The best insurance stocks on the ASX

Suncorp, QBE and IAG are the best options for Foolish investors.

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Insurance is something that (almost) everyone has to have. There's compulsory insurance when you buy a car, there's life insurance automatically included in most super funds, there's home and/or contents insurance for those that live in a house or own things, and there's even pet insurance for when Rover thinks it's a good idea to try and eat the table tennis balls.

The point here is that insurance is something that people rarely cut back on, in fact, during economically tough times people may actually spend more on insurance just in case the worst should happen!

With that in mind, insurance stocks are pretty good investments over the long run. The three-year return for two of the three largest insurers on the ASX has been reasonably good. However, insurers' exposure to different economies and sectors make them very different investment propositions.

Suncorp Group Ltd (ASX: SUN)

Suncorp offers investors' exposure to both banking and insurance, mind you insurance provides the lion's share of profit (~70%). The company offers commercial, general, personal and property insurance alongside general banking services to over one-million Australian customers. The three-year return for the company is 41%, however most of that was realised in 2013.

QBE Insurance Group Ltd (ASX: QBE)

QBE insurance has perhaps been the most disappointing of the major insurers. In the past three years the company's share price has fallen over 40%, following a fairly reliable pattern of missed earnings guidance. With new management and a reorganisation of US assets, the global insurer, which services 46 countries, will hopefully be set for a period of outperformance in 2014 and beyond. The company services almost all forms of insurance, however exposure to the US infrastructure market has proven to be damaging to earnings in previous years.

Insurance Australia Group Limited (ASX: IAG)

While similar in size to QBE, IAG has a more concentrated market, operating in only Australia, New Zealand and selected Asian countries through a range of joint ventures. IAG has performed exceptionally well in the past two years, delivering earnings and revenue growth when QBE has faltered, but it is not expected to continue delivering similar returns going forward. The recent acquisition of Wesfarmers' insurance arm has added a few more unknowns into the equation, but it remains probably the sector's best pick at this stage, albeit at a more unsustainable price point. IAG has returned 46% over the past three years before dividends.

Foolish takeaway

Insurance is something we all need in good times and especially bad. In that way, revenues are usually predictable and price rises frequent, making insurance companies highly attractive. The three companies above are all high-quality businesses with bright futures and Foolish investors should consider them for insurance exposure as part of a diversified portfolio.

Motley Fool contributor Andrew Mudie owns shares in QBE.

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