Record profits for Lloyd's but tougher times ahead

Lloyd's of London reported record profits yesterday, but warned of tougher times ahead as prices soften and the financial climate worsens.

The 320-year-old insurance market's pre-tax profit for 2007 rose 5.2 per cent to £3.85bn, driven by healthy pricing and few major disasters.

Richard Ward, the chief executive of Lloyd's, said its syndicates may have to cut back on the business they underwrite to maintain profitability. Though Lloyd's has gained from the combination of high rates and low claims, its business is cyclical because customers expect their premiums to fall to reflect the lack of claims. That creates a danger of prices falling below the correct level for the risk involved.

"We are seeing rates soften. We don't want to write risks at unprofitable levels to chase market share," Mr Ward said. He added that the recent period of relatively few catastrophes such as hurricanes would inevitably come to an end.

Lloyd's paid out about £200m for last summer's floods in the UK but most of the £5bn bill was footed by retail insurers. The market also took limited hits from European windstorms.

Lloyd's results benefited from a 21 per cent return on its investments in bonds, money market instruments and other assets, as well as releases from reserves set aside for earlier claims. Mr Ward said it would be hard to reproduce last year's investment performance in the current market.

Andrew Hubbard, head of insurance services at the accountancy firm Mazars, said Lloyd's performed well but that the underlying results showed the cycle had already turned substantially. "If the back-year releases are ignored the result is actually a reduction from £3.29bn to £2.99bn, indicating that the pure year has not been as good and supporting the view that the market has softened in 2007," he said.

Lloyd's combined ratio, a key performance indicator, weakened to 84 from 83.1 a year earlier. The ratio measures costs and claims as a percentage of premiums.

Mr Ward said Lloyd's had "no exposure" to US sub-prime loans in its asset portfolio but that it would face claims as a result of the credit crunch. Lloyd's insures risks such as company directors' liability and professional indemnity, which could attract lawsuits from angry investors who have lost money in the crisis.

He said Lloyd's had cut back its dealings with financial institutions since the collapse of Enron and WorldCom.