Growing well

Today’s 463p share price means Aviva trades on a forward price-to-earnings (P/E) ratio of just under 10 for 2016, which seems undemanding. Taken with City analysts’ estimates of a 17% uplift in earnings in 2016 and 10% in 2017, the picture becomes more intriguing. On top of that, the firm expects to pay a dividend yield in excess of 5%, and forward earnings should cover the payout almost twice.

In Aviva we have a company that generates around half its sales in the UK and a big operation covering France, Holland and Poland. In August, the chief executive said: “After three years of turnaround we are now moving to a different phase of delivery. We have improved the balance sheet, simplified the Group and we are now transforming our business.” 

Indeed, Aviva seems to be firing on all cylinders. My only reservation is that insurance firms tend to have a big investment arm that makes their trading outcomes reliant on general financial market movements. Aviva is a cyclical firm for sure, but I wonder if the current valuation and immediate prospects of the firm make it worth switching from an investment in Admiral Group (LSE: ADM).

Dividend hike

Admiral’s full year results came out on Thursday and the shares shot up around 8%. A 16% hike in the dividend and earnings-per-share up 4% worked wonders. However, it might not have turned out that way, according to the firm’s chief executive, who said: “I would describe 2015 as: the year of the uncut diamond. When the year started, many people thought it would turn out to be a lump of coal. But no, 2015 was no lumpy coal year.”

Admiral specialises in providing low-cost car insurance for young drivers, people living in cities and those driving high-performance cars. That sounds like a cut-throat business to me, so if I held the shares I’d be constantly wondering whether the next year’s trading would turn up coal or diamonds.

Momentum

Investors have enjoyed a good run with the shares. Since the beginning of 2012, they’re up around 130%. At today’s 1,898p share price, the firm trades on a forward P/E rating of just over 18 for 2016, which is racy compared to Aviva’s valuation. Meanwhile, City analysts forecast a 1% uplift in earnings during 2016 followed by 8% in 2017 — growth rates below Aviva’s. There’s a 5.2% forward dividend yield on offer, albeit covered just once by forward earnings.

Admiral’s share price chart shows that today’s level is back up to a peak achieved at the start of 2011, which, coupled with the firm’s high-looking valuation, makes we wonder whether investors have become carried away by momentum.

Overall, Admiral’s business seems less diversified than Aviva’s. The share price strength at Admiral contrasts with recent weakness at Aviva to produce divergent valuations. On top of that, Aviva’s immediate prospects seem more compelling.

The post Should You Sell Admiral Group plc And Buy Aviva plc? appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

It seems to me that those with lots of disposable income have a tendency to spend a fair bit on luxurious items for their homes. The rich could also benefit from a degree of insulation from the fiercest effects of economic downturns, perhaps so much that they will splash out on keeping their homes well decorated and furnished whatever the economic weather.

With that theory in mind, I am glad to have stumbled across Walker Greenback (LSE: WGB), a firm that specialises in luxurious interiors for the mid to upper end of the premium market.

Must-have brands       

The firm designs, manufacturers and markets wallpapers, fabrics and a range of ancillary interior products, all under the brand names Sanderson, Morris & Co, Harlequin, Zoffany, Scion and Anthology. These brands, the firm says, offer solutions for customers, designers and contract interiors by covering a wide range of tastes from traditional to ultra contemporary.

Walker Greenback trumpets its ‘made in Britain’ heritage, which in itself strikes me as a good selling point. On top of that, the company’s show rooms are in all the ‘right’ places for hooking the rich, including London, New York, Paris and Dubai, and the firm also runs partnership arrangements in Moscow and Shenzhen. On the face of it, Walker Greenback ticks all the right boxes, but how well has the firm been trading?

Strong growth

Despite targeting the well healed, there is bound to be a good deal of cyclicality in Walker Greenback’s business. However, growth since 2010 has been strong and the shares responded well by multi-bagging over the period. Here is the company’s financial record:

That looks like well-balanced progress with cash flow broadly supporting the expansion in revenue and profits.

