Significant uncertainty ahead for investors after Queensland floods

Insurance, transport and retail worst sectors hit

The Australian insurance sector is one of a number of sectors that faces a significantly uncertain outlook following the devastating Queensland floods, according to Melbourne based fund manager, Aviva Investors.

Aviva Investors’ investment manager, Andrew Hamilton, said the risk of additional heavy rainfall in the current wet season could create more flooding for Queensland, which would further impact the insurance sector and consumers.

“There remains significant uncertainty over the outlook for the insurance sector with the risk of continued heavy rain over the wet season. The cost of reinsurance is also likely to rise and as a result, retail premiums will undoubtedly be higher next year as the insurers try to cover cost increases,” Mr Hamilton said.

Aviva Investors said the immediate impact of the recent floods is a fall in profits as insurers were forced to pay out on many policies.

“Within the sector, Suncorp has the largest market share in Queensland and is likely to be worst affected as it does provide flood insurance under its Suncorp-branded policies. The cost to Suncorp is estimated to be at least $200 million, at which time its aggregate reinsurance program will be triggered and the remaining cost will be covered by its reinsurers,” Mr Hamilton said.

“The impact on Insurance Australia Group and QBE is relatively minor as neither of these companies insure against flood damage in Queensland – their rationale being the lack of availability of state-wide flood zone mapping from the Queensland government. However, this lack of cover looks set to become a major ongoing political issue that has the potential to affect the industry’s approach to flood cover in the future.”

The widespread flooding in Queensland also has important investment implications for other sectors of the Australian sharemarket, including transport and retail.

Aviva Investors identified QR National as being one of the worst-affected companies in transport given supply disruptions and the potential costs of repairing its own rail infrastructure damaged by the floods.

“Other transport companies that have been affected include Toll Holdings, which has a large franchise in North Queensland and the closure of the highway that services Rockhampton has impacted volumes,” Mr Hamilton said.

“The floods have also resulted in many people cancelling Queensland holidays and Brisbane airport was also closed for several days. This is likely to have a near-term impact on airline earnings for Qantas and Virgin Blue.”

Widespread damage to retail stores in the Brisbane area and lost sales will affect retail earnings in coming months, but this is likely to be offset by “catch-up” buying after the clean-up is completed.

“Bunnings Warehouse is likely to benefit from the floods as the company is a major supplier of items that will be used in the clean-up operations and it should also experience increased demand for hardware items once repairs and rebuilding get underway,” Mr Hamilton said.

Aviva Investors said the Reserve Bank of Australia is likely to keep monetary policy on hold in the near-term given the negative impact of the floods on overall economic growth.

“This will result in positive retail sales outside of Queensland and may contribute to stronger consumer demand in 2011,” Mr Hamilton said.