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Is Aviva plc The Best Insurer In The UK?

Is Aviva (LSE: AV) (NYSE: AV.US) the best play in the insurance sector right now?

Well, the rise in its stock price in recent weeks poses more questions than answers, in my view. There are signs that Aviva stock may be overvalued, although Aviva’s fundamentals and prospects aren’t too bad.aviva And how about RSA Insurance (LSE: RSA)Legal & General (LSE: LGEN) and Admiral (LSE: ADM)? Do their valuations offer an attractive entry point for investors looking for bargains?

Aviva: Time To Cash In?

Fact: On August 7, I argued that Aviva was “a risky investment proposition”, but I also noted that its shares were not too expensive, and may have been added to a diversified portfolio. “I may cash in a 10% pre-tax paper gain,” I pointed out. Aviva stock has risen by about 4% over the period. If I were invested, I would be tempted to cash in right now. Not so fast.

What’s going on: Aviva has certainly struggled to create value for shareholders since the credit crunch, yet things have markedly improved in the last year or so. This life and general insurance business, which has a market cap of £15.4bn, may have turned the corner. Rivals’ woes are a blessing for Aviva shareholders. Of course, Aviva still bears the hallmarks of a restructuring story, given that it must continue to cut costs to improve its cash flows and earnings. Projections for muted revenue growth are priced into its trading multiples, in my opinion.

Upside: A back-of-the-envelope valuation suggests that Aviva stock could reward shareholders. Upside could be as much as 15% to the end of the year, under a bull-case scenario — or just 5%, under a base-case scenario. Downside risk is about 5% to the end of 2014.

RSAL&G And Admiral: All In the Same Boat?

L&G stock is hovering around all-time highs. It’s expensive based on trading multiples, in my view. Dividends and earnings are expected to grow nicely until the end of 2016, but such estimates in the insurance sector are just that — estimates. L&G stock carries a 10% downside to the end of the year, although I like its business model and its management team. L&G remains a better investment proposition than RSA and Admiral.

“Chief Executive Kevin Chidwick and Chief Financial Officer Geriant Jones were awarded 114 shares each under its share incentive plan at a strike price of £13.064 per share,” Admiral said on Monday. The stock traded just below £13 on Tuesday, but it is down more than 4% on Wednesday. It trades about 20% below the high in recorded in July.

Interested? Admiral stock is for opportunistic traders, rather than for value investors. End of the story. RSA, meanwhile, isn’t exactly the safest restructuring story in the sector. So, forget about it for the time being.

I am not particularly upbeat about the broader insurance sector, and I'd rather bet on the banking industry if I didn't have any other option at this point in time. If you share the same view, you may want to spend some time on this this ad-hoc report , which makes for a compelling reading. Based on several metrics, a couple of UK banks, in particular, could offer meaningful upside into 2015. The report is FREE! Get it now: you'll find all the tools you need in order to decide whether banks are a wise investment right now. Click here to read it. 

Alessandro Pasetti has no position in any shares mentioned. The Motley Fool UK 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.