After years in the doldrums, long-standing shareholders of Aviva (LSE: AV.) finally have something to shout home about, with the share price up 41% in 2025. The transformation over the past few years into a lean, capital-light business has undoubtedly taken the market by surprise. Now that it’s finally got rid of the label of being a ‘boring’ stock, can the growth story continue?
Evolving business model
At the heart of Aviva’s transformation has been a shift toward a capital-light business model. Less than three years ago, over half of all profits were generated from the more capital intensive business units of Retirement and Heritage. Today, the mix is totally different with General Insurance accounting for half of all profits.
But the business isn’t ending there. By the end of next year, it expects that over 70% of all profits will be generated from the capital-light insurance, wealth, and protection businesses. Driving this optimistic forecast is the Direct Line acquisition, which completed last month.
Direct Line
Following the buy-out of personal lines insurance competitor Direct Line, the business now boasts greater than 21m UK customers on its books. To put that in perspective, only Lloyds Banking Group is larger. Today, 40% of the adult UK population has a policy of some sort with them.
One of the most important aspects for any insurer looking to grow its book is to find innovative way of reaching more customers. Acquiring Direct Line will boost its presence across retail channels (e.g., through price comparison websites) as well as strengthen its position in lower-cost segments.
As it deepens its relationships with customers, I foresee a virtuous cycle ensuing. To provide but one example, clear synergies exist between the newly acquired Green Flag brand, Direct Line’s Auto Services, and its own in-house car repair service, Solent.
Risks
One of the key factors that has boosted profits for Aviva over the past few years has been sky-rocketing insurance premiums. However, clear evidence is emerging that this trend is now going into reverse.
The latest monthly national general insurance price index shows that motor insurance premiums across the industry have now fallen for seven months in a row. Premiums are now on average 6% lower than at the start of the year.
Now, these figures must be treated with caution because they only include data from price comparison websites. Aviva sells a number of policies direct and through intermediation channels too.
Another risk I foresee is potential challenges from the integration of Direct Line into its core business. The business foresees cost efficiencies of £125m over the next three years. However, there is no guarantee that these will emerge.
Amalgamating two large businesses together is a lot harder than it looks on paper. Many mergers and acquisitions in the past have failed to deliver on expected cost savings.
Nevertheless, I think there is an awful lot to like about Aviva. It operates in many high-growth markets including pensions, advice, and investments. With a growing customer base, the opportunities are clearly there. And the icing on the cake is a forward dividend yield of 5.8%. I have been accumulating the stock for years, and after an excellent set of results, expect to buy more soon.
