Bermuda-based insurer and reinsurer XL Capital Ltd. announced yesterday it would buy back as much as $1 billion of the company’s shares.

Purchases will be made from time to time, either in the open market or privately negotiated transactions, XL said in a statement distributed yesterday by PR Newswire.

The company, which three weeks ago announced an operating profit of $1.76 billion for 2006, said the new repurchase programme included the unused $135.4 million allocated to the share repurchase programme authorised by the Board seven years ago.

When a company buys back stocks it has sold, it effectively reduces the number of shares outstanding, giving each remaining shareholder a larger percentage ownership of the company.

Reasons for buy-backs include putting unused cash to use, raising earnings per share, increasing internal control of the company, and obtaining stock for employee stock option plans.

For XL, things have come full circle since December 2005, when the company announced plans to sell $2.15 billion of shares to replenish its capital base.

The move was designed to offset losses from the 2005 Atlantic hurricane season and a loss of more than $800 million loss for disputed claims against its Winterthur insurance businesses.

But XL’s decision to buy back shares now may be taken as a sign that the company’s management is optimistic about the future and believes that the current share price is undervalued.