At today’s 214p share price, Walker Greenback trades on a forward price-to-earnings (P/E) ratio of just under 18 for year to January 2017. City analysts following the firm expect earnings to grow 6% that year and to cover the dividend payout almost four times. That’s encouraging — a high level of dividend cover suggests the directors see more opportunity for growth ahead, otherwise they might hand more back to investors in the dividend. Right now, the forward dividend yield runs at around 1.5%.

One to watch

So Walker Greenback isn’t cheap, but the firm has potential. In an interesting recent development, one of the firm’s factories suffered extensive flooding, which will have an adverse impact on machinery, stock and profits.

The company has a comprehensive insurance policy, it says, which covers flood damage and business interruption, and has already logged a claim. However, maybe this or some other temporary setback could end up knocking the share price. If it does, we could see an opportunity to dig into further research with a view to buying some of the firm’s shares.

Or should I go for Aviva?

FTSE 100 constituent Aviva’s (LSE: AV) valuation certainly looks lower than Walker Greenback’s. At today’s 498p share price, Aviva’s P/E ratio comes in at just over 10 for 2016. However, I’m not keen on insurance firms because they fall into the wider category of ‘financials’.

The ‘trouble’ with financials is that they tend to be very responsive to macro-economic cycles. A good lurch down in the economy can really pull the rug from full-on cyclicals such as Aviva. On the other hand, maybe Walker Greenback’s brand strength and its affluent market could provide some watering down of the most onerous effects of cyclicality.

The post Can Walker Greenback plc Beat Aviva plc In 2016? appeared first on The Twelfth Magpie.

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Kevin Godbold 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.

Looking ahead, however, it appears as though Aviva has the better prospects for capital growth. That’s at least partly because it is in the process of integrating the recently acquired Friends Life business, which is due to produce a significant amount of synergies as well as being a dominant player in the life insurance market. And, with the merger moving along as planned and Aviva stating that it remains confident in the ability of the company to deliver on its expectations for the deal, investor sentiment in Aviva could pick up over the medium term.

On this front, there is tremendous scope for an improvement. That’s because Aviva trades on a price to earnings (P/E) ratio of just 11.2, which is a substantial discount to a number of its insurance peers. Furthermore, with Aviva forecast to increase its bottom line by 12% next year, it trades on a price to earnings growth (PEG) ratio of just 0.8, which provides further evidence of a generous margin of safety.

Meanwhile, Provident Financial may be set for a more challenging period than has been experienced in recent years. Interest rate rises are on the horizon and, while they are set to be slow and steady, they are still likely to hurt consumer demand for new loans as well as make servicing existing loans more challenging.

Despite this, Provident Financial is forecast to increase its earnings by 21% in the current year and by a further 9% next year. Although this is an impressive rate of growth, much of it appears to be priced in since Provident Financial trades on a P/E ratio of 22.4 and has a PEG ratio of 2.3. Neither of these figures indicate good value for money, which means that Provident Financial may be fully valued.

Of course, Provident Financial remains a relatively high quality business which operates in a highly appealing niche. But, with its shares having soared by 387% in the last five years, it may be prudent for investors to look elsewhere for their long term capital growth.

As well as Aviva offering just that, it also has a forward yield of 5% despite paying out less than half of profit as a dividend. Therefore, rapid dividend rises could be on the horizon which, alongside a high income return, could act as a positive catalyst on the company’s share price. As such, and while 2015 has been disappointing for investors in Aviva, buying now for the long term appears to be a very sound move.

The post Are Aviva plc And Provident Financial plc Set To Soar? appeared first on The Twelfth Magpie.

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Peter Stephens 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.

Looking at the grand scheme of things, the stop-start performance of Aviva (LSE: AV) shares during the last 18 months will have probably left most investors feeling cheated. However, there have been some improvements in the underlying business of late that are worth taking stock of.

