Kick Off: AMP Limited v Insurance Australia Group Limited

Two mighty insurers go head-to-head, who will win?

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Today’s battle between AMP Limited (ASX: AMP)and Insurance Australia Group Limited (ASX: IAG) at the Motley Fool’s ASX World Cup sees two of Australia’s most mighty insurers go head-to-head.

Investors looking to gain exposure to the domestic insurance industry should watch the game closely as their strengths and weaknesses will be on full display.

Before the game begins, let’s take a look at the backgrounds and some key stats of both teams:

  AMP Insurance Australia Group
Market Cap $15.9 billion $13.5 billion
FY 2015 P/E ratio 14.5x 11x
FY 2015 Yield 5% 6.2%
Price/ Book Value 1.9x 2.5x

AMP hardly needs any introduction to investors as its range of investment management, financial advice, wealth protection (often referred to as life insurance), and banking services are well known to most Australians particularly those with superannuation.

Unlike AMP which is categorised as an insurer but could more accurately be described as a diversified financial services provider, IAG specialises in providing general insurance products that are marketed under brands including NRMA, CGU, SGIO and SGIC.

Strengths

When it comes to creating shareholder value, IAG appears to be the clear winner. According to research by Morningstar, the insurer has produced a five-year average annual total shareholder return (TSR) of 15.6%. In contrast AMP has only managed to achieve a TSR of 7.7%.

Goal to IAG!

With a forecast FY 2015 price-to-earnings ratio of 14.5, AMP is trading at a significant premium to its peer IAG which has a forward PE of just 11. Likewise when it comes to dividend yield, IAG’s forecast 6.3% fully franked yield is again more appealing than AMP’s 5% yield which will probably only be 70% franked.

Another goal to IAG!

Weaknesses

Both AMP and IAG operate in mature domestic industries which mean their businesses are primarily operating in low growth markets. To counteract this situation both firms have been trying to find ways to expand.

In IAG’s case this has included a move into Asia and also via acquisition. The firm recently completed the purchase of Wesfarmers Ltd’s (ASX: WES) underwriting operations which should increase its gross written premiums by $1.6 billion per annum.

AMP has also looked towards Asia for growth. Last year AMP created a joint venture (JV) funds management company with China’s largest insurance group China Life. The JV business has already grown its funds under management to over $2.2 billion.

A goal to both AMP and IAG!

Full Time

At the end of the match it’s a 3-1 win to IAG. Many viewers will no doubt be shocked by the final tally but in many ways investors familiar with the past history of both firms won’t be too surprised.

Since the beginning of 2001 to today the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO) has gained 70%; over the same timeframe IAG has outperformed with a return of 106%, while AMP has underperformed with a decline of 74%.

The historic results in many ways speak volumes to AMP as a serial underperformer. While there is every chance that AMP could turn things around in the future and “rewrite” the history books, today just wasn’t that day!

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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