Nomura switches preference from Direct Line to RSA Insurance

Nomura pointed out that DLG has been a star performer in the insurance sector over the past two years, with a total shareholder return of 40% last year, as it delivered on its strategy and faced fewer headwinds from Solvency II than its peers.

The bank stressed that it was downgrading after a strong performance, as the underlying investment case for DLG of strong total returns via special dividends is intact.

By contrast, RSA was flat in 2015 and while progress has been made on the balance sheet and underlying performance, low bond yields and FX went against the stock, serving to constrain performance.

“However, we believe from here there is scope to surprise to the upside on the balance sheet as the group discloses Solvency II numbers and a more up-to-date valuation on the pension position.”

Nomura is expecting RSA to start paying special dividends next year, which leads to similar yields for both stocks – 6.8% for RSA and 6.6% for DLG.

It reckons there is upside risk to both companies’ dividend estimates, so there isn’t much to choose between the two in terms of yields.

“However, we believe there is likely more potential for self-help measures at RSA, helping earnings and dividends, compared with DLG, which has achieved more on efficiencies and improving the underwriting performance.”

At 1032 GMT, DLG shares were 0.1% lower at 371p while RSA was 1.5% higher to 411.10p.