* Q2 net profit 1.87 bln eur vs poll average 1.61 bln eur
* Expects P&C combined ratio to improve in H2
* Prepared for market with structurally lower returns -CEO
* Diversified enough to benefit from market upturn -CEO
* Shares erase losses to close up nearly 1 percent
(Adds comments from CFO, detail, closing share price)
By Jonathan Gould
FRANKFURT, Aug 7 (Reuters) - Improving financial markets helped net profit at Germany's Allianz rise by nearly a quarter though a set-back in property and casualty insurance worried investors.
Net second quarter profit at Europe's biggest insurer swelled to 1.9 billion euros ($2.7 billion) from 1.5 billion in the year-earlier quarter, beating forecasts as writedowns diminished in the wake of a broad markets rally.
But analysts and investors zeroed in on a sharp fall in profitability at Allianz's main money spinner, its property and casualty business, worrying about a rise in claims and costs relative to premiums earned, known as the combined ratio.
"The most important figure in our opinion is the somewhat disappointing combined ratio," said DZ Bank analyst Thorsten Wenzel in a research note, saying that he was reviewing his "buy" recommendation on the stock.
Allianz shares fell by more than 4 percent and were the biggest decliners on Frankfurt's blue chip DAX index before turning positive late in the trading day.
The share closed up 0.9 percent at 76.15 euros, in line with the DJ Stoxx index of European insurance shares.
Other European insurers such as France's AXA, Zurich Financial Services, Aviva, and RSA all turned in above-expected earnings performance this week that gave their shares a fillip.
Allianz's property and casualty division combined ratio jumped to 98.9 percent in April-June from 93.5 percent in the year-earlier quarter as a slew of small damage claims and rising expenses ate into profit.
Operating profit in the division nearly halved to 895 million euros, falling below earnings at the smaller life and health division for the first time in company history.
"If I compare ourselves to the competition, we don't have a loss ratio problem, we have an expense ratio problem," Chief Financial Officer Helmut Perlet told a call with analysts.
Perlet said the company was working to trim costs and would also raise prices in some markets, forecasting an improving combined ratio in the second half of the year that would put a ratio of 97 percent for the full year within reach.
Analysts said high-tech pattern-recognition technology had helped alert insurers to potentially fraudulent claims.
NEW NORMAL
Chief Executive Michael Diekmann said Allianz was strongly capitalised and able to withstand market shocks, echoing comments from French rival AXA earlier this week.
Allianz was also girding itself for a new era following the financial market crisis, where mature markets would see lower growth, emerging economies would play a bigger role in profits and scale would become decisive for insurance players.
"Allianz is prepared for what we perceive as 'the new normal', an ongoing challenging market environment with structurally lower returns," Diekmann said in a statement.
"We are well diversified from both a regional and business unit point of view, and are thus able to benefit from a market upturn," he added.
Like other insurance players, Allianz benefited from rebounding financial markets and a more conservative investment strategy.
Writedowns on investments such as debt and equities fell sharply, totalling 144 million euros compared with 506 million in the second quarter of last year. Realised gains fell less than 10 percent.
Allianz reported improvements in life and health insurance, where investment results and a 10 percent rise in premium income helped boost operating profit in the segment by 40 percent.
Its stock has fallen by 1.5 percent from the start of the year, lagging a 5 percent rise the DJ Stoxx insurance index.
According to StarMine, which weights analysts' forecasts according to their track record, Allianz trades at 7.6 times 12-month forward earnings, making it cheaper than French rival AXA, which trades at a multiple of 8.7.
($1=.6954 Euro)