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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.

In particular, I'm bullish on two of the firms selected for "The Motley Fool's Three Shares To Beat Property". This report highlights three firms which offer emerging market exposure -- one of which currently offers a yield of 4.3%, with a P/E of just 10.8.

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