Aviva's Probitas acquisition highlights growth prospects for buyer and target

Aviva PLC's planned acquisition of Lloyd's insurer Probitas should allow both companies to accelerate their growth.

The UK multiline insurer will be buying one of the top-performing underwriters in Lloyd's: Probitas Managing Agency Ltd. reported the lowest combined ratio in the market of 71.8%. Probitas' combined ratio, derived from Lloyd's Syndicate 1492, has been consistently below that of the Lloyd's market's collective combined ratio over the five years to 2022.

This performance should provide scope for Probitas to continue growing at Lloyd's, which is tough on serial underperformers but more permissive of consistently profitable syndicates. "I wouldn't be surprised to see Aviva give it more capital going forwards," Thomas Bateman, an analyst at Berenberg, said in an interview. "I'm sure it's got the remit under Lloyd's to extend the underwriting capacity that it's got given the profitability of the business. It's a great platform with good underwriters there, and Aviva should be able to give it the scale to grow further."

Supportive parent

Aviva CEO Amanda Blanc declined to put numbers on capital commitment or growth ambitions for Probitas on press and analyst calls for Aviva's 2023 earnings, released three days after the Probitas deal was announced. But Blanc made it clear that Probitas' new parent would not hold it back. "[I'm] not going to give you a firm [growth] number, but we're definitely not going to limit the scale of their ambition," Blanc told journalists. "We're very keen to support them in their growth ambitions." Aviva said when announcing the acquisition that Syndicate 1492 had delivered a 21% compound annual growth rate in gross written premium since 2019. The syndicate's gross written premium for 2023 was £288 million.

Probitas has limited exposure to areas that have caused insurers headaches in recent years. Syndicate 1492 said in its 2022 accounts that it does not provide cover for war or aviation risks. It also has limited exposure to the US, where claims from natural catastrophes and casualty claims inflation have been troubling insurers and reinsurers. Syndicate 1492 forecast that 2%, or £5.9 million, of its 2023 premium would come from mainland US, but that the bulk of this was related to its cyber business, which it started writing in June 2022. The syndicate has "no exposure to US casualty risk," Aviva CFO Charlotte Jones told analysts on the earnings call.

The deal will grant Aviva access to a distribution channel it has lacked for many years. The company has been absent from Lloyd's since 2001, when it sold managing agency Marlborough to Berkshire Hathaway. "Clearly, there are many brokers that really prefer to place business via the Lloyd's market. We didn't have access to that distribution," Blanc told analysts. "Now is the time for them to deliver on the promises they have made to us."

The deal also shows that Aviva has the financial capability to do bolt-on acquisitions while still returning capital to shareholders, according to Bateman. "I think it's testament to the fact that Aviva are in a good position at the moment," he said.

The company has made a series of smaller purchases in recent years, including its £460 million acquisition of AIG's UK protection business in 2023, which it will fund from the sale of its 25.9% stake in joint venture Singapore Life Holdings Pte. Ltd.

Aviva is reentering Lloyd's when the market is on a high fueled by price increases in much of the specialty business that is the market's stock in trade, as well as continued efforts by the market's performance directorate to suppress unprofitable underwriting. Lloyd's is "a market we consider attractive" based on coverage of listed Lloyd's insurers Hiscox Ltd., Lancashire Holdings Ltd. and Beazley PLC, UBS analyst Nasib Ahmed said in a research note on the Probitas deal.

Lloyd's has reported a combined ratio of 84.0% for 2023, 7.9 percentage points better than the 91.9% it reported in 2022.

The question now is how long the good times will last on the pricing front. Price increases in some lines are slowing or even reversing. Asked about the timing of getting into Lloyd's given the current stage of the pricing cycle, Blanc told analysts that the company was buying Probitas for the long term, and that the syndicate's team have already navigated the market "extremely well." Blanc also stressed that the company would put no pressure on Probitas to grow unprofitably. "It's not just about the top line, it's about the bottom line," she said.

Jones said there had been several years of price increases in a lot of Probitas' business lines, so risk-adjusted pricing is now "really strong." She added, "We don't really assume any further increase but some of that is still earning through."