Aviva has had a tentative offer rejected from Direct Line that valued the business at 250p per share. The proposal comprised 112.5p in cash plus 0.282 new Aviva share for every Direct Line share.
The Direct Line board concluded the offer was “highly opportunistic and substantially undervalued the Company”.
Aviva has until 5pm on 25 December to either make a firm offer or walk away.
The shares fell 2.3% in early trading.
Our view
Fresh from strong third-quarter results, Aviva is making moves to acquire fellow insurer Direct Line. While the initial offer was rejected, a revised bid seems likely, though Aviva has limited room before the price starts to sting. The deal would bolster its UK personal insurance presence and aligns with its push for more capital-light business.
Back to core business, Aviva brings insurance, wealth, and retirement under one roof. The general insurance arm centres around the UK and Canada. The latter now claims the number two spot in its market. General insurance in the UK & Ireland saw more challenging conditions for parts of last year, but we’ve seen a sustained improvement so far this year.
Higher prices are continuing to benefit key areas like motor and home insurance where Aviva is a market leader. It takes some time for these price hikes to feed through, but the benefits are starting to be felt. There’s still some work to be done in the Canadian business, but management is confident it’ll follow suit as we move into 2025.
Aviva's bulk annuity business (BPA), where it takes on final salary commitments from pension funds, has grown rapidly. The market's hot and Aviva’s already hit its £15-£20bn target across 2022-24. The focus continues to be on finding the right new business rather than pushing for market share. These contracts feed significant quantities of new assets into the business, which Aviva Investors can manage - increasing scale and profitability.
Being a huge workplace pension provider is the logic behind increasing its presence in the wealth management market. Plans are also underway to expand the advisory offering to help achieve the goal of at least 10% growth in net flows to wealth (6% in 2023). Performance this year has been impressive, but it’s a tough market, so it's one to watch.
The retirement products sit alongside Aviva’s protection business (this includes products such as life assurance and income protection policies). And this year’s acquisition of AIG Life UK saw protection sales jump 49% in the first half.
Aviva is a diversified player with fingers in basically all the pies. The insurance business is starting to benefit from an improving market, momentum in the wealth management division continues to be impressive, and Aviva’s capitalising on the resurgence of activity in the bulk annuity market.
We like the mix, and with a strong balance sheet, the 7.7% prospective forward yield looks attractive. However, there are no guarantees, and there’s more pressure to deliver than there’s been for some time, increasing the risk of ups and downs.
Environmental, social and governance (ESG) risk
The financials sector is medium-risk in terms of ESG. Product governance is the largest risk for most companies, especially those in the US and Europe with enhanced regulatory scrutiny. Data privacy and security are also an increasingly important risk for banks and diversified financial firms. Business ethics, ESG integration and labour relations are also worth monitoring.
According to Sustainalytics, Aviva’s overall management of material ESG issues is strong.
Aviva values ESG management and focuses on transparency around key issues. The company actively addresses physical climate risks, data privacy, security, and sustainable finance. Aviva aims to boost sustainable investments by 2025 and integrates ESG factors into its investment strategies. The absence of customer satisfaction targets in FY2022 is a potential area for improvement.
An independent Non-Executive director of Hargreaves Lansdown plc is also an Independent Non-Executive Director of Aviva plc.
Aviva key facts
All ratios are sourced from Refinitiv, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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