Briefing: Why is Aviva so keen on taking over DLG?

By news editor James Cowen

One week ago, I examined whether Direct Line Group (DLG) would continue rejecting Aviva’s acquisition advances and instead focus on executing its strategy for profitability on a standalone basis.

Aviva first put in a £3.3bn bid for its rival insurer in late November 2024, however DLG shunned this offer, concluding that the proposed takeover was “highly opportunistic and substantially undervalued the company”.

DLG chief executive Adam Winslow, who joined the insurer from Aviva in March 2024, additionally appealed to DLG shareholders following Aviva’s olive branch, asking for more time to turn his firm around for the better.

However, given multiple market reports were suggesting that Aviva chief executive Amanda Blanc was not giving up on her pursuit of DLG, I ended my last briefing with the sentence: “I would not rule out Winslow and Blanc reuniting in the future”.

Just one day later, Aviva upped its purchase offer to £3.6bn and the two firms subsequently confirmed a preliminary agreement on the financial terms for a potential acquisition.

Why the swoop?

According to The City Code on Takeovers and Mergers, Aviva has until 25 December 2024 to make a firm offer for DLG or it has to walk away from the merger.

However, I expect a firm deal to be announced before this deadline. Blanc has wasted no time in getting a preliminary agreement secured, with a source telling Reuters that “the insurers are keen to wrap up the deal quickly, given the final deadline falls on Christmas Day”.

So, why does Aviva so badly want DLG? The main reason is because it wants to expand in the UK personal lines market.

Aviva has seen growth in this area this year. According to a trading update published on 14 November 2024, Aviva’s UKGI arm grew in the nine months to September 2024 as a result of personal lines business increasing 25% year-on-year.

However, this market can be difficult to navigate – with rules such as 2022’s general insurance pricing practices coming into force and inflation causing claims costs to spiral, pricing is often king in this segment.

But DLG is very much focused on personal lines. As part of its refreshed strategy, revealed in July 2024, it launched its flagship brand Direct Line on price comparison websites (PCWs).

And the insurer is clearly showing growth. In a trading update published on 11 November 2024, DLG saw its motor business grow 11.4% in the nine months to September 2024, while its home brands delivered 21.6% growth in gross written premium (GWP) year-on-year.

Explaining its thought process on purchasing DLG, Aviva said: “The acquisition would expand Aviva’s presence in the attractive UK personal lines market, building on its existing strength and creating a more efficient platform from which to serve existing and new customers.

“In addition, the acquisition would allow DLG customers to benefit from Aviva’s breadth, scale and financial strength.”

Competition

In my view, a combination of the two firms is going to create a very large force in the personal lines market.

It is a very competitive market, however, which has recently seen new entrants. For example, Markerstudy merged with Atlanta to create a “major new platform” in the personal lines arena.

The deal, which was given the green light in June 2024, will provide a range of insurance products to consumers, including home and motor insurance. Markerstudy aims to transact around £3bn in GWP across these lines.

Markerstudy group chief executive Kevin Spencer said at the time that both Markerstudy and Atlanta had a “strategic view” of how the new platform will operate and that the business would expand into servicing more product lines should the right opportunities present itself.

So, some tough competition out there already, no doubt about it.

However, in my opinion, it seems Aviva has played the card of ’two can play at that game’ by trying to create its own major force. And its swoop for DLG has certainly caught the attention of the industry.