LONDON (Reuters) - Bermuda-based Lancashire Holdings blamed hefty hurricane damage claims for a 75 percent drop in 2008 profit, but those earnings beat forecasts and the non-life insurer said it planned to start paying dividends within a year.

London-listed Lancashire also said yesterday it expected insurance prices to rise strongly this year as a result of the 2008 hurricane season, one of the most destructive on record.

Lancashire said it had enough capital to take advantage of the firmer market, and did not plan to tap investors for cash.

The company made a 2008 pretax profit of $97.6 million. Analysts had expected a profit of $58.9 million, according to the average of eight forecasts collected by the company.

The drop in profit largely reflected a $150 million hit from hurricanes Ike and Gustav last year. Those losses were partly offset by a robust performance from Lancashire's investment portfolio, which returned 3.1 percent over the year despite tumbling financial markets.

Lancashire shares closed four percent higher at 481.75 yesterday.

"2008 was one of the toughest years that many of us have experienced in the insurance industry," Lancashire CEO Richard Brindle said. "To grow book value per share by 7.5 percent is a considerable achievement, and further proof if any were needed that our risk management has been thoroughly tested on both sides of the balance sheet.

"Lancashire has achieved an excellent combined ratio of 86.3 percent despite exposure to Hurricane Ike, one of the largest offshore and onshore market losses that the insurance industry has seen. We also achieved a very strong investment return."

Mr. Brindle said a further erosion of industry capital in a tumultuous fourth quarter for global investment markets would serve to accelerate the hardening of the insurance market.

"As we expected, it appears that investment losses in the fourth quarter have taken a further toll on the insurance industry's capacity," Mr. Brindle said. "Importantly, unlike previous cycles, we do not expect to see a quick replenishment of lost capacity.

"The market has undoubtedly turned. As in 2006, we expect the rate increases we have seen in January to gain momentum as the year progresses. Sections of the market are less than nimble and take some time to adjust their business plans to the new reality but the fundamental shift in the demand/supply equation is inescapable."

Last week, rivals Catlin and Beazley announced plans to raise £200 million ($289 million) and £150 million respectively via rights issues, saying they wanted funds to exploit an anticipated rise in insurance prices.

"As we head into a hardening market, we are in the fortunate position of doing so with a strong balance sheet," Lancashire finance director Neil McConachie said in a statement.

"As things stand right now we believe we are carrying the appropriate level of capital and consequently do not plan to raise or return capital at this time."

Lancashire, which listed on the London Stock Exchange's junior AIM market in 2006, also said it intended to start making payouts to shareholders within 12 months.

The dividend will be "sustainable", and be supplemented from time to time by special dividends, it said, adding plans to move its listing to the LSE's main market was at an advanced stage.