Head-to-head: Should You Buy RSA Insurance Group plc or Aviva plc?

AvivaThe market loves a good turnaround story, and Aviva (LSE: AV) (NYSE: AV.US) chief executive Mark Wilson has delivered in spades since he took the helm on 1 January 2013.

Aviva’s share price is up by 62% from the March low that followed Mr Wilson’s big dividend cut, and things got even better yesterday, when the insurer announced a 4.5% increase to the interim dividend.

Shareholders in UK peer RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US), on the other hand, are still suffering.

The only dividend action RSA shareholders have seen since ex-Royal Bank of Scotland boss Stephen Hester took over, has been the cancellation of their firm’s dividend, ahead of a £775m rights issue, earlier this year.

Both companies published their half-year results yesterday, giving us a snapshot of progress so far this year.

Aviva vs. RSA

To gauge how each company is performing, I’ve chosen three key insurance industry metrics:

  Aviva RSA
Return on equity 14.5% ca. 0%
Price/Book ratio 1.7 1.2
Combined operating ratio 95.5% 100.8%

The results are largely as you’d expect, given that RSA’s recovery is only just starting.

RSA’s combined operating ratio of 100.8% shows that it made an underwriting loss during the first half — claim payouts and operating expenses were greater than total premium income.  However, RSA is targeting £180m of cost reductions, which if delivered, could considerably improve this ratio.

Aviva has already done much of its cost-cutting, and reported an 8.4% fall in operating expenses, compared to the same period last year. This helped the firm to generate a return on equity of 14.5%, a level being targeted by RSA.

Equal valuation?

Analysts are currently pencilling in adjusted earnings — excluding exceptional costs — of 40.5p per share for RSA this year. In my view, that seems ambitious, but assuming these estimates aren’t downgraded following yesterday’s results, it leaves RSA on a remarkably similar valuation to Aviva:

  Aviva RSA
2014 forecast P/E 10.8 10.7
2014 forecast yield 3.3% 2.7%

In terms of price, RSA shares don’t offer the kind of discount I’d expect to see, compared to Aviva. This might be justified if RSA was expected to report a big increase in profits in 2015, but it isn’t — analysts currently expect RSA’s profits to fall next year, before gradually recovering.

Buy RSA or Aviva?

Investing in both companies carries some risk: Aviva’s strong performance means it could be at risk of a pullback, while I’m also concerned that RSA shares do not yet look cheap enough, especially as CEO Stephen Hester warned yesterday that “clean-up costs are proving higher than initially expected“.

My pick would be Aviva, but in all honesty, while I'm a fan of both companies, I think there are better buys in today's market.

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Roland Head owns shares in Aviva. The Motley Fool has no position in any of the shares mentioned.