The last five years have been phenomenal for the Aviva (LSE:AV.) share price. The insurance giant leveraged higher interest rates to propel its earnings. And the result has been a near-120% surge in its market-cap since July 2020.
Looking at analyst forecasts, the most optimistic prediction over the next 12 months is that Aviva shares could reach as high as £7. But when looking beyond a single year, a path to £10 may exist if the company can hit certain milestones.
Long-term potential
For the Aviva share price to reach £10, the £19bn business needs to expand into a £30bn one. Needless to say, building shareholder value on this scale is no easy feat. But now that the company has successfully completed its takeover of Direct Line, management could use this as a powerful catalyst.
Of course, that’s dependent on the deal actually delivering on expectations. If everything goes smoothly, the company anticipates:
- An additional £125m in revenue from product cross-selling
- £125m in annual cost savings within three years
- 70% of operating profits originating from capital-light operations (up from 56% today)
- A 13% net insurance margin by 2026
The addition of Direct Line also gives Aviva control of roughly 20% of the UK motor insurance market and 17% of the wider property insurance market, granting significant economies of scale. After all, the more premiums it issues, the wider it can spread its risk and offer more competitively-priced policies.
But is that enough to build £11bn of shareholder value?
Crunching the numbers
As of the first quarter of 2025, the firm’s combined ratio stands at 96.6%. That implies a net insurance margin of 3.4%. And if management isn’t being overly ambitious with boosting this to 13% by the end of next year, then based on current insurance revenue projects, Aviva’s earnings could potentially double as a result.
Of course, that’s all dependent on the Direct Line acquisition going off without a hitch. And historically, acquisitions of this scale have rarely ended up as a completely smooth process. Even if there are no delays in integrating and cross-selling insurance products to its new customer base, the expected cost-saving synergies may simply fail to materialise.
The bottom line
A doubling of profits certainly paves the way for a near-doubling of share price if Aviva can maintain these gains in the long run. However, this potential may already be partially baked into the share price. After all, the insurance stock’s currently trading at a price-to-earnings ratio of 27.
In other words, the success of Direct Line alone likely won’t be sufficient to push the Aviva share price to £10. Instead, the company will have to continue expanding its market share and earnings to hit this milestone. And that could take several years, at least.
Nevertheless, given the potential, this could be an opportunity worth taking a closer look at for patient long-term investors.
