* Q4 op profit down more than a third to 243 million euros
* Net up 48 pct to 265 mln after 90 mln one-off tax benefit
* Says 2014 challenging but keeps 850 mln euro profit goal
* Shares fall more than 2 percent in firm sector (Recasts with operating result, adds details, shares, analyst comment, changes dateline from Frankfurt)
By Jonathan Gould and Thomas Atkins
HANOVER, Germany, March 11 Germany's Hannover Re posted a sharp drop in underlying quarterly earnings on Tuesday after results in life and health reinsurance fell short of its expectations, helping send its shares down more than 2 percent.
The world's third-biggest reinsurer after Munich Re and Swiss Re said its operating result fell by more than a third to 243 million euros ($337.3 million) in the fourth quarter of 2013.
In the life and health business, Hannover Re said its results did not live up to expectations due to a substantial strengthening of reserves for its Australian disability business, which hit its operating result by some 100 million euros.
An additional negative was the absence of a more than 40 million euros derivatives-related gain which had boosted the previous year's results, the net effect being that operating results in life and health reinsurance contracted by 46 percent to 150.5 million euros.
Analysts at Berenberg Bank, who have a "buy" rating on the stock, noted the reserve charge was "obviously larger than we had anticipated", though they added that "encouragingly the company has indicated that it does not anticipate further reserve charges from this business in 2014".
Hannover Re shares were down 2.1 percent at 59.43 euros by 0950 GMT, making them the weakest performers in the STOXX Europe 300 index of insurer stocks, which was up slightly. The shares are down 6 percent in the past 12 months, compared with a 23 percent gain in the index.
Reinsurers, which help insurers shoulder risks in exchange for part of the profit, have had a buoyant few years, but are facing one of the biggest market-wide price declines since the late 1990s as their customers press for better deals.
A decline in the number of major natural catastrophes such as hurricanes or earthquakes over the last two years has left many reinsurers sitting on a thick cushion of profit that has prompted their customers to press for cheaper premiums.
That price pressure has been compounded by competition from pension funds, which have poured into investment vehicles that offer reinsurance in direct competition with traditional reinsurance companies.
Hannover Re's net profit rose 48 percent to 265 million euros ($368 million) in the quarter, beating expectations due to a 90 million euro one-off effect resulting from the release of provisions for deferred taxes.
The company said it would pay a dividend of 3 euros per share, the same as for 2012 if the standard dividend of 2.60 euros and the special dividend of 0.40 euro are combined.
With the payout, Hannover Re joins its larger peers in returning cash to shareholders through higher payouts or share buybacks.
Hannover Re had been expected to report a fourth-quarter net profit of 213 million euros and a dividend of 2.85 euros, according to the average of 13 estimates in a Reuters poll of banks and brokerages.
Annual profit rose to a record 895.5 million euros.
"In view of the prolonged period of low interest rates and increasing competition, especially in non-life reinsurance, the general environment remains challenging", Chief Executive Officer Ulrich Wallin said in a statement, though the company repeated a 2014 target to earn 850 million euros and pay out up to 40 percent of profit to shareholders. ($1 = 0.7205 Euros) (Editing by Tom Pfeiffer and David Holmes)