First and foremost, the “rights issue in disguise” acquisition of Friends Life has had a notably positive effect upon the group’s regulatory capital position, which is positive in light of the looming implementation date of the EU’s more stringent Solvency II capital regime in January 2016.  

In addition, the addition of Friends Life net assets dilutes the leverage of Aviva’s balance sheet, offers up to £225 million in annual cost savings and also boosts the cash-generative potential of the group. In short, with integration risks set aside, the acquisition is supportive of management’s strategic objectives of increasing cash flow and growth.   

Secondly, Aviva will eventually benefit from a gradual increase in investment income as interest rates rise and this feeds through to the yields of longer dated US & UK fixed income instruments.

While non-life insurance shares have already begun to benefit from changes in interest rate expectations, it is possible that we could soon see a spillover into the life and pensions side of the market as forward valuations rise elsewhere.

However, having said this, further weakness in the shares cannot be completely ruled out as a possibility in the near term, given that concerns remain over whether or not management can successfully integrate Friends Life into the existing group.

I am minded to think the management team can, and that the naysayers will eventually be proven wrong. It is also possible that the lion’s share of this concern over integration is already priced into the shares, given that the current 9.6x forward price to earnings valuation provides a 20% discount to the sector average of 11.8x.

So, to sum up on Aviva, it seems that for those who have the requisite time-frame of 2-3 years available, the shares could be worth holding onto. Particularly when we consider that the long-term investment case remains strong, while the shares trade at a discount to their peer group in the present day.

Only time will tell…

RSA Shares Could Also Be Worth Keeping For A Rainy Day…

The market was quick to dump RSA (LSE: RSA) shares this week after Zurich dropped its proposed bid for the group. While a persistent lack of returns from the shares means that some investors probably shouldn’t be blamed for this, I cannot help but think that they are still worth holding on to.

As a general insurer, with a short-term investment exposure, RSA is one of those that could see higher interest rates provide a meaningful boost to its bottom line sooner rather than later.

Also, while progress may have been slow to date, management have taken lots of positive action to rejuvenate the business.

This has resulted in the group’s combined ratio reducing steadily, something which should continue as losses within the Irish division dissipate further, while balance sheet leverage has also improved markedly.

Total debt/equity now sits at 0.32x and gearing at 24.5% for RSA, while the £1.2 billion in debt that the group does hold exists purely to act as regulatory capital.

In addition, RSA’s regulatory capital coverage ratio sits at 1.3x which means that unless regulators decide to dispute the methodology employed by the group to calculate this, it should be able to meet the requirements of the EU’s new Solvency II capital regime in January 2016.

In terms of valuations, the shares currently trade on a forward earnings multiple of 12.9x, which is a significant discount to the 17.8x sector average. This is while on a Price/Tangible Net Asset Value basis, RSA’s 1.4x multiple also compares very favourably against a 2.5x sector average.

With all things considered, it seems that the future for RSA Insurance may not be quite so bleak after all, particularly after looking at the valuation metrics.

The post Here’s What You Need To Know About Aviva Plc And RSA Insurance Group Plc! appeared first on The Twelfth Magpie.

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James Skinner 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.

In tandem with the contagious effect of chaos in China, further reductions in unemployment and strong wage growth in the US during August have prompted several hawkish statements from FOMC rate setters — which also means that the possibility of a 2015 rate hike is now a reality.

As a result, equity markets on both sides of the Atlantic fell to multi-year lows during the month of August, no doubt prompting some investors to begin considering where they will turn to if the Chinese economy does slow further or when interest rates do actually begin to rise in the West.

Insurance companies are worth looking at, particularly those on the non-life side of the sector

For those seeking a reasonably safe haven for their capital in the equity market, insurance companies could be worth looking at.

This is because before interest rates hit rock-bottom in the aftermath of the financial crisis, many insurers derived a considerable portion of their earnings from the investment income provided by their bond portfolios.

