Last week’s announcement of the£242mn acquisition of Lloyd’s managing agency Probitas and its Syndicate 1492 comes more than 23 years since the November 2000 sale of its then Lloyd’s managing agency Marlborough.
Announcement of the deal followed a long period of speculation that Aviva was looking to return to Lloyd’s, while the company had been repeatedly linked with acquiring Probitas in 2022-23.
More recently, it was linked with exploring an alternative build strategy by establishing a start-up syndicate under the framework of a third-party managing agency. The decision to acquire an established business means it can bypass that process.
Having refocused Aviva’s strategy around the UK, Ireland and Canada since becoming CEO in 2020, Dame Amanda Blanc has now secured access to Lloyd’s global licences to complement the growth of its existing London market specialty business.
Aviva’s existing commercial and specialty lines book is not immaterial, with the carrier already supporting a number of MGAs within the London market and in the US. Probitas will add its specialty platforms in Europe, Australia and Mexico and brings a top-quartile Lloyd’s business – its 2023 GAAP combined ratio of 79.8 percent is only modestly behind the 78.6 percent and 78.7 percent combined ratios it delivered in 2022 and 2021, respectively.
The transaction represents a major victory for Ash Bathia, who founded Probitas in 2015 following more than 16 years with QBE, and provides him an opportunity to end his underwriting career on a high.
For Lloyd’s CEO John Neal, the transaction could also be viewed as a flagship deal in his efforts to bring large international composite (re)insurers into the Lloyd’s market.
The big question is whether Aviva shareholders will also be winners in the deal. After all, the Lloyd’s market is on a high but not all acquisitions have proven to be successful – as American Financial Group will testify. It will take time before the answer to this becomes clear but there are a number of pointers that suggest why the initial share price response has been positive.
Firstly, the deal price represents a multiple of 7x expected pre-tax operating profit in 2026. Of course, these are the company’s own figures and much can slip between cup and lip, but on the face of it this is good value relative to peers.
In addition, given Probitas’ significant casualty focus and the current trend of reserve deterioration across the sector, it is likely the 2023 calendar year result and prior year movements will have given reassurance considering the two firms have been talking for some time.
One (minor) negative was a 3 percent dip in Aviva’s solvency ratio but in the grand scheme of things this is hardly material.
The move is also another feather in the cap of Blanc – one of a host of names linked as the next Lloyd’s chair – as she continues to oversee the transformation of Aviva. The UK insurer’s share price is up over 65 percent since she was parachuted in.
Blanc said late last week that Aviva’s prospects have “never been better” as she fended off questioning around whether the London-listed carrier might itself become a take-over target. Blanc dismissed speculation Generali was poised to bid for Aviva as “largely market chatter” but it is certainly the case there is renewed overseas interest in the UK sector and Aviva is repeatedly mentioned as a possible target.
Last month, motor insurer Direct Line Group rejected a ~£3bn cash-and-stock approach from Ageas and the Belgian insurer now has until the end of the month to formally table an improved offer. RSA – Aviva’s UK rival – was itself acquired and broken up in 2021 by Intact and Tryg in a £7.2bn deal.
The move to improve its dividend and hand back £300mn through a share buyback will strengthen Aviva’s case for remaining independent if overseas predators do emerge. The Probitas deal is also a signal that the company has a clear growth strategy that includes strategic M&A. Investors will, however, be watching closely to ensure the deal does prove to be accretive to earnings and not another Lime Street deal at the top end of the hard market…
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