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Investing.com -- Morgan Stanley (NYSE:MS) has resumed coverage of Aviva (LON:AV) with an “overweight” rating, following the completion of its acquisition of Direct Line (LON:DLGD), in a note dated Friday.
The transaction expands Aviva’s presence in U.K. general insurance and increases its exposure to capital-light earnings.
By 2026–2027, over 70% of Aviva’s earnings are expected to be capital-light, excluding the U.K. Annuities and Heritage, allowing it to be more directly compared to larger multi-line European peers despite lower diversification and balance sheet strength.
Aviva is now a top-three player in most of its operating segments in the U.K. Morgan Stanley identifies scale as a key advantage and highlights Aviva as its preferred domestic U.K. insurance pick.
The brokerage forecasts about 15% annualised EPS growth through 2027, with an exit rate in the mid- to high-single-digit range.
Operating EPS is estimated to rise from 48p in 2024 to 72.6p by 2027. Aviva is also expected to maintain a total payout ratio of around 75%, in line with peers.
The free cash flow yield is projected at 12% for 2027, well above the 8% average of large-cap multi-liners.
This, along with a dividend yield of 6.4% based on a 2025 dividend per share estimate of 39.3p, positions Aviva as attractive despite its relatively weaker solvency profile.
Morgan Stanley notes the solvency ratio, while below peers, remains above internal targets and is forecast to reach 206% by 2027.
The updated price target is 680p, implying over 10% upside from the last close of 615p. Including dividends and buybacks, total shareholder return is estimated at around 18%.
The valuation uses a sum-of-the-parts approach, assigning 12x 2026 earnings for life insurance, 10.7x for property and casualty (10x U.K., 14x Canada), and 12x for asset management, with a £0.2 billion excess capital adjustment based on a 180% solvency ratio threshold.
Operating profit is forecast to grow from £1.47 billion in 2023 to £2.91 billion by 2027. Reported EPS is expected to rise from 39.5p to 69.4p over the same period.
General insurance revenue in the U.K. and Ireland is projected to increase from £5.49 billion in 2023 to £10.79 billion in 2027, while the combined operating ratio is expected to improve to 89.4%.
Canada’s insurance revenue is also forecast to grow steadily, reaching £4.66 billion by 2027 with a combined ratio of 91.5%.
These forecasts now include Direct Line’s contribution from the second half of 2025. For the first half of 2025, Morgan Stanley estimates operating EPS of 25.1p, an interim dividend of 13.1p, and a solvency ratio of 204%.