By Oliver Suess

Swiss Re AG, swimming in excess capital after several years of lower-than-expected disaster claims, plans to shift to share buybacks to return cash to investors after three years of paying a special dividend.

The world’s second-biggest reinsurer announced plans on Thursday to buy back 1 billion francs ($1.1 billion) of its stock, saying it has almost exhausted its tax-privileged reserves for special dividends.

It will also raise its regular dividend to 4.25 Swiss francs a share from 3.85 francs for 2013, the Zurich-based company said in a statement. And it will distribute a special dividend of 3 francs, down from 4.15 francs a year ago. That represents a total payout of 7.25 francs a share, compared with 8 francs a year ago.

“The capital situation remains strong with more than $10 billion of excess capital above the S&P AA rating and $3.5 billion of cash at group items,” Stefan Schuermann, an analyst with Vontobel, said in a note to clients Thursday. He has a hold rating on the stock.

Swiss Re shares rose 1.4 percent in Zurich trading at 9:07 a.m. They gained 2.8 percent this year, valuing the company at about 32 billion francs. That compares to a 10 percent increase in the Bloomberg Europe 500 Insurance Index.

Swiss Re, led by Chief Executive Officer Michel Lies, is cutting back coverage of catastrophes like hurricanes and earthquakes and ramping up new lines of business, such as corporate insurance and coverage in Asia. It is also expanding in markets including China, where in July it agreed to acquire Sun Alliance Insurance (China) Ltd.

Profit Declines

Net income fell 80 percent to $245 million in the fourth quarter from $1.2 billion in the year-earlier period after U.S. restructuring costs weighed on profit. That missed the $325 million average estimate of seven analysts surveyed by Bloomberg.

Reinsurers, which help primary insurers such as Allianz SE and AXA SA shoulder risks in exchange for a share of the premiums, are returning cash to investors as gains on fixed income investments and lower-than-average disaster losses leave them with a surplus of funds. Capital available for reinsurance coverage reached a record $575 billion at the end of the third quarter, according to estimates by broker Aon Benfield.

Swiss Re said it will continue to rely on buybacks to return cash to shareholders if the trend toward lower disaster claims continues. “Risk-adjusted price quality” declined by 3 percentage points during the January renewals of reinsurance treaties, the company said. Munich Re, the world’s largest reinsurer, reported a 1.3 percent rate decline for January.

U.S. Losses

“We have now seen for some time a trend of economic value significantly exceeding the market value,” Chairman Walter Kielholz said in a letter to shareholders. “It makes therefore a lot of sense for the company to invest in its own shares and benefit from the discount.”

Swiss Re booked a pretax charge of $623 million from the restructuring of business written before 2004 at its U.S. life and health reinsurance unit. The reinsurer had said in November that it expects an impairment of $550 million.

The sale of U.S. life insurer Aurora National Life Assurance Co. resulted in a loss of $203 million in the quarter. Swiss Re said in November it expects a loss of less than $200 million as it focuses its Admin Re unit, which buys and manages closed books of life and health insurance, on the U.K. market. It also booked a $344 million charge from the unwinding of an asset funding structure in its life and health unit.

Challenging Market

Munich Re said on Feb. 5 that it plans to raise its dividend even after fourth-quarter profit declined 42 percent on investments and goodwill impairments. At the same time, the Munich-based reinsurer confirmed a plan to buy back 1 billion euros of its stock by its annual shareholder meeting in April.

“We expect the overall re/insurance market environment to remain challenging over the next years, especially for the smaller and less differentiated players,” CEO Lies said in the statement. “With this, a clear focus on profitability and economic growth is essential.”

–With assistance from Elena Logutenkova in Zurich.

Copyright 2015 Bloomberg.