Could Direct Line Insurance Group PLC Outperform Aviva plc & Prudential plc?

Anyone who chose to invest in Direct Line Insurance Group (LSE: DLG) at the start of 2015 , instead of Aviva (LSE: AV) or Prudential (LSE: PRU),  is likely to be feeling pretty pleased. Direct Line shares have risen by 25% so far this year, compared to a rise of 1% for Prudential and a 3% fall for Aviva. 

Direct Line has proved to be a top choice for income, too. Including special dividends, the firm has paid out 44.9p to shareholders so far in 2015, giving a dividend yield of 11.9% at today’s share price! 

This combination of income and capital gains means that Direct Line shareholders have enjoyed a total return of about 37% so far this year. This is an outstanding performance.

Is Direct Line still a buy?

Until now, Direct Line’s share price growth has been backed by earnings growth. Earnings per share for the current year are expected to rise by 21% to 32p, putting the shares on a very reasonable 2015 forecast P/E of 11.6.

However, next year could be different. The latest City forecasts suggest that Direct Line’s earnings per share may fall by around 15% to 27p next year, giving a 2016 forecast P/E of 14. This could limit the potential for special dividends, and may put pressure on the firm’s share price.

Is it time to take a closer look at some of the other choices in the insurance sector?

Aviva looks cheap

After recovering strongly in 2013 and 2014, Aviva’s share price has fallen by 15% over the last six months, despite solid results.  As a shareholder, I’m not concerned. Aviva shares currently trade on a 2015 forecast P/E of 10.2, falling to 9.2 in 2016. There’s also a prospective yield of 4.4%, rising to 5.1% in 2016.

The market seems to have been a slightly spooked by downgrades to earnings forecasts for Aviva earlier this year, but over the last month consensus forecasts for Aviva’s 2015 earnings have started to rise again. If this momentum is maintained, then the shares could head back towards the 500p+ level once more. Now could be a good time to buy.

What about Prudential?

Prudential shares have now fallen by 14% from an all-time high of 1,752p in March this year. At around 1,510p, they now look quite reasonably priced, on a 2015 forecast P/E of 14, falling to 12.6 in 2016.

Prudential’s yield remains below average, at around 2.6%. However, the firm’s long-term growth prospects remain exciting, in my view. The group’s operating profit rose by 17% to £1,881m during the first half of the year and full-year earnings per share are expected to be 25% higher than in 2014.

A word of warning

It’s often easy to underestimate the effects of momentum on stocks. Direct Line may continue to outperform for longer than expected. Similarly, Aviva and Prudential could underperform for longer than I expect.

I believe that all three are reasonable buys, and I wouldn’t sell any of them in order to switch to another. After all, when you own shares in a good company, doing nothing is often the most profitable approach.

However, if you are looking for new stocks to add to your portfolio, I would strongly urge you to take a look at "5 Shares To Retire On".

The stocks in the mini portfolio were chosen by the Motley Fool's top analysts for their long-term dividend growth potential.

Interestingly, none of today's insurance stocks feature in this report -- but a utility giant and a consumer goods firm are amongst the five picks.

This report is FREE and carries no obligation.

To receive your copy today, simply click here now.

Roland Head owns shares of Aviva. 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.