Nov. 7 (Bloomberg) -- Munich Re, the world's biggest reinsurer, plans to pay its dividend and buy back shares even after third-quarter earnings slumped on investment writedowns.

Munich Re rose 6.9 percent in Frankfurt trading after saying in a statement today that it will match the 5.50 euro-a-share payout it made on last year's record earnings. In contrast, Swiss Reinsurance Co., the second-largest reinsurer, suspended its share-buyback program this week after posting the first loss in almost six years, and Hannover Re, Germany's second-biggest reinsurer, scrapped its 2008 dividend as it heads for its first full-year loss.

``Munich Re's capital position has barely changed during the quarter, which is good news as it allows them to benefit from improving reinsurance markets next year,'' said Thomas Noack, an analyst at WestLB Equity Markets in Dusseldorf who has an ``add'' rating on the shares.

Munich Re expects reinsurance rates to increase ``significantly'' next year as primary insurers whose capital is being eroded by the credit crunch seek more coverage against risks. This may help offset the industry's losses on equity investments stemming from a 40 percent slump in stock markets this year, and claims from hurricanes Ike and Gustav that Swiss Re said may saddle the industry with $18 billion in insured losses.

Shares Advance

Munich Re climbed 6.61 euros to 102.97 euros today, giving the company a market value of 21.3 billion euros ($27.2 billion).

Net income fell to 7 million euros from 1.2 billion euros a year earlier, bringing profit for the first nine months to 1.4 billion euros.

``In view of the considerable share price losses, our annual profit will probably not reach 2 billion euros,'' Munich Re Chief Financial Officer Joerg Schneider said in a statement.

That was the second time the company lowered its outlook this year, after first reducing its target on July 25 to ``well above 2 billion euros'' from an initial goal of as much as 3.4 billion euros. Reinsurers are writing down equity investments after global stock markets slumped 42 percent this year. The investment losses add to claims from hurricanes Ike and Gustav, which may cost the industry $18 billion, according to Swiss Reinsurance Co.

The reinsurer wrote down 1.79 billion euros on equity investments in the third quarter after 2.22 billion euros in markdowns in the first half. The revaluation of the investments in fixed-interest securities led to writedowns of 101 million euros in the first nine months, it said.

Lehman Writedown

Equities represented 4.6 percent of the company's total investments after hedging as of Sept. 30. That compares with about 11 percent at the end of last year. The equity ratio ``had sunk even further'' by the end of October, Munich Re said.

Munich Re wrote down about 115 million euros on capital- market transactions related to bankrupt Lehman Brothers Holdings Inc. Losses related to American International Group Inc. and Washington Mutual Inc. ``had no notable impact on Munich Re's results,'' it said.

Hurricane Ike cost Munich Re about 300 million euros before taxes, and hurricane Gustav about 90 million euros.

Spending on claims and costs at Munich Re's property and casualty reinsurance unit rose to 101.3 cents for each euro of premium income, compared with 97.1 cents a year earlier.

The company said its forecast for a combined ratio of 98 percent this year ``can only be achieved if major losses remain significantly below expectations in the fourth quarter.'' A combined ratio below 100 percent means premium income exceeds claims and costs, or that underwriting is profitable.

Munich Re will maintain a target to increase earnings per share by an average of 10 percent until 2010 to at least 18 euros.

``We are still optimistic that this ambitious target isn't unrealistic,'' CFO Schneider said on a call with analysts.

Reinsurers assume parts of primary insurers' liabilities in exchange for a share of their premiums.

To contact the reporter on this story: Oliver Suess in Munich at osuess@bloomberg.net

Last Updated: November 7, 2008 11:54 EST