Direct Line acquisition accelerates Aviva's pivot to capital-light structure: Blanc

By Aidan Gregory

Feb 27 - (The Insurer) - Aviva expects its takeover of Direct Line Group to supercharge its effort to power its earnings via capital-light business, according to CEO Amanda Blanc.

On its 2024 annual results call on Thursday, Aviva said its acquisition of rival UK home and motor insurer Direct Line Group is expected to significantly accelerate its pivot to capital-light business, which accounted for 56% of the group’s operating profits of 1.8 billion pounds ($2.3 billion) last year.

“The transaction will create a leader in UK personal lines, accelerating in capital light and bringing the best of Aviva to millions more customers," Blanc told analysts on Thursday.

The absorption of Direct Line Group is expected to generate around 125 million pounds of cost synergies for Aviva and will push its capital-light operating profits past 70% of group revenue.

“The rationale is just as attractive,” said Blanc. “We will deliver 125 million pounds in cost synergies that is over and above Direct Line's existing commitment. And we will unlock material capital benefits over time. This will enable us to further enhance shareholder distributions. This is expected to occur by the middle of 2025, subject to regulatory approvals. It will create a leading UK P&C insurer, with a share of around a fifth of the country’s home and motor insurance markets.”

Since 2020, Aviva has shed non-core international business and focused on generating capital-light returns within its core markets of the UK, Canada and Ireland. Under Blanc, Aviva has also returned more than 10 billion pounds of capital to shareholders.

The Direct Line Group deal marks the next phase of Blanc’s strategy for Aviva – a pivot to capital-light-fuelled growth.

According to JP Morgan, the market has not yet given Aviva full credit for the positive effect that Direct Line Group will have on its financials.

“Aviva’s business mix and risk profile have improved strongly under its current CEO, Amanda Blanc, who has simplified the business and equity story through major disposals and initiated one of the largest equity capital return and de-leveraging programmes in the sector in the past decade,” said Farooq Hanif, head of insurance equity research at JP Morgan in London, in a note on Thursday. “Aviva’s acquisition of Direct Line, which we expect to close in mid-2025, takes this story significantly forward.”

However, JP Morgan added that the merger will leave Aviva highly exposed to P&C earnings.

“We expect EPS to benefit strongly from cost synergies from this deal, but we also see upside risk to our forecasts from revenue synergies,” said Hanif. “Aviva’s business mix will shift strongly to P&C earnings (~60% by 2028E), arguably a higher multiple mix than peers, and these businesses should benefit from the improved scale and buying power in the UK P&C market, particularly in personal lines.

“We think the shares remain inexpensive, and expect its capital position, cash and debt leverage to improve strongly over the next three years,” added Hanif in the note.

Shares in Aviva were trading at 537.20 pence as of 10:39am in London on Thursday, up 2.4% from the previous close, giving Aviva a market capitalisation of 8.68 billion pounds. The stock has gained 19.3% over the past year, outperforming the FTSE 100, which has returned 13.8% across the same period.