The Motley Fool

Head To Head: Direct Line Insurance Group PLC vs RSA Insurance Group plc

The half-year results of general insurers Direct Line (LSE: DLG) and RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) hint at different long-term prospects.

Flotation

It’s just 10 months since RBS floated the first tranche of Direct Line shares, and a further institutional sale has brought RBS’s interest down to 48%. I bought shares in the flotation, frankly without knowing too much about the company. It was a fair bet that as a forced seller — by European Union diktat — and with sale of more stock to come, RBS would have to price the issue favourably.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

So I sold out at a profit, but probably too early. The shares set a high last week, as the company delivered a reasonably good set of results. Core operating profit was up nearly 30% — partly due to lower weather-related claims — and gross written premiums (the equivalent of turnover) down 4%. But fundamentally, the results reinforced my gut feel that long term the company has nowhere to go.

Comparethepricecomparisonwebsite.com

With over 90% of its business in the UK, Direct Line is hostage to the highly competitive and price-transparent motor and home insurance markets. One day, somebody will launch a website that compares price-comparison sites!

A resurgent UK economy will help, but the main upside lies in cutting bloated costs inherited from RBS. That’s going well and the positive momentum will continue, with management aiming to increase the dividend — yielding over 5% – in real terms. But it’s not a share to buy and forget.

Dividend cut

This was RSA’s first half-year results since slashing its payout last February, and the shares are still 7% below their pre-dividend cut level. But RSA’s results show why it has more opportunities for growth than Direct Line.  It’s much more diversified internationally, with big operations in Canada, Scandinavia and emerging markets.  Cash saved from the reduced dividend can be invested where there is more scope for growth and a better competitive environment.

Growth in net written premiums of 15% in Canada and 16% in emerging markets dwarfed the UK’s 3% to deliver an overall 7% increase. RSA is enjoying operational leverage in its emerging markets businesses, as a higher proportion of incremental income drops through to the bottom line.

RSA is also yielding over 5%, but with substantial non-sterling income its stated intention is simply to grow dividends in line with earnings. Both RSA and Direct Line are trading at a 25%-30% premium to NAV but, for me, RSA offers the better long-term prospects.

Accidents

However, RSA’s dividend cut highlights the potential for accidents in general insurance shares. If you’re looking for a safer bet, I recommend you take a look at The Motley Fool’s top income stock. Just click here to download this report that tells you all about it.  It’s free.

> Tony does not own any shares mentioned in this article.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US $12.3 TRILLION out of thin air…

And if you click here, we’ll show you something that could be key to unlocking 5G’s full potential...

It’s just ONE innovation from a little-known US company that has quietly spent years preparing for this exact moment…

But you need to get in before the crowd catches onto this ‘sleeping giant’.

Click here to learn more.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.