* 2008 profit falls to 1.5 billion euro ($2 billion)
* Premiums fall 3 percent in January contract renewals
* Financial crisis saps profits but helps reinsurance prices
* Confirms to propose 5.50 euro/shr dividend
* Shares down 2.8 percent, second-biggest DAX decliner
(Adds company, analyst comment, background)
By Jonathan Gould
FRANKFURT, Feb 4 (Reuters) - Munich Re unveiled a disppointing drop in premiums at the start of the year as well as a sharp fall in 2008 earnings due to the financial crisis, sending its shares down more than 4 percent on Wednesday.
The world's biggest reinsurer said premium volume in contract negotiations with insurance company clients at the start of the year fell 3 percent, marking a sharp contrast with rival Hannover Re, which this week cheered investors by reporting a premium rise of the same size in its business.
"Munich Re was unexpectedly weak in the January renewals compared with competitor Hannover Re," said LBBW analyst Robert Mazzuoli, adding that he had expected a 4 percent premium rise.
DZ Bank analyst Thorsten Wenzel also said he was disappointed with Munich Re's performance in the contract talks.
"We are surprised that premium volume declined in an environment of rising demand and hardening rates," Wenzel said.
Munich Re attributed the drop in premiums to its scaling back of the cover it offers to mainstream insurance companies where it felt reinsurance prices were not adequate for the risk, reflecting its focus on profitable underwriting.
Like Hannover Re, it also predicted that prices and conditions would improve over the course of the year, but Chief Financial Officer Joerg Schneider said it was too early to give a quantitative forecast for 2009 and investors remained cool to the outlook.
Munich Re's shares were the second-biggest decliners on the German DAX index, falling 2.6 percent by 1038 GMT compared with a rise in the main index of 1 percent and a 2.5 percent gain in the DJ Stoxx index of European insurers.
According to StarMine, which weights analysts' forecasts according to their track record, Munich Re trades at 7.8 times 12-month forward earnings, a premium both to Hannover Re and Swiss Re, which trade at multiples of 6.6 and 4, respectively.
EARNINGS HIT
Earnings shrivelled in the final three months of last year as the financial crisis intensified and Munich Re reduced its exposure to volatile equity investments, which now acount for less than 2 percent of its portfolio.
The group made a net profit of around 100 million euros ($129 million) in the fourth quarter of 2008 -- against 600 million euros in the year-earlier period.
In preliminary financial results on Wednesday, Munich Re said full-year 2008 profit fell by almost two thirds to around 1.5 billion euros, undercut by writedowns linked to the market crunch.
Munich Re had originally said it wanted to make up to 3.4 billion euros in 2008 but twice warned on profit as the financial storm raged. In November it said it did not expect to reach 2 billion euros.
The company posted record net profit of 3.9 billion euros in 2007, helped by asset sales and one-off tax gains.
"Our capitalisation remains solid and even contains a buffer for the further profitable expansion of our business," CFO Schneider said.
Munich Re, which helps mainstream insurers shoulder the burden of damage claims from earthquakes, floods and other catastrophes, confirmed that it planned to keep its dividend steady at 5.50 euros per share for 2008, despite lower profit. (Reporting by Jonathan Gould; Editing by David Cowell)