Aviva has proposed a new and improved offer to buy Direct Line. The proposed deal values Direct Line at 275p per share, a 73.3% premium to the closing Direct Line share price before the offer period opened (27 November). Direct Line’s board has provisionally accepted these terms.
The proposed offer consists of 129.7p per share in cash, 0.2867 new Aviva shares per Direct Line share, and a dividend of up to 5p per share subject to completion.
Aviva has until 5.00 pm on 25 December 2024 to make a firm offer.
The shares fell 0.7% in early trading.
Our view
Fresh from strong third-quarter results, Aviva is making moves to acquire fellow insurer Direct Line. After an initial soft offer was rejected, a revised proposal looks to have done the trick, and we expect a firm offer to follow.
Aviva brings insurance, wealth, and retirement under one roof and a Direct Line deal would bolster its market leading positions in key areas like UK motor and home insurance. The proposed terms require a decent chunk of cash, which will likely mean no buybacks for 2025 and an increase in debt, both of which are manageable.
General insurance in the UK & Ireland saw more challenging conditions for parts of last year, but we’ve seen a sustained improvement over 2024. Higher prices are continuing to benefit key areas like motor and home insurance. 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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