* 2012 net income $4.2 bln vs $3.65 bln in poll
* To raise dividend to 3.50 Sfr per share
* Proposes special dividend of 4 Sfr per share
* Shares up 2.5 pct, hit near 5-yr high (Re-leads, adds analyst comments, shares, details)
ZURICH, Feb 21 (Reuters) - Swiss Re set out plans for a hefty special dividend on Thursday as it was able to draw back $1 billion previously set aside for disaster payouts, helping send its shares to a near five-year high.
The world's second-biggest reinsurer by market value after Germany's Munich Re said it would pay out a one-off 4 francs per share, as well as raising its annual payout 17 percent to 3.50 francs a share.
Reinsurers such as Hannover, Munich and Swiss Re help insurance company customers cover the cost of major damage claims like hurricanes or earthquakes in exchange for part of the premium.
Swiss Re said it was able to release funds set aside for unrealised claims despite $900 million in estimated losses from Superstorm Sandy, which swept the east coast of the United States late last year.
The company had said last November it might pay a special dividend if it could not find ways to plough earnings back into the business.
Its shares rose 2.5 percent to 75.65 francs by 0822 GMT, outperforming a 1.1 percent decline in the European insurers as a whole. The stock rose as high as 76.6 francs, its highest since June 2008.
The group also posted a 60 percent rise in net income to $4.2 billion, ahead of average estimates for $3.65 billion in a Reuters poll, driven by a 22 percent rise in property and casualty reinsurance premiums and the $1 billion pretax reserve release.
The company said its property and casualty business had begun the year strongly, with 11 percent premium growth and average price increases of 2 percent.
The expiry of a quota share agreement with Warren Buffet's Berkshire Hathaway is expected to bring a significant rise in premium income in 2013, Swiss Re said.
"This alone could lead to 25 percent net premium growth during 2013-14, which is pleasing and brings Swiss Re back to the company it used to be in the good years," said analyst Fabrizio Croce at brokerage Kepler Capital Markets in a note.
"Capital is at a suitable level, with a book value of $96 (88 Sfr)... Reasons for a discount to the book value are difficult to find at this point," Croce added.
The company reported a combined ratio, an insurance industry measure of profitability weighing payouts against premium income, of 80.7 percent, well ahead of the 86.3 percent average poll estimate. Adjusted for natural catastrophes and reserve releases, the ratio was 90.1 percent.
It said it expected a group combined ratio of 93 percent in 2013 and forecast a combined ratio for property and casualty of 92 percent, implying reduced expectations for investment returns and reserve releases.
Chief Executive Michel Lies said in a statement the company was on track to achieve its 2011-2015 financial targets.
Swiss Re shares have been on an upward trajectory since 2011, when huge natural catastrophes including the Japanese earthquake and tsunami and flooding in Thailand created the market conditions which allowed insurers to charge higher prices on property and casualty policies. (Editing by Helen Massy-Beresford and David Holmes)