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Should I Sell Aviva plc And Buy RSA Insurance Group plc And Lancashire Holdings Limited?

Shares in Aviva (LSE: AV) have been a profitable buy over the last three years, during which they’ve climbed by 50% and paid 52p in dividends.

It’s been a very different story for RSA Insurance Group (LSE: RSA), which has fallen by 24% over the same period and has been forced to cut its dividend.

Specialist insurer Lancashire Holdings (LSE: LRE) has also been a relatively weak performer, dropping by 13% since November 2012.

However, RSA’s recovery finally seems to be getting underway, while Lancashire is using its surplus capital to fund a series of special dividends. Lancashire shares currently offer a prospective yield of 9.8%!

As an Aviva shareholder, I’m wondering whether I should take profits on my Aviva shares and invest in RSA or Lancashire.

RSA Insurance

In a trading statement today, RSA boss Stephen Hester brushed off the failed Zurich takeover deal as a “distraction” and said that the three elements of his turnaround plan were “each going well”. There has certainly been some progress. The recently announced sale of RSA’s Latin America business means that the firm has now collected £1.2bn in proceeds from disposals.

RSA said today that trading results for the third quarter were ahead of expectations and that premium trends were in-line with expectations. RSA shares have edged up slightly following today’s results. They now trade on 13 times forecast earnings and with a prospective yield of 2.7%.

Aviva vs RSA

Aviva stock trades on a forecast P/E of 10 and offers a prospective yield of 4.3%. It’s not clear to me why Aviva shares are cheaper than those of RSA, especially as Aviva’s earnings per share are expected to rise by 11% in 2016, whereas those of RSA are expected to be broadly flat.

Aviva’s chief executive, Mark Wilson, appears to be doing a good job. His focus on new business and cash generation is working well, in my view. The value of new life insurance business rose by 25% to £823m during the first nine months of the year, for example.

Lancashire Holdings

Lancashire is a specialist insurer that covers areas such as disaster losses, shipping and offshore oil platforms. The last few years have been fairly quiet in terms of big claims, which has led Lancashire to reduce its new business in order to protect its profit margins.

A lack of catastrophe claims means that Lancashire has accumulated a lot of spare cash. This is gradually being returned to shareholders through a series of special dividends, the latest of which is for $0.95 (c.62p).

At the current share price of 730p, this payout, plus the firm’s $0.15 ordinary dividend, gives a prospective yield of about 9.8%.

Today’s best buy?

I have to confess that I sold my shares in Lancashire earlier this year, thinking that they were already fully valued. This has proved to be a mistake, but they now trade on 14 times 2016 forecast earnings, so I’m not going to buy back in, despite Lancashire’s income potential.

I have not sold my Aviva shares and plan to continue holding these for their dividends. I’m not sure that RSA is sufficiently attractive to justify swapping out of Aviva, especially as Aviva shares look quite cheap at the moment.

However, even if you don't agree with my view on these three insurance companies, I'd urge you to take a look at "How To Create Dividends For Life" before you make any further investment decisions.

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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.