Now that the winds of monetary policy are finally beginning to change, the industry will be one of the fortunate few to actually benefit from higher interest rates.

While there may be some benefit to companies like Aviva and Standard Life, the case is stronger for companies like Hiscox, Beazley, RSA Insurance Group, Esure Group and Direct Line Insurance Group, who tend to hold only shorter dated bonds.

Short dated bonds are great in a rising rate environment because the lower time until maturity means that insurers will often be able to hold them until redemption, instead of selling them back to the market at a loss after rates change.

This is because regular new issuance means that these bonds will also be among the first to eventually begin to display higher coupons.

Both of these factors hold positive connotations for earnings in across the non-life insurance sector.

Valuations at some insurance companies are highly attractive — particularly in relation to the banks!

If the scope for earnings growth was not enough for some investors, then maybe these individuals will find the low valuations across the sector more encouraging.

This is because the average forward P/E multiple for the above referenced group of companies is just 13.8x the consensus for 2015 earnings, which is only a short distance ahead of the lumbering banking sector.

Such a differential is of particular interest to this Fool when considering that the banks remain dogged in a quagmire of scandal and are often quite rightly lambasted for their inability to generate meaningful returns on equity..!

The post Could Hiscox Ltd, Beazley Plc, Esure Group Plc, Direct Line Insurance Group plc & RSA Insurance Group Plc Underwrite Your Portfolio When Interest Rates Rise? appeared first on The Twelfth Magpie.

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James Skinner owns shares of Beazley. The Motley Fool UK has recommended Beazley. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Set for growth

Prudential and Aviva are two of my favourite companies. Both are on my watchlist. In many ways, the two companies were built with the long-term investor in mind. Indeed, both have been around for more than a century and their primary lines of business — life insurance and retirement savings — guarantee recurring cash flows for decades. 

But while Aviva and Prudential operate within the same industry, they’re both very different companies. On one hand, Aviva dominates the UK pension and retirement savings market. On the other, Prudential is more of an international savings provider and asset manager. 

And an international presence has helped Prudential grow faster than its peers during the past five years. Prudential’s earnings per share have increased at a compound annual rate of around 26% since 2009. Over the same period, the company has hiked its dividend payout by approximately 13.2%. 

International markets such as Asia should continue to be a key growth driver for Prudential going forward. In particular, according to City analysts, demand for life insurance is set to grow by around 10% per annum within Asia during the next four years. Based on this forecast, City analysts currently expect Prudential’s earnings per share to grow 14% this year and a further 11% for 2016. 

What’s more, according to forecasts, Prudential is expected to hike its dividend payout by 10% per annum for the next two years. The company’s shares currently support a dividend yield of 2.8% and trade at a forward P/E of 12.6. 

Huge market 

As I’ve written before, Legal & General believes that over the next 15 years the value of savings in UK defined contribution pension schemes will nearly quadruple to approximately £3.3tn by 2030. Aviva should be able to capture a huge share of this market, as it is one of the UK’s largest long-term savings managers.

Steady growth in assets under management should push Aviva’s earnings higher over the long term, and the company is committed to returning excess cash to investors. For example, after completing its merger with Friends Life over the summer, Aviva now has an economic capital surplus of £10.8bn, up 35% from the figure of £8bn as reported last year. Further, it’s estimated that as a result of the Friends merger, Aviva’s cash flow will increase by an additional £600m per annum. 

With a robust balance sheet and capital surplus in place, Aviva’s management was able to hike the company’s dividend payout by 15% when it announced first-half results at the beginning of this month. Aviva currently trades at a modest forward P/E of 10.2 and supports a dividend yield of 4.3%. City figures suggest Aviva’s earnings per share and dividend payout will expand by 11% and 17% respectively next year.

The post Why You Can’t Go Wrong With Aviva plc And Prudential plc appeared first on The Twelfth Magpie.

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Rupert Hargreaves 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.

