It's a battle Royal! A classic grudge match between the undisputed insurance king of the period 2000-2010 and the (probably) undisputed insurance king of the period 2010-2015! QBE Insurance Group Ltd (ASX: QBE) vs Insurance Australia Group Ltd (ASX: IAG) and you have front row seats.
Operations
IAG is a general insurance company with operations in Australia, New Zealand and Asia under the brands NRMA Insurance, CGU, SGIO, Swann Insurance, and AMI Insurance, among others.
Similarly, QBE is a general insurer and reinsurer (it insurers insurance companies) with operations across Australia and New Zealand, North America, Latin America, Europe and the Asia-Pacific region.
Financial Health
At the end of 2014, QBE generated Gross Written Premiums (GWP) of over $US16 billion. About 33 per cent of this was generated in North America, with Australia and New Zealand and Europe both providing close to 28 per cent.
Over the same period, IAG generated GWP of over $US9.8 billion and had closing debt of just under $1.8 billion, representing a debt to equity ratio of 35.6% and within the group's 30% to 40% target range. The majority of IAG's debt matures after 31 December 2019.
Unlike IAG, which has maintained a relatively stable balance sheet, QBE went through a period of balance sheet restoration. Its debt to equity ratio at December 2014 was 32.5%, from an uncomfortable more than 40% previously. This has been funded by a cut in the dividend payout ratio to about 50%, an equity raising, and sales of some of the less important parts of the business. In addition, around 60% of the debt matures after 2019.
Risks
QBE has made 135 acquisitions in 25 years, leading to a company with many working parts. The new management team has been able to reconcile some of the issues by selling off underperforming arms of the business and tightening insurance standards, however the risk remains that the group's risk management strategy again lets it down. QBE is also exposed to currency risk, with over 60% of earnings coming from overseas.
IAG meanwhile, has a major implementation risk following its recent purchase of the insurance arm of Wesfarmers Ltd (ASX: WES). Analysts consider that the purchase price may have been a little high for the risks evident in integrating such a large business (GWP of $1.6b).
Both insurers face earnings and dividend risk from an extended period of major catastrophes, higher reinsurance costs, increasing policy churn and continued weak investment performance from their investment portfolios.
Outlook
As far as we know, QBE remains on track to hit full-year guidance of gross written premium (GWP) between US$15.5bn and US$15.9bn, net earned premium (NEP) between US$12.6bn and US$13.0bn, and combined operating ratio (COR) between 94% and 95%. Analysts expect this to convert to earnings per share (EPS) of 72.5 cents and dividend per share (DPS) of 40.5 cents this year and up to 84 and 49 cents next year.
IAG meanwhile, is forecasting GWP growth at lower end of its 17-20% guidance range and an insurance margin of 10.5-12.5% (down from 14.2% due to weather-related claims in NSW and Queensland). Analysts predict IAG will payout a 31 cent dividend this year, 32 cents next year and 32.5 cents the year after – down from 39 cents last year.
The Winner?
In my opinion, there's more upside to QBE's share price than there is for IAG. IAG had a great couple of years as a result of lower claims and a lack of natural disasters, while QBE had a poor five years due to dismal management. Management can be controlled, while disasters, and their impact on your insured clients, cannot. As a result my money's on QBE over the next five years, especially if there's a dip in the market that presents a great opportunity to stock up!
