Is It Time To Dump Aviva plc For Lancashire Holdings Limited?

Aviva  (LSE: AV) (NYSE: AV.US) has put in a strong performance this year, as the company’s turnaround plan continues to gain traction.

Indeed, since the beginning of 2013 Aviva’s shares have risen approximately 40%, outperforming the wider FTSE 100 by around 30%. However, after these gains it could be time to give up on the life insurer, in favour of the company’s smaller peer, Lancashire Holdings (LSE: LRE).

Solid start Aviva

Aviva has made a strong start to 2014 and the company is well on the way to putting past mistakes behind it. 

During the first quarter, across the group, the value of new business increased by 13%, the sixth consecutive quarter of year on year growth. Businesses within Poland and Asia racked up the best performance, with new business in these two regions expanding 108%, to £21m and 96%, to £32m respectively.

Unfortunately, UK business did slow. The value of new life insurance business within the UK declined by 22% from £114m, to £89m, with annuity sales 43% lower at £40m.

Nevertheless, Aviva continues to make progress on its structural reform. During October of last year the group completed the sale of Aviva USA, for a total of £1.6bn.

Other disposals include the company’s Turkish general insurance business, US asset management boutique, River Road and Aviva’s South Korean joint venture. Further, Aviva has restructured its Italian operations.

Still, despite this progress, Aviva has now lost many of its attractive qualities as an investment. For example, the company only offers a dividend yield of 3% at present, lower than the FTSE 100 average of 3.4%. What’s more, at present levels Aviva is trading at a forward P/E of 10.1, significantly above its ten-year average P/E of 8.

So, maybe it’s time to take profits on Aviva, the company’s smaller peer, Lancashire Holdings looks to be a better pick.

A better option

Unlike Aviva, Lancashire is not a life insurer. Lancashire is a specialty insurer, providing insurance for the Aviation, Energy, Marine, Property and Terrorism/Political Risk markets, which can be a highly profitable business. Actually, famed City fund manager Neil Woodford was a fan of Lancashire, praising the company’s management and attractive dividend payouts. 

It’s easy to see why Woodford was attracted to the company. Within Lancashire’s half year report, released today, the company revealed a 54% jump in quarterly net premiums written. 

For the most part, this gain was driven by the acquisition in late 2013 of Lloyd’s of London insurer Cathedral Capital Ltd. City analysts expect this strong performance to filter through to investors over the next two years. 

In particular, the City is currently predicting that Lancashire will support a dividend yield of 9.8% during 2015, a lofty payout, which you would be hard pressed to find anywhere else. Lancashire is also cheaper than Aviva, as the company currently trades at a forward P/E of 8.6.

A good holding for your SIPP?

Life insurers like Aviva can be great long-term investments. Indeed, the long-term nature of their businesses means that their income is stable and predictable for many years.

This means that insurers are great investments for your retirement portfolio. Of course, how you choose to run your retirement portfolio is entirely up to you.

However, if you don't find this advices useful then there are plenty of other ways to build a retirement portfolio that won't let you down.

And you can't go wrong with a portfolio of defensive stocks.

To help, The Motley Fool's top analysts have put together this free report entitled, "5 Shares You Can Retire On". All five opportunities offer a mix of robust prospects, illustrious histories and dependable dividends.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned.