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Right now, Aviva (LSE:AV) shares offer an attractive dividend yield of 7.5%. But there is another FTSE 100 insurance stocks you'd rather buy right now.
Insurance companies
Although they are both in the insurance business, Aviva and Admiral (LSE:ADM) differ significantly. The former is the largest life insurer in the United Kingdom, while the latter focuses on motor insurance.
This is one of the reasons I prefer the Admiral. I think it's easier to make money in auto insurance, where policies are renewed annually, than in life insurance.
The problem with life insurance is that a policy can last for decades. Therefore, it usually takes a long time before a company knows for sure whether a policy will be profitable.
This is not to say that auto insurance is an easy business: underwriting margins are often tight. But I think the relatively short nature of their contracts creates considerably more flexibility.
Competitive advantage
Insurance policies are often something of a commodity, so it can be difficult for a company to stand out. But I think Admiral has a more obvious advantage over its rivals than Aviva.
Admiral has been an early adopter of telematics: boxes that drivers install in their cars to provide data about their driving. This gives the company a better understanding of specific risks.
Proof of the success of this comes from the company's relative success compared to its rivals. Over the past decade, it has consistently achieved superior technical returns than its competitors.
Aviva, for example, achieved a 5% profit margin on its insurance underwriting during the first half of 2023. Admiral, by contrast, achieved just over 10%.
In my opinion, this is a sign that Admiral's technology gives it a clear advantage over the competition. And I think this is an advantage that will last for some time.
Dividends
It's hard to ignore the 7.5% dividend yield offered by Aviva shares. Especially compared to the 3% yield that Admiral shares offer at current prices.
Compounding returns at a 7.5% rate instead of a 3% rate can generate significant gains over time. But there is something else that investors should keep in mind and that is the growing number of stocks.
Since 2013, Aviva has increased its shares outstanding by 38%. Admiral has also increased its share count, but only by 10%, and this is important from a growth perspective.
Suppose I own 1% of Aviva's outstanding shares and reinvest my 7.5% dividend each year. With the increase in the number of shares, my share in the business would have increased to 1.3% after a decade.
If I owned 1% of Admiral's shares and reinvested my 3% dividend each year, the increase in the number of shares means I would own 1.2% of the company after 10 years. That's not much less than with Aviva.
Invest in insurance companies
The 7.5% dividend yield offered by Aviva shares is attractive to investors and could be a good idea for a passive income investor. But I'm worried about the rising share price.
In contrast, I believe Admiral is a company with a strong competitive advantage in a more attractive part of the market. That's why it's the insurance stock I would look to buy at current prices.
