LONDON/FRANKFURT (Reuters) - European insurers Munich Re, Old Mutual and Royal & Sun Alliance warned that market conditions would be tough this year, due to rising competition and turbulent financial markets.

Munich Re, the world's second-largest reinsurer, said its net profit fell by nearly a fifth in the first quarter to 785 million euros ($1.20 billion), slightly better than expected, as investment gains and premiums fell. Analysts expected it to make 779 million euros in a poll conducted by Reuters.

South Africa's largest insurer Old Mutual saw first-quarter life sales rise less than was expected to £426 million, dragged down by disappointing sales in Europe, and warned it could miss a key asset management target because of the volatile financial markets.

Royal & Sun, the UK's second-largest commercial underwriter, shrugged off the gathering gloom, with a 15 percent rise in first-quarter premiums, boosted by rapid growth in its international operations, helped by recent small acquisitions and currency effects, and issued a confident outlook for 2008.

Insurers are facing a tougher outlook, as competition in the non-life market intensifies while turbulent financial markets are hitting their investment income and sales of life products.

Munich Re and Old Mutual shares were both trading down over two percent, while Royal & Sun's were up 0.9 percent at 10.55am GMT.

Despite warning they faced increasingly challenging market conditions, both Munich Re and RSA stuck to their full-year targets.

Munich Re said it still aimed to make a profit of three to 3.4 billion euros in 2008, while the UK insurer said it expected to have a strong result and reiterated its combined ratio goal for the year of around 95 percent.

Munich Re and RSA said they were eyeing small bolt-on acquisitions, with the German company's insurance subsidiary Ergo saying it would look at insurance operations being sold by banks looking to raise cash to bolster their lending arms. But Old Mutual said it was still looking for a buyer for its majority stake in South African general insurer Mutual & Federal , after the planned sale to Royal Bafokeng Holdings fell through earlier this year.

Despite the sub-prime meltdown, Munich Re, Old Mutual and RSA have steered clear of the big credit writedowns that have hurt rivals such as Swiss Re and Aegon.

The reinsurer said it had written down five million euros on its US sub-prime portfolio and taken an opportunity provided by turbulent credit markets to increase its portfolio of structured products by 400 million euros to 5.9 billion. RSA said it had benefited from investment market movements.

Old Mutual indicated it had no additional writedowns in the first quarter, saying writedowns remained in line with the level announced at the end of 2007

But Old Mutual said its key target of £300 billion of funds under management in 2008 could be at risk due to the financial markets turmoil. Assets fell by seven percent in the first quarter to £261 billion.