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Should you buy IAG or Suncorp?

Australian investors have a plethora of good insurers to choose from and premiums are only set to go up. After the GFC, insurers were left with their tales between their legs and massive amounts of debt, which made for tough investing in the past four years.

QBE (ASX: QBE), Suncorp (ASX: SUN) and Insurance Australia Group (ASX: IAG) have not recovered from their 2007 highs because of ongoing struggles to pay down bad debts and recover from aggressive expansions.

IAG’s share price was trending upwards until the GFC, at which time it had expanded into the UK, but its high hopes quickly faded. In April this year, the company announced the sale of its Equity Red Star business (UK), however it’s the expansion into Asian markets that has caught the attention of many investors.

In the past year, IAG has risen 51%, and based on current earnings could be considered cheap. For the six months to December 31 2012, the company increased profit by an impressive 220% and expects “strong gross written premium growth and a high insurance margin for the full 2013 financial year compared to 2012”.

In addition, the company’s outlook for the longer term looks increasingly positive. Its Australian and New Zealand businesses are expected to increase between 9.5-11.5% for FY13, but the company believes the group’s Asian businesses are just finding their feet and could provide a massive upside.

Just as IAG has made mistakes, so too has Suncorp. In the wake of the GFC, Suncorp was left with a ‘bad bank’ debt of over $17 billion, which was the result of a large portfolio of commercial property developer loans. This year will mark the first time Suncorp has not had huge liabilities weighing in on profits since selling most of the remaining debt to Goldman Sachs.

Investors have jumped on the company’s first-half results and inflated the share price to a much higher earnings ratio, but it will decline if the company continues with its most recent results. In the six months to 31 December 2012, NPAT was up 47% which was helped by favourable investment markets, operational efficiencies and a benign period for natural disasters.

Despite huge increases in NPAT, the sale of its bad debt to Goldman will result in a net loss of approximately $480 million and will wipe out much of the first-half gains.

Foolish takeaway

Both companies have been busy coping with the fallout of the GFC and now we will start to see an increase of revenues and profits. The two have reputable brand names and pay dividends of around 4%. Although Suncorp’s long-term ‘diversified financial services’ strategy is not as appealing as IAG’s Asian expansion, investors should show caution before jumping aboard either company.

At current prices, Suncorp is quite expensive and the full-year results may come in lower than expected, which would be good for investors waiting on a lower entrance price. IAG has a poor history of international expansion but should be added to watch lists because the next annual report will allow analysts to scrutinise the books and expansion strategies in more detail.

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Motley Fool contributor Owen Raszkiewicz does not have a financial interest in any of the mentioned companies. 

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