By Carolyn Cohn
LONDON (Reuters) - Aviva expects to generate an extra 3 billion pounds in cash over the next two years and will make acquisitions as well as giving money back to shareholders, it said on Thursday, sending its share price to three-month highs.
Insurers and reinsurers, among them Allianz and Swiss Re, have been returning cash to shareholders as strong competition cuts opportunities for expansion.
Aviva has made a number of disposals in the past year, including in France, Spain, Italy and Taiwan, and says its Indian joint venture is under "strategic review".
"The franchises we have left have a pretty decent track record," Chief Executive Mark Wilson told an investor day in Warsaw.
"We are moving into a new phase and we have the capital to be able to do it."
Aviva expects to deploy 2 billion pounds of cash in 2018 by spending 900 million pounds on repaying expensive debt and using the remaining 1.1 billion pounds for "bolt-on" acquisitions and returning cash, it said in a statement ahead of the investor day.
Some analysts had anticipated Aviva would announce a share buyback of 1 billion pounds on Thursday, but Wilson said the firm had an "appetite for M&A".
Aviva has said it is only looking at small purchases following its 5.6 billion-pound ($7.5 billion) takeover of Friends Life in 2015, and is interested in expanding in "insurtech" and artificial intelligence.
Aviva's cash promise helped send its shares to three-month highs. They were up 2.17 percent at 520 pence at 1035 GMT, the second-biggest gainer on the FTSE 100 index.
Morgan Stanley analyst Jon Hocking reiterated his 'overweight' rating on the stock in a note to clients. "Taken as a package, we think this is a bullish set of goals from Aviva and, if achieved, the current multiple on the shares looks too low," he said, giving the shares a 649p price target.
Aviva said it was raising its expectations for earnings growth to more than 5 percent annually from 2019 onwards, from a previous target of mid-single-digit growth.
It also said it would increase its dividend pay-out ratio to 55-60 percent of earnings per share by 2020, from 50 percent.
The new targets are "achievable", JP Morgan analysts said in a note, reiterating their "overweight" investment rating on the shares.
(Additional reporting by Simon JessopEditing by Jason Neely, Greg Mahlich)