Insurance may not always set the pulse racing, yet the sector has a habit of slipping in the big plot twists quietly. Aviva PLC (LSE:AV.) recent strategy update was one of those moments: no fireworks, but enough moving parts to keep investors leaning in.
RBC’s analysts think the market may be missing the bigger picture. The shares are up 47% this year, helped by the Direct Line acquisition, yet still trade on a 10.5 times multiple of next year’s earnings.
For a business guiding to 11% annual earnings growth through to 2028 and offering an 8% all-in yield, the bank argues the stock still looks inexpensive.
The immediate takeaway is that forecasts have been trimmed, not torn up. RBC has cut operating profit estimates by about 5% on average across 2025 to 2027, mainly to reflect Aviva’s new longer-term targets.
Expected earnings for each major division fall slightly, and dividend cost growth has eased back to 5% a year from 7.5%.
Yet the numbers still paint a robust picture. Aviva is aiming for operating earnings of roughly 55p a share next year and says it can grow that at 11% a year to 2028.
A good chunk of that comes from the Direct Line deal. Integrating the business adds scale to its general insurance arm in home and motor, where size matters for pricing power and claims data.
Cost savings are being upgraded too: the target is now £225 million a year, up from £125 million, with £40 million expected to land by the end of 2025. Aviva has already delivered £85 million of claims savings and expects Direct Line to add another £50 million.
The other big boost is capital. The group expects more than £7 billion of cash remittances from its divisions over 2026 to 2028, which comfortably covers dividends and buybacks.
Solvency, the key regulatory measure of financial strength, should climb back towards 202% by 2028 as capital synergies from the Direct Line deal come through .
General insurance will play an ever larger role. RBC estimates the UK and Ireland business could account for around 45% of operating profit by 2028, helped by a 13% compound annual premium growth rate since 2022.
Aviva’s customer base is now more than 22 million, and cross-selling opportunities look meaningful: only 11% of Direct Line’s customers hold more than one policy, compared with 32% for Aviva’s existing base.
There are risks. Integration is not simple, and the UK motor market is still prone to sharp shifts in pricing and claims.
But Aviva has made a solid start: the combined motor book under Aviva and Direct Line saw pricing hold steady in the first nine months of the year, while wider comparison-site rates fell 10%. In home insurance, Aviva’s pricing rose 1% against a 12% fall elsewhere.
RBC has trimmed its price target to 760p from 800p, mainly because of the earnings reset. Even so, the bank keeps its Outperform rating, arguing that a business growing steadily, generating surplus capital and shifting further into capital-light products deserves more credit from the market.