Long-term outlook

As two of the UK’s largest pension and long-term savings providers, Aviva and Standard Life are insulated from emerging market turbulence — slowing Chinese economic growth isn’t going to affect the demand for pensions here in the UK. 

Legal & General believes that over the next 15 years the value of savings in UK defined-contribution pension schemes will nearly quadruple to approximately £3.3tn. Standard Life and Aviva are well placed to capture an enormous share of this additional business. Standard Life is the leading provider of workplace pensions in the UK.

After recent declines, Aviva trades at an attractive forward P/E of 10.1 and the company’s shares support a dividend yield of 4.4%. In contrast, Standard Life trades at an expensive looking forward P/E of 17.9. However, City figures suggest that the company’s earnings will grow 54% this year. Based on these forecasts for growth, Standard Life’s shares currently trade at a PEG ratio of 0.3. 

Asian exposure

Prudential has outperformed almost all of its peers over the past five years. From June 2010 to date, the company’s shares have produced a total return of 23% per annum. Over the same period, earnings per share have roughly doubled, and the company has hiked its dividend payout by 70%. 

Prudential’s well-timed expansion into the Asian life insurance market has helped the group grow faster than its peers in the past, and despite regional economic worries, Asia should continue to be a growth driver for Prudential going forward. Indeed, demand for life insurance is set to grow by around 10% per annum within Asia during the next four years. 

City analysts currently expect Prudential’s earnings per share to grow 14% this year and a further 11% for 2016. What’s more, according to forecasts, Prudential is expected to hike its dividend payout by 10% per annum for the next two years. The company’s shares currently support a dividend yield of 2.8% and trade at a forward P/E of 12.8. 

UK demand 

Hargreaves Lansdown is one of the UK’s most recognisable asset administrators, and looks after more than £55bn of people’s investments and pensions. 

The company’s shares are a play on the wider market’s performance over the next few years. City analysts believe that if the markets head higher during 2016 and 2017, assets under administration could expand by 20% per annum. But a negative market performance could cost the company 10% per annum in client assets. 

With Hargreaves Lansdown’s future dependent on the direction of the market, the company’s current valuation might be too pricey for some. At present, Hargreaves Lansdown trades at a forward P/E of 32.7 and its shares support a dividend yield of 2.9%. 

The post After Recent Declines Now Could Be The Ideal Time To Buy Aviva plc, Prudential plc, Hargreaves Lansdown Plc And Standard Life Plc appeared first on The Twelfth Magpie.

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

If they’re not getting into trouble for rigging the Libor rate, they’re mis-selling payment protection to their unsuspecting customers. But, more to the point, they are now paying the price – with interest.

So what is it with the UK’s love affair with these bad banks? Even today, they still command a place in many private investors’ portfolios, not to mention our huge holdings by proxy.

It’s hard to let go

As the heading suggests, some investors reading this article may well be long-term holders of RBS (LSE: RBS) and Lloyds (LSE: LLOY) since the financial meltdown that blighted investment returns in 2008-9.

Although a relative newcomer to stock market investing during that time, I, too, flirted with the banks. My thinking, rather naively in hindsight, was how much money I could make when they returned to their pre-crisis levels. Having realised the error of my ways, I exited some time ago, licking my wounds.

There are some schools of thought who believe that investors feel the pain of a loss on an investment twice as much as the elation of a gain. This can cause them to focus on their losing investment too much, often doubling down, a tactic that can sometimes makes fools of even the most experienced investors.

Despite all of the current negativity, I felt that it was worth revisiting these FTSE 100 constituents to see whether they make for a decent investment, or whether there is better value and income to be found in other less controversial parts of the market.

A wise-guy, huh?

Having looked elsewhere, not too far away from the banks, I stumbled upon Direct Line (LSE: DLG) after watching Harvey Keitel reprising his character Winston Wolf from ‘Pulp Fiction’ in one of the insurance groups adverts.

