LONDON (Reuters) - Bermuda-based Lloyd's of London insurer Catlin posted a better-than-expected 2009 pretax profit on healthy investment returns and a benign hurricane season, and was upbeat despite a challenging outlook.

The property and casualty insurer said its international focus will help offset the effects of weaker rates in 2010, while underwriting contributions are forecast to grow year on year.

However, the focus for insurers is firmly on the outlook for 2010 over concerns that falling government bond yields could dent investment performance in the months ahead, in a "challenging" environment, said Catlin's chief executive.

"Our view at the moment is let's keep our powder dry, let's be short in duration and very much liquid, so we're not affected by the crisis per se," CEO Stephen Catlin told Reuters.

"We have hit on just short of $8 billion of funds now, if liquidity dries up, then there's going to be some distressed opportunities to invest at a premium," he added. Catlin, one of the biggest players in the Lloyd's of London market, reported a pretax profit in 2009 of $603 million, ahead of a consensus forecast of $552.3 million supplied by the group.

This compares with a pretax loss of $13 million in 2008 after hurricane Ike and Gustav claims pushed it into the red.

Investment returns jumped 5.9 percent in the year against a dip of 1.4 percent in 2008.

Beazley, the first Lloyd's of London insurer to report 2009 results, said earlier this week its profit rose 15 percent on the back of a recovery in its investments.

Christopher Hitchings at KBW commented: "Not quite as good as they first appear, but these are strong results, beating on investment and underwriting, and there is a confident outlook.

"This supports our view that Catlin is the best value of the Lloyd's majors."

Catlin added the role of the financial services regulator is a further cause for concern as a general election looms, and in light of the surprise decision of its head, Hector Sants, to step down earlier this week. "The thing that is causing concern around the city is the Tories' comments about the FSA and the fact that Sants has resigned," he said.

The insurer reported a 12 percent increase in gross written premiums to $3.7 billion on a constant currency basis, with non-London centres contributing 37 percent to this total.

Non-London hubs are forecast to add over 10 percent to profitability in 2010, subject to losses, according to Catlin.

Insured losses in 2009 were less than half the total for 2008, after Hurricane Ike, the largest natural disaster in 2008, cost the industry $20 billion.

Windstorm Klaus was the most costly event of 2009 after it triggered insured losses of $3.5 billion according to Swiss Re. The storm hit France and Spain with hurricane-force winds in January 2009, with gusts peaking at 120 mph, killing 25 people.

Catlin reported an eight percent rise in its annual dividend to 25 pence per share, with attractive dividends forecast in the sector by analysts, despite catastrophe rates set to soften, after coming off five to 10 percent from historically high levels.