FRANKFURT (Reuters) - The world's biggest reinsurer Munich Re (>> Muenchener Rueckversicherungs-Ges. AG) raised its dividend by more than expected, returning cash to shareholders that it cannot profitably invest in its business.

The German reinsurer on Thursday said it would pay a dividend of 8.25 euros per share for 2015 compared with 7.75 euros a year earlier, matching the highest forecast in a poll of analysts. It is making the payout on the back of stable net profit in a difficult reinsurance market.

"The further strong increase in the dividend demonstrates our trust in the sustained earnings power of Munich Re," said Chief Financial Officer Joerg Schneider.

Munich Re shares rose more than 4.6 percent to the top of Germany's blue chip DAX index <.GDAXI>, which was 0.25 percent higher.

Munich Re and rivals such as Swiss Re (>> Swiss Re AG) and Hannover Re (>> Hannover Rueck SE) are facing a slump in reinsurance prices and rock bottom capital market interest rates that have weighed on revenue.

They have focussed on maintaining profitable underwriting, preferring to lose market share rather than undercutting competitors on price. Surplus capital is being returned to shareholders though higher dividends or share buybacks.

Munich Re expects to do further share buyback programmes with volumes of around 1 billion euros, CFO Schneider told a conference call with journalists, a move welcomed by Bernstein analysts in a research note.

"We expect these buybacks will continue to attract income oriented investors and will be able to set off the weaker earnings prospects of the group," the analysts said.

LOWER EARNINGS

Preliminary net profit for 2015 was around 3.1 billion euros ($3.4 billion), down slightly from 3.2 billion the previous year but in line with the average expectation in a Reuters poll.

Munich Re does not see profit falling below 2.5 billion euros this year, Schneider said.

"It could also be much higher," he said, adding that analysts' forecasts for net profit of around 2.75 billion euros this year were "not implausible".

Prices in the reinsurance market have been driven down by a lack of demand from insurance companies as well as oversupply fuelled by new entrants to the market and an accumulation of surplus capital because of unusually low damage claims from natural catastrophes.

There were signs that the multi-year slide in reinsurance prices was coming to an end, Schneider said, adding that he no longer expected broad-based price erosion.

Munich Re's premium volume rose by 0.7 percent when it renewed 9.2 billion euros of property-casualty reinsurance contracts with insurance company clients on Jan. 1. Prices fell by about 1 percent in the renewals, the company said.

Munich Re's earnings have benefited from the absence of major claims from hurricanes or earthquakes in recent years but that could easily change.

"We cannot build a prognosis on another year of good luck," Schneider told analysts.

(Editing by Keith Weir)

By Jonathan Gould