Sold off by RBS in October 2012 as punishment for receiving state aid, this insurer has seen its share price more than double since floating on the market, whilst throwing off dividends and special dividends to its shareholders.

The company recently announced some expectation-beating results, too, though these were flattered by an absence of extreme weather in the first half. Still, the combined operating ratio or COR (this is the sum of the loss, commission and expense ratios, and is a measure of the amount of claims costs, commission and expenses compared to net earned premium generated) was 89.4% — anything under 100 means that the business is making a profit.

Despite the rise in the share price, the shares still only trade on a forward P/E of under 13 times forecast earnings and are expected to yield over 7%.

Not all bad

Despite all of the bad news on the front page, behind the scenes, Lloyds and RBS are fixing the things that went wrong and slowly, very slowly, returning to health. Indeed, if it wasn’t for further provision for PPI and restructuring costs, both banks would now be profitable.

Lloyds has returned to the dividend list and is on a 12 month forward rolling basis is expected to yield around 4% — it has even intimated that it could pay additional special dividends, too.

Even RBS is expected to return to paying a dividend  in the next twelve months And although the forecast 1% pay-out isn’t much, it’s a move in the right direction.

In addition, the treasury seems happy to begin to reduce its stake, albeit at a loss. Whilst I’m not best pleased as a tax payer, I do believe that it is a positive signal for the bank.

The Foolish bottom line

As the chart below shows, all three shares have managed to outperform the FTSE 100 over the last year, though I think sentiment towards these two banks will be negative for some time as they clear out the misdemeanours of the past.

And on that basis, I’ll be looking closely at Direct Line as the market wobbles. I think that investors and the market are still positive on its prospects, buying into the management strategy of simplifying the business, reduces costs and building on its market-leading position. I expect the share price to grow going forward and the company to continue to throw off cash to its shareholders.

The post Why I’d Sell Royal Bank of Scotland Group plc And Lloyds Banking Group plc But Buy Direct Line Insurance Group plc appeared first on The Twelfth Magpie.

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Zurich is said to be considering a bid for RSA (LSE: RSA), the UK’s second largest general insurer. Rumour have been spreading that Zurich intends to price RSA at 525 pence a share, but a much better than expected set of results for the first half of 2015 means RSA shareholders are likely to reject a bid that values its shares at less than 600 pence. Operating profit rose 84% to £259 million, which was more than £50 million higher than analysts’ expectations, and shows the insurer’s recovery is firmly embedded.

Further consolidation in the insurance industry is likely as insurers seek to benefit from scale economies and greater efficiency. Lowering costs and greater diversification are particularly important as Europe’s stricter Solvency II capital rules are set to take effect at the start of 2016.

Takeover targets

Market conditions are conducive to takeovers, as insurance stocks benefit from low price-to-earnings and price-to-book valuations, and low interest rates mean the cost of financing acquisitions is cheap. Although competition is intensifying, profitability amongst many insurers, particular those underwriting speciality lines, are still relatively high when compared to historical averages. Consolidation will likely lead to a withdrawal of capacity in the market and have a positive effect on premiums and profitability in the industry.

Lloyds of London and Bermuda-based insurers are the most attractive takeover targets, because of their focus on speciality lines of insurance. The unique nature of the risks they underwrite should mean that they will benefit more from diversification and scale. As part of a larger firm, they can carry less capital, and have better opportunities to expand their product lines and underwriting capabilities.

Here are four Lloyds of London insurers:

Amlin (LSE: AML) has fared relatively resiliently with softening market conditions. There are initial signs that its claims ratio is improving and it continues to benefit from a paucity of major catastrophe losses. Renewal retention rates are near 90%, which underscores its loyal customer base and its focus on long term risks.

Hiscox (LSE: HSX) is the most expensive of the four on a forward P/E basis. Its forward P/E is 15.0 and it currently yields only 2.7%. But, because of its fast growing retail speciality insurance business, the insurer’s earnings growth is likely to outpace its competitors.

