Aviva AV. has reportedly directly contacted shareholders of Direct Line DLG. This is after Direct Line’s board dismissed Aviva’s takeover approach on Nov. 19 at a price of £1.12 cash per share and 0.282 new Aviva shares, equal to £2.50 per share at the time.
If the news, first published in the Financial Times, is true, it shows that Aviva is serious in its bid for the company—a business that struggled to grow over the last 10 years in core markets of motor and home. Commercial insurance is another area where it has grown profits well as well as the top line.
There is also discussion in the FT that the offer undervalues the prospects of Direct Line, its new strategy and turnaround, particularly as through the combination Aviva should be able to extract synergies because it also sells commercial insurance, and motor and home personal lines.
Direct Line’s primary target is a 13% net insurance margin in 2026, and it aims to grow the gross premium it writes within the newly formed nonmotor division by 7%-13% per annum. The new nonmotor division consists of commercial insurance, rescue, and home.
Having reviewed the Changing Gears strategy and its financial objectives, we are raising our fair value estimate to £2.20 per share for Direct Line. We don’t award the business a moat and rate it as having High Uncertainty, so we still think the offer is good for shareholders of Direct Line.
Direct Line’s motor division was growing up until 2020, when its policy growth stated to decline. That seems to coincide with a marked reduction in business investment, capital expenditure, and putting Churchill on price comparison sites. Since then, the division has had a torrid time.
Direct Line has now also put its core motor insurance brands on price comparison sites. And our assumptions use the low end of nonmotor insurance growth guidance. Excluding the original equipment manufacturer, or OEM, motor affinity partnerships, we assume the same growth for motor at Direct Line.
Key Morningstar Metrics For Direct Line Group
• Economic Moat: None
• Morningstar Rating: 3 stars
• Fair Value Estimate: £2.20
• Morningstar Uncertainty Rating: High
• Sector: Financial Services
DLG Share Price vs Morningstar Fair Value Estimate
The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.
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