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Aviva will return unused capital for purchases to shareholders, CEO says

Aviva Plc will return any of the money earmarked for bolt-on acquisitions to shareholders if it fails to find compelling purchases, according to CEO Mark Wilson.

The U.K. insurance group has allocated £600 million of the £2 billion excess capital it plans to deploy in 2018 for bolt-on acquisitions, and has already spent £116 million on its acquisition of Irish insurer Friends First Life Assurance Co. Ltd., which is expected to complete in the first quarter.

"Just because we have a large pile of cash does not mean it is burning a hole in our pocket," Wilson told journalists during a full-year 2017 earnings call. "We may not spend all [the £600 million]. If we don't, we will increase the capital returns for shareholders."

He added that despite looking for bolt-on acquisitions, "the focus is on organic growth."

'Opportunistic' M&A

Aviva is looking for smaller acquisitions "in existing markets and areas where we might want a skill set," the CEO said, citing the 2017 purchase of fund platform Wealthify as an example. Markets where Aviva could look for smaller acquisitions include Poland and Turkey, Wilson said, adding: "We are going to be opportunistic here."

As well as looking for bolt-on deals, Aviva will use £900 million of its excess capital to pay down debt and return £500 million to shareholders.

Aviva boosted its full-year dividend by 18% in 2017 to 27.4 pence from the 23.3 pence it had paid out in 2016. It is targeting a future payout ratio of between 55% and 60% of profits, up from the current level of 50%.

Wilson said that the future rise in the dividend would be underpinned by profit growth in its businesses, noting that six of Aviva's eight main divisions delivered "double-digit" profit growth in 2017.

Aviva's 2017 dividend of 27.4 pence and operating earnings per share of 54.8 pence beat the analysts' consensus estimates of 26.4 pence and 53 pence, respectively. Analysts seemed positive about the results, with Goldman Sachs calling them a "solid set of numbers" in a March 8 research note.

But shareholders appeared less impressed, with the share price down 1.75% to 498.70 pence at 11.28 a.m. in London on March 8.

'Disappointing' Canada

While Aviva's results were positive overall, one blip was its Canadian nonlife insurance business, where operating profit fell sharply to £46 million from £269 million and the combined ratio — a key measure of underwriting profitability deteriorated to a loss-making 102.2% from a profitable 93.0%. This was in part caused by a jump in bodily injury claims inflation, which Aviva international insurance CEO Maurice Tulloch said was "fueled by more active claims farming from the plaintiff bar."

Wilson described the result in Canada as "disappointing," but added: "We have a very detailed plan to turn that around. That is now underway, and we would expect it to bounce back over the next couple of years."

The turnaround plan includes price increases, looking at underwriting rules and tightening up some claims practices, Tulloch added.