Aviva plc Beats Legal & General Group Plc And Prudential plc In The Life Insurance Stakes

AvivaThe life insurance sector has been on a bit of a resurgence of late, with share prices rising across the board.

Aviva (LSE: AV) (NYSE: AV.US) shares are up 25% over the past 12 months to 508p, Legal & General (LSE: LGEN) (NASDAQOTH: LGGNY.US) is not far behind with a 19% rise to 239p, and Prudential (LSE: PRU) has managed a healthy 16% growth to 1,414p.

But is there more to come, and which of the big three is best?

Here’s a snapshot of last year’s performance, with two years of forecasts:

      Aviva       Legal &  
EPS growth 2013 n/a(1) +10% +18%
P/E 2013 20.4 14.7 14.7
Dividend Yield 2013 3.3% 4.2% 2.5%
Dividend Cover 2013 1.47x 1.63x 2.71x
EPS growth 2014*
+113% +10% +5%
P/E 2014 10.8 14.3 14.7
Dividend Yield 2014 3.4% 4.6% 2.7%
Dividend Cover 2014 2.82x 1.52x 2.69x
EPS growth 2015* +11% +9% +11%
P/E 2015 9.7 13.1 13.3
Dividend Yield 2015 3.9% 5.2% 2.9%
Dividend Cover 2015 2.72x 1.47x 2.71x

* forecast
(1) loss in 2012

Being prudent

Prudential does not thrill me much on the dividend front, but then it has a reputation to match its name of being safely and conservatively managed. Those relatively low dividend yields of below 3% are consistently very well covered, and Prudential is the only one of the three to have recorded five straight years of earnings rises up until 2013 — Aviva and Legal & General both suffered falls during the financial crisis, with Aviva famously being forced to slash its badly overstretched dividend in 2012.

If you want the safest of the safe, Prudential could be the one, but I think taking a bit more risk in search of higher dividends is likely to pay better in the long run.

More cash

Legal & General’s yields are clearly the strongest — it’s hard to beat a forecast of 5.2% in any sector. And at the halfway stage, the company reported a 13% rise in net cash generation, with record annuity sales of £3.5bn and assets under management up 7%.

But Aviva’s first-half figures looked similarly good, with cash remittances up 7%, the value of new business up 9%, debt reduced, and net asset value per share up 7%.

The firm is still in its turnaround phase, with chief executive Mark Wilson saying “Aviva remains a work in progress, and these results are a step in the right direction“.

So why to I like Aviva best?

It’s all to do with potential for future dividend rises. While both Aviva and Legal & General look set to hike their dividends equally strongly this year and next, Aviva’s superior cover suggests it can keep the rises going further and for longer — Aviva has the dividend cover of Prudential while already offering higher yields.

Greater potential

And while Legal & General’s rises are keeping pace for now, its cover is dropping, and that will put pressure on future paydays. Aviva’s lower P/E suggests we could be seeing stronger share price rises too.

Should Aviva have chosen the same level of cover as Legal & General, we’d be looking at a forecast 6.1% yield this year and 7% in 2015! I expect to see Aviva keeping cover higher than that, but I’d be very surprised if we’re not seeing yields equivalent to more than 5% at today’s prices before too much longer.

If you seek shares like our top insurers, with great dividends and growth prospects for the future, you'll find more ideas in "The Fool's Five Shares To Retire On" report. They're nicely diversified across the FTSE sectors too, so you'll get a nicely balanced selection.

The report is completely free, so click here to get your copy today!

Alan Oscroft has no position in any shares mentioned. The Motley Fool has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.