stock, has retained a Buy rating and confirmed Suncorp as its number one pick in the insurance sector, believing there is more upside due. BA-ML raised the price target to $11.40. The price targets range from $10.11 (JP Morgan) to Citi's $12.20. Macquarie is the one with a Sell rating, having said earlier this month that it needs to see material improvement in the company's performance to change its opinion.

QBE's maximum event retention is $200m but Goldman considers it unlikely that figure will be reached and QBE is well able to absorb the costs in its global budget for losses. Deutsche Bank sees QBE's Queensland exposure as entailing just 3-4% of gross written premium. QBE has six Hold and two Buy ratings on the FNArena database.

In terms of IAG, this company will wear a larger share of claims in northern NSW's flood affected region but, overall, claim values are seen as modest. Deutsche expects that IAG's conservative catastrophe budget, $320m per half, should leave ample room. UBS says it's too early to assess whether Suncorp and IAG's single event retentions will be breached but they both should have room within their natural peril allowances. The broker cut the sector to a Hold rating last week and retains a Sell recommendation for IAG and Hold for Suncorp and QBE. On FNArena's database for IAG there are five Hold ratings, two Sell and one Buy (JP Morgan). The price target ranges from $4.40 to $4.90.

Goldman Sachs believes the miners will be affected to a much smaller extent than in January 2011, when three quarters of  Queensland was declared a disaster, with preliminary estimates of one million tonnes of coal shipment being held up because of transport and production disruption.Companies affected include Asciano ((AIO)) but here the impact is considered minimal as take-or-pay contracts are robust and Queensland coal accounts for only 15% of earnings. For Aurizon ((ASJ)) it is a bit greater as 30% of its earnings are derived from Queensland coal haulage. While it's too early to assess, Goldman observes that flooding has had more impact on rail haulage of coal rather than the mines.

Deutsche Bank notes the Blackwater and Moura rail lines have been closed and these account for 30% of Queensland's coal rail capacity. The broker expects the impact to be immaterial for AIO while Aurizon might see a 3.3% detrimental impact on FY13 earnings if the line is closed for a month or more. BA-ML has evaluated the impact on mining areas in Queensland and NSW and notes there are minimal impacts at this stage, with Moranbah in Queensland and Gloucester Basin in NSW having the greatest potential for disruption. Again, it's the coal haulage and the Port of Gladstone which are most affected with shipping delays. However, BA-ML warns it is easy to underestimate flood impacts, noting Aurizon's initial assessment for FY11 was 15-20m tonnes affected and that ended up being 37m. Moreover, it's only January. February and March are the wettest months in Queensland.

A third category of potentially affected stocks is agricultural fertiliser suppliers, hence Incitec Pivot (((IPL)). Goldman notes that around 50% of the company's Dyno Asia Pacific earnings are generated from flood affected areas. However, fertiliser consumption was already down with respect to the summer crops because of lower plantings. The impact of the flood on FY13 earnings is considered negligible.
 

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