Lancashire Holdings (LSE: LRE) is a particularly attractive takeover target because of its industry-leading underwriting profitability. Its combined ratio, which is the percentage of premiums earned used for settling claims and paying operating costs, was 75.1% for the first half of 2015.

Although Lancashire’s combined ratios have worsened recently, they remain well above many of its peers. Strong free cash flow generation and healthy solvency ratios means a potential bidder would have little to worry about the increase in debt needed to fund the acquisition.

Beazley (LSE: BEZ) has been offsetting the decline in profitability from its Lloyds insurance syndicate by growing premiums in its locally underwritten US business. In contrast to many of its peers, the insurer is expecting to achieve moderate growth over the next few years.

It’s difficult to tell which insurer will be taken over, but with valuations so low, these insurance stocks are worth buying even in the absence of a potential takeover bid.

The post 5 Potential Takeover Targets: RSA Insurance Group plc, Amlin plc, Hiscox Ltd, Lancashire Holdings Limited and Beazley plc appeared first on The Twelfth Magpie.

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

esure’s interim dividend will be just 4.2p per share, down from the 5.1p paid in the same period last year. Increasing claim costs and more personal injury claims caused underwriting profitability for its motor business to fall 81% to £3.3 million in the first half of 2015. Underlying earnings per share fell 20% to 9.0 pence in the half year.

Although motor insurers continue to face steep claims inflation, competitive pressures are easing in the industry. Premiums have started to rise since the start of 2015, after three years of declines. The increase in premiums also looks sustainable, and esure plans to implement further rate increases to combat the rising cost of claims.

However, raising premium rates too sharply may lead esure to lose its customers to its competitors. But, as its competitors are raising rates themselves and capacity is being withdrawn from the market, the loss of some customers should be manageable and benefit its bottom line.

The interim dividend comprises a 3.0 pence per share base dividend and a further special dividend of 1.2 pence per share. This compares to last year’s 3.6 pence per share base dividend, which came with a special dividend of 1.5 pence per share. The reduction in the base dividend is particularly concerning, as a cut to just its special dividend would have been sufficient to reduce its interim dividend to 4.2 pence per share. Instead, it is likely an indication that management expects earnings will likely remain weaker in the longer term.

Earnings have been more resilient at two of its largest competitors, Direct Line Group (LSE: DLG) and Admiral Group (LSE: ADM). Both insurers have seemed to sacrificed customer growth in order to preserve their profitability more.

Direct Line Group saw the number of its in-force policies fall 1.6% in the first half of 2015, whilst esure let its policy numbers grow 2.5% over the same period. And in stark contrast to esure, Direct Line’s underlying EPS rose 48% to 16.7 pence.

Admiral Group, which has yet to announce its interim results, saw its customer base fall 8.6% in 2014. Although Admiral Group is set to see earnings decline by around 10% in 2015, the insurer has a strong competitive advantage over its competitors.

Admiral’s industry leading combined ratios of 78.5% for its UK car insurance business compares favourably to the over 95% ratios enjoyed by esure and Direct Line. Its wide profitability margin means it can weather higher rising claims inflation more easily than its competitors. But, unfortunately, its valuation is significantly more expensive than the other insurers.

Admiral’s shares trade at a forward P/E of 15.5, compared to esure’s 13.9 and Direct Line’s 13.3. Including the impact of special dividends, Admiral and Direct Line have a 2015 forward dividend yield of 6.1% and 12.4%. If we assume esure will cut its final dividend by 18% as well, shares in esure would have the lowest prospective dividend yield, at 5.8%.

Direct Line seems to be the best insurer on growth, dividends and valuations. The insurer is still seeing strong growth in profitability, yet it is also the cheapest on earnings and dividend yield.

The post esure Group plc Cuts Its Dividend: Should You Buy Direct Line Insurance Group plc Or Admiral Group plc Instead? appeared first on The Twelfth Magpie.

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Jack Tang 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.