In the latest showdown of the Motley Fool's ASX World Cup, two giants of the Australian insurance industry – Insurance Australia Group Limited (ASX: IAG) and QBE Insurance Group Ltd (ASX: QBE) face-off in a battle of gross written premiums, balance sheet strength and capital adequacy!
IAG has provided shareholders with a mediocre total shareholder return (TSR) of just 6.7% over the past decade, yet even that lacklustre performance beats the 3.2% TSR of QBE. Given the poor past performance of these two giants, viewers will be excused for having low expectations for this match-up.
Here are some key stats on each insurer:
| Insurance Australia Group | QBE Insurance Group | |
| Market Cap | $13.6 billion | $14 billion |
| FY 2014 P/E ratio | 11x | 11x |
| FY 2014 Yield | 6.1% | 4.4% |
| Combined Operating Ratio | 86.1% | 97.8% |
| Solvency Ratio | 55.1% | 67% |
Source: Morningstar.
IAG
IAG operates insurance underwriting businesses in Australia, New Zealand and Asia, however Australia is by far the dominant division.
The recent acquisition of Wesfarmers Ltd's (ASX: WES) WFI and Lumley underwriting businesses will add over $1.6 billion in annual gross written premiums to the group with around $140 million in synergies to be obtained.
IAG appears to be trading on a fair multiple given the inherent risks involved with investing in insurers. The fully franked dividend yield is particularly attractive.
QBE
Under the previous management of QBE, acquiring companies was turned into a sport of its own. As a result, QBE is one of the top 20 general insurers and reinsurance companies in the world, employing over 17,000 people in 43 countries.
QBE also trades on a forecast price-to-earnings (PE) multiple of 11, however given consensus forecast earnings growth of 41% from 101.9 cents per share (cps) in FY 2014 to 143.8 cps in FY 2016, compared with earnings growth of just 5.5% at IAG, there is good reason to suggest QBE's stock could command a higher multiple.
Full Time
It's been very hard to separate IAG and QBE in this match-up. IAG has less growth options, but is in a solid financial position and its shares look reasonably priced. At the other end of the field, QBE is battered and bruised, with depressed earnings and a beaten-up share price. Forecast earnings growth adds to the argument that this stock could be undervalued, however as a serial choker and with a question mark hanging over its balance sheet strength, QBE has failed to score a goal.
A nil all draw!
