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Aviva gains on plan to return cash as operating profit rises

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(Bloomberg) — Aviva Plc, Britain’s second-largest insurer, raised its dividend and said it will return more cash to shareholders this year after higher earnings at the life insurance unit helped boost full-year operating profit. The shares rose the most in seven months.

Related: 2016 earnings: Mostly positive, but big losses for 2 titans

Operating profit climbed 12 percent to $3.66 billion (3.01 billion pounds) from a year earlier, and Aviva raised the full-year dividend by 12 percent to 23.3 pence per share, the London-based insurer said in a statement on Thursday. Net income declined 22 percent to 859 million pounds last year, hit by the U.K. government’s cut of a key discount rate to calculate payouts.

“We have the high-quality problem of too much capital so we’re going to invest in our business,” said Chief Executive Officer Mark Wilson. “We’re saying today we’re going to give some of that back to our shareholders in 2017 and we’re going to pay down some pretty expensive hybrid debt as well.”

Aviva climbed as much as 7 percent in London trading, the most since Aug. 4, and were up 6.8 percent at 545.5 pence as of 10:44 a.m. The stock is has gained 12 percent this year, giving the company a market value of about 22 billion pounds.

Aviva said it will meet a target of increasing its dividend payout ratio to 50 percent of operating profit by the end of this year. The current ratio is 46 percent.

The company has $609 million (500 million pounds) of debt coming due this year and intends to pay that down, Wilson said on conference call with journalists. “We could get a pretty good return by buying back our own stock. That would be our preference,” he said.

Related: Insurance regulators respond to ongoing low interest rates

Changing face

Wilson has reshaped Aviva, which offers both life and general insurance, through a mix of asset sales and acquisitions since he took over in 2013. His purchase of Friends Life Group for more than $8 billion in 2015 was the biggest deal the U.K. insurance industry had seen in 15 years.

“Aviva delivered a useful ‘beat’ against both our and the market’s expectations in respect of profits Solvency II coverage ratio and NAV, with the dividend ahead of consensus,” Eamonn Flanagan, a director at Shore Capital Group Ltd., wrote in a note to clients.

Aviva’s life-insurance business, the most important in terms of earnings, reported an 8 percent gain in operating profit to $3.2 billion (2.64 billion pounds), helped by Friends Life. The general insurance and health unit reported a 9 percent increase in operating profit and earnings at the fund management division were up 30 percent. Total group assets under management rose to $548 billion (450 billion pounds).

Wilson said the company isn’t interested in expanding in asset management through acquisitions as competitor Standard Life Plc did this week with the purchase of Aberdeen Asset Management Plc.

“We might do some tactical bolt-ons,” Wilson said. “We’re not looking at anyjumbo deals, we don’t need it, we’re getting organic growth across the board.”

Aviva said last month that its full-year results will take a hit after the U.K. government cut the Ogden rate used to calculate payouts for personal-injury claims. The insurer included a charge of $462 million (380 million pounds) after tax for the Ogden rate reduction in its results, it said.

Aviva’s Solvency II ratio, a measure of an insurer’s ability to absorb losses under industry regulation introduced in 2016 in the European Union, was 189 percent at the end of last year, compared to 180 percent a year ago. A ratio of 100 means a firm has sufficient capital to withstand the kind of shock that happens once in 200 years.

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