Lloyd's feels the pain from Chile earthquake and BP's oil disaster

Lloyd's of London yesterday admitted that first-half profits halved, thanks to a string of catastrophes.

And the iconic insurance market warned that life will be tough for those who put up capital for its syndicates in the months ahead, saying there was still "too much capital in the industry" with premium levels across many classes of business still falling.

Pre-tax profits tumbled to £628m from £1.32bn over the same period last year. The market's combined ratio – a measure of premiums taken in over costs and claims – also declined to 98.7 per cent. This means that for every £100 the market received in premiums, it paid out £98.70. The previous year's combined ratio stood at a buoyant 91.6 per cent.

However, this year's figure was flattered by the release of reserves to cover against losses from previous years of 4.6 per cent. Without those, the market would have lost £3.30 on every £100 of premiums received.

Returns from investing those premiums, however, helped the bottom line by returning £597m although it is still down from the previous year's £707m. Overall, the market's central assets are at a record high of £2.23bn.

Last year was unusually light in terms of the number of natural catastrophe that the insurance bought at Lloyd's is designed to protect against. This year's figures were, however, hit by the Chilean earthquake, which cost $1.4bn (£890m) net and the Gulf of Mexico oil spill that has plunged BP into crisis.

Some $270m has been paid out on the loss of the Deepwater Horizon oil rig but other claims related to the disaster could add between $300m and $600m to the total cost.

Lord Levene, chairman of Lloyd's said: "In the first half of this year, there have been more catastrophes across the world, including notably the earthquake in Chile and the Deepwater oil rig explosion, than in any year since we began interim reporting.

"Globally, the insurance market has experienced one of the largest levels of catastrophe losses in the first half of a year ever, so it is no surprise that this has been a testing six months for the market." The insurance market has also been facing increasing claims from the banking crisis in the US, although it said that they remain at "manageable levels".

Another black cloud has been the continuing increase in the cost of accident-related compensation claims in the UK, which has badly dented the market's UK car insurance book and forced syndicates providing this sort of cover to strengthen their reserves.

Of more concern for the future, however, is that despite the big claims linked to big disasters, premium rates have not really risen much. There is still too much capital chasing business at the market for that to happen anytime soon.

Lloyd's' finance director Luke Savage said: "What we have seen following the Chilean earthquake is that some categories of business have seen rating increases. Cover against earthquakes in South America, for example. But that has not been reflected across the board. It has not even been reflected in the cost of, for example, covering against earthquakes in North America. The price increases we have seen have been quite specific. In areas such as general property, aviation, marine, and casualty, we have continued to see falls in premium rates. That is because of the excess capital in the market."

Analysts have warned that it would take a really major disaster – such as a big hurricane hitting the US and causing severe damage – for excess capital to be taken out of the industry and premium rates to begin increasing across all classes of business at Lloyd's.