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Catlin FY loss predicted, possible fundraising

Bermuda-headquartered Lloyd's (re)insurer Catlin is predicted to swing to a full-year loss for 2008, and may need a capital infusion, according to Numis Securities.

Analyst Nick Johnson slashed his pre-tax 2008 earnings estimate from a $30mn profit to a $68mn loss, reflecting lower investment return assumptions, due to weaker bond markets in November and December 2008 and a $20mn increase in assumptions for Catlin's hurricane losses for the year.

Numis said that its forecasts now assume a negative investment result of -1.3 percent in Q4, down from a previous assumption that returns would be flat for the quarter. This would imply a full-year return of -2.2 percent against a previous projection of -0.9 percent.

Johnson explained his increase in wind loss assumptions in the light of the "implied risk to the current published estimate of $200mn, following recent upward revisions by some peers and modelling agencies," referring to recent reserve hikes from Bermudians PartnerRe, Platinum Underwriters, Validus and IPCRe, as well as Lloyd's (re)insurer Advent.

Looking ahead to 2009 and 2010, with the caveat that investment earnings are likely to remain volatile, Johnson left forecasts for investment income unchanged because lower interest rates could be largely offset by higher returns on corporate debt over the same period.

Numis also noted that although Catlin had previously stated that it had sufficient capital to fund the take up of residual Names' capacity and existing organic growth initiatives, it thought that unrealised investment losses incurred since that date were placing "pressure on the balance sheet that may result in a capital shortfall."

According to the analyst, if this were the case it would either restrict Catlin's capacity to increase volume into improving underwriting conditions, or necessitate an increase in capital - a scenario he though more probable - and one he had already built into his target price.

Johnson downgraded his target by 15 pence to 445p - still a premium to 22 January's 393p - noting that "if the group is able to successfully address potential funding pressures, we think the shares will rebound strongly, given attractive growth prospects and low 2009E P/E of 3.8x".

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