Munich Re promised to return over 8 billion euros ($10.9 billion) to its shareholders through 2010, answering criticism it was not doing enough to drive up its stock price.
The German reinsurer made the commitment on Friday on the back of a stronger-than-expected first-quarter net profit of 982 million euros. The result was helped by investment gains that partly offset losses from European winter storm Kyrill, which pushed the company into an underwriting loss for the quarter.
As a first step in the capital return programme, Munich Re said it would buy back up to 2 billion euros in shares or about 6.75% of its share capital at current prices by April 2008, with a further 3 billion planned through 2010.
It would also continue paying high dividends.
"With dividends at this level and a share buy-back programme of over 5 billion euros, we would pay out more than 8 billion euros to shareholders by the end of 2010," Chief Executive Nikolaus von Bomhard said in a statement.
Munich Re also tweaked its 2007 net profit target range to between 3.0 billion euros and 3.2 billion, from 2.8 billion to 3.2 billion previously.
"This is good news, not just because of the share buyback," said JP Morgan analyst Michael Huttner. "It reflects their confidence in reinsurance profitability remaining at a very high level."
Munich Re's expectation of 10 percent average earnings per share growth through 2010, which follows a positive outlook from rival Swiss Re, would lead to a positive reappraisal of reinsurers generally, he said.
"They have the cash and the reinsurance sector is performing better than people had been thinking," Huttner said.
Munich Re's first quarter net profit of 982 million euros before minorities was well above the average forecast of 772 million euros in a Reuters poll, but down from 979 million euros a year earlier.
Investment income rose by nearly half to 3.16 billion euros, above the poll average of 2.30 billion, while gross written premiums were flatat 10.02 billion.
Munich Re's first-quarter result was hit by damage claims from winter storm Kyrill, which struck in January and cost Munich Re 450 million euros before tax.
The storm helped push the combined ratio, a key measure of profitability in the company's reinsurance business, to 101.8% from 91.6% a year earlier, showing costs and claims exceeded premiums and the business segment made an underwriting loss.
Munich Re shares edged up 0.4% in early Frankfurt trading, compared with an 0.1% rise in European insurance peers. The stock has risen by almost 14% in the last two months, outpacing a 7% rise among European insurance peers, partly on hopes of it returning more cash to shareholders.
But some analysts had complained that the company needed to show where it would generate growth ahead.
FPK analysts said in a note this week this factor made them cautious on Munich Re, even though the company's shares trade at about 1.04 times estimated 2007 embedded value, making them cheaper than the sector average multiple of 1.22.