Briefing: What the Aviva and Direct Line mega-deal means for UKGI

It was arguably the biggest news of 2024, breaking just before Christmas on 6 December 2024 and rippling round the market as everyone was finishing off their shopping.

The sale of Direct Line Group (DLG), of course, was not unexpected, with Aviva having already had one bid rejected following Ageas’s failed bid earlier in the year.

And, on the face of it, the deal makes sense.

DLG has a rich history in the personal lines market and will bring additional volume to Aviva, which is already the second largest insurer in UKGI.

The combined business will be the first UK-regulated insurer to break the £10bn gross written premium (GWP) barrier, making it undeniable that Aviva will reclaim its position at the peak of the Top 50 Insurers once the deal is completed, which is expected to be around mid-2025.

DLG has not been without its troubles in recent years, however, and despite swinging back to operating profit in 2024, many of those issues remain.

The insurer has long been feeling the effects of a high expense ratio, with my own analysis of insurer Solvency and Financial Condition Reports (SFCRs) for Insurance DataLab revealing that DLG has had a higher than average expense ratio in each of the last four years.

DLG chief executive Adam Winslow – a former Aviva man himself – has already announced a cost saving target of £100m a year in an effort to bring down the insurer’s cost base and Aviva now has the opportunity to accelerate those cost-savings even further.

Promote synergy

The buzz word with any merger like this is always synergies and Aviva is already expecting to be able to shave a further £125m off the cost base by the end of the third year post-completion of the deal.

This will go a long way to bringing down the expense ratio of the combined insurer. With Aviva already having a favourable expense ratio compared to most of the market – and having consistently reported underwriting profits in recent years – it would be fair to expect DLG to follow suit once the benefits of the deal have been realised.

But the vast majority of these synergies are expected to come from job cuts, with up to 2,300 jobs at risk as the insurer looks to remove overlapping roles across shared services and its insurance operations.

As always, where there are winners there will also be losers and, sadly, there will soon be a lot of people looking for new jobs in the industry.

Combined IT services and systems are also expected to deliver cost savings, while the sheer size of the new business will also create efficiency savings, including in the purchase of reinsurance for the newly combined business.

Deal scrutiny

The scale that will confer these advantages will come with its own problems, particularly in the form of scrutiny from the Competition and Markets Authority (CMA).

Competition and maintaining consumer choice is always an important consideration with these mega-mergers – and the Aviva/DLG deal is no exception.

The issue is particularly apparent in the hyper-competitive motor insurance market, with DLG and Aviva sitting in second and third place respectively, just behind Admiral, when it comes to GWP.

Insurance DataLab’s figures, however, show that the combined business will have almost double the premiums of its closest competitor, with more than £4.5bn in GWP once the deal completes.

However, the saving grace for the deal could be the sheer competitiveness of the market in the UK.

Although the combined market share of Aviva and DLG will be huge – and could be as much as 20-30% – it is unlikely that this will stifle competitiveness given the sheer volume of other options available to consumers.

So while the CMA will likely scrutinise the deal – as they should – it seems unlikely they will block the takeover from happening. The effects of this acquisition now look set to reshape the UKGI landscape throughout 2025 and beyond.