Calendar-year 2013 was a great year for investors in the domestic-focused Insurance Australia Group (ASX: IAG), with the share price gaining 23.6%. This provided IAG shareholders not only with a return well above the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) return of 15%, but also a return significantly higher than the 5.7% delivered by globally-focused QBE Insurance (ASX: QBE).
The significant underperformance of QBE was very much a result of its own doing. Up until early December the stock price had performed incredibly well as investors looked to the future and became more comfortable with the earnings potential of the insurer. However all of that changed when QBE issued another profit downgrade which sent the share price plummeting and investors heading for the exits again.
With QBE's share price languishing at under $12 and IAG currently undertaking a capital raising at $5.47 to fund the recently announced $1.845 billion acquisition of Wesfarmers' (ASX: WES) insurance division, investors have plenty to contemplate in 2014.
One part of IAG's acquisition of Wesfarmers' insurance division is a 10-year distribution agreement with Coles' supermarkets. Given the potential cross-selling opportunities both Coles and Woolworths (ASX: WOW) have – thanks to their entrenched customer bases – IAG's access to this distribution channel could become very important to the insurer over the coming decade.
Currently IAG writes around $9.2 billion in premiums across Australia and New Zealand (it writes a further $343 million throughout Asia). The acquisition of Wesfarmers' insurance business will add a further $2 billion in premiums to its underwriting business, with scope for this to increase as further cross-selling opportunities are explored. In contrast QBE writes around US$5 billion of business in Australia and New Zealand out of a total of over US$18 billion in gross written premiums.
Foolish takeaway
IAG's exposure to the Australian insurance market is significantly greater in absolute and relative terms than QBE's and here lies the problem for investors analysing QBE. While IAG enjoys a market leading position in Australia, with growth options in the form of both the newly acquired Wesfarmers' business and in Asia, QBE owns a collection of businesses all over the world which offer varying degrees of synergies and growth options.
While IAG's business is relatively easy to understand, the complexity of QBE's business makes it difficult for many investors to accurately analyse and value, however with a knocked-down share price it could offer the greater potential for capital gains.
