Feb. 25 (Bloomberg) -- Munich Re, the world's second-biggest reinsurer, reported a 12 percent decline in fourth-quarter profit and predicted ``a more difficult environment'' in 2008.

Net income fell to 560 million euros ($830 million) from 636 million euros a year ago, the Munich-based company said today in a statement. Munich Re rose 1.6 percent in Frankfurt trading after the reinsurer's operating profit exceeded analysts' estimates.

Chief Executive Officer Nikolaus von Bomhard said he expects insurance and capital markets hurt by the collapse of the U.S. subprime market to remain tough this year, with earnings falling as much as 24 percent to 3 billion euros to 3.4 billion euros. Shareholders, including Cevian Capital AB, have pushed Munich Re to raise profit and payouts as reinsurance rates fell after the record 2005 hurricane season.

``Many clients of Munich Re are suffering from the crisis and are reconsidering their risk structures and buying more reinsurance covers,'' said Stephan Kalb, an analyst at Oppenheim Research in Frankfurt who has a ``buy'' recommendation on the stock.

Munich Re rose 1.82 euros to 118.42 euros in Germany as the 28-member Bloomberg European Insurance Index gained 2.3 percent. The company has lost 11 percent this year, valuing the reinsurer at almost 26 billion euros.

``It's a sign of strength that Munich Re gave a confident outlook for this year after Allianz rather diluted its expectations,'' said Lucio di Geronimo, an analyst at UniCredit with a ```buy'' recommendation on Munich Re.

Allianz Chief Executive Officer Michael Diekmann last week declined to give a precise profit forecast for 2008, saying only that the German insurer is ``well-positioned.''

`Stock Performance'

``While we are certainly not happy with the stock performance, Munich Re's management has taken the right initiatives and every month without a major natural disaster is playing into its hands,'' said Thomas Radinger, who helps oversee about $95 billion including Munich Re shares at Pioneer Investments in Munich.

Fourth-quarter losses related to the U.S. subprime mortgage crisis totaled 15 million euros, reducing the company's remaining exposure to 340 million euros, or less than 0.2 percent of total investments, Chief Financial Officer Joerg Schneider said today.

``Munich Re is one of the few financial companies for which I would put my hand into the fire regarding subprime,'' Radinger said ahead of the results.

Munich Re said on Jan. 30 that 2007 profit before minority interests rose 11 percent to a record 3.9 billion euros.

Sweden's private equity firm Cevian, which also owns stakes in companies such as Volvo AB and TeliaSonera AB, bought 3 percent of Munich Re in December.

Dividend, Payout

The company that's been led by von Bomhard since he became chief executive in 2004 said last month that it planned to increase its dividend for 2007 to 5.50 euros a share from 4.50 euros for 2006 and reiterated a target to pay out at least 8 billion euros to shareholders in buybacks and dividends by 2010.

``With that we plan to return more than 80 percent of last year's profit to shareholders,'' von Bomhard said, adding that investors shouldn't expect the ratio to remain as high in 2008.

Munich Re completed a 1 billion-euro share buyback last February, its first ever, and expects to repurchase 5 billion euros more of its own stock by 2010. It has bought back about 2 billion euros of the shares already.

``Munich Re's 2008 profit outlook is more optimistic than what they said last month and it shows that they haven't been hurt by the declining reinsurance rates,'' said Konrad Becker, a Munich- based analyst at Merck Finck & Co.

`Ambitious Goals'

Munich Re has ``ambitious goals'' for 2008, Robert Mazzuoli, an analyst at Landesbank Baden-Wuerttemberg in Stuttgart, Germany, wrote. The company plans to maintain earnings at last year's level, which ``seems very ambitious in a difficult financial market environment and a softening reinsurance market.''

Munich Re had a gain of 356 million euros in the fourth quarter of 2006 related to a change in German tax rules. The reinsurer also booked a gain of 385 million euros in the third quarter of 2007 from business tax changes in Germany.

Operating profit rose 29 percent to 1.1 billion euros in the quarter as spending on claims and other costs at the property and casualty reinsurance unit fell to 91.7 cents of each euro of premium income from 96.5 cents a year earlier. Analysts surveyed by Bloomberg had expected a combined ratio of 93.8 percent.

Premium income from property and casualty contracts renewed in January fell by 4 percent after a second year without major natural disasters, Munich Re said. The company renewed about two-thirds of its traditional non-life reinsurance business in January. Rates on the renewed business fell by an average of 2.8 percent, it said.

Pricing, Volumes

``Investors are unlikely to be very positive on a sector where both prices and volumes are under pressure,'' Tim Dawson, an analyst with Helvea, wrote last week. Still, Munich Re ``has not got involved in more exotic financial products as Swiss Re has'' and thus ``looks like a safe haven in the financial sector.''

Zurich-based Swiss Reinsurance Co., the world's biggest reinsurer, fell the most since 2003 on Nov. 19 after reporting writedowns on credit default swaps it sold to protect a client against losses on mortgage-backed securities. The loss came less than two weeks after the company reported third-quarter profit that exceeded analysts' estimates.

The Atlantic hurricane season, which often causes reinsurers' costliest claims, hasn't resulted in a major storm striking the U.S. for two years. Still, worldwide insured losses related to natural disasters doubled to about $30 billion last year from 2006.

In 2005 claims reached a record $99 billion when hurricanes including Katrina and Rita hit the U.S., Munich Re estimated.

EPS Target

Munich Re reiterated a target to increase earnings per share an average of 10 percent until 2010, which would result in earnings per share of more than 18 euros excluding one-time effects.

``We have again set ourselves a high profit target even though a more difficult environment is to be expected in the insurance and capital markets this year,'' Munich Re's von Bomhard said.

Today's 560 million-euro profit trailed the 579 million-euro median estimate of 12 analysts surveyed by Bloomberg.

Gross premium income fell 1.8 percent to 9.19 billion euros in the quarter. Munich Re said it is aiming for gross premium income of 37.5 billion euros to 38.5 billion euros this year after 37.26 billion euros in 2007.

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

Last Updated: February 25, 2008 11:49 EST