Surplus capacity and poor underwriting could drive market down, warns Lloyd's chief

Richard Ward, Lloyd's chief executive, has called for underwriting discipline in the face of record profits.

This week Lloyd's reported profits of £3.7bn, but Ward warned that the market could be driven down by surplus capacity and indisciplined underwriting.

He said: "We are fully aware that the cycle is beginning to soften and the surplus capacity in the market is going to put pressure on the market.

"We cannot be complacent or fool ourselves into believing that the market or weather conditions will not change."

Ward said: "With an increasing trend of more frequent and severe natural catastrophes overlaying the peaks and troughs of the insurance cycle, we must continue our focus on underwriting for profit."

He added: "While we are delighted with the results, there is a word of caution about what we can deliver in the forthcoming years. However, we are in a very strong position."

After two years of increased hurricane activity, resulting in losses of £103m for Lloyd's in 2005, a benign hurricane season in 2006 produced favour-able results for the market.

Of the $16bn of worldwide catastrophe losses suffered last year, Lloyd's liabilities came to only $100m.

But Ward said: "A benign claims period is not always good. We must show our customers that we are here to take premiums but also to pay claims."

In 2006, Lloyd's reported a combined ratio of 83.1% compared to 111.8% in 2005, with a 14.8% increase in central assets to £1.454bn.

Together with the successful completion of phase I of the Equitas deal with National Indemnity, a subsidiary of Berkshire Hathaway, Fitch increased Lloyd's financial strength rating from A to A+.

Andrew Hubbard, head of insurance services at financial adviser Mazars, said: "With record levels of capital and reserves (up 21% on last year), including central assets up 22%, and a solvency ratio of the order of 800%, this is not a result which has come from raiding the piggy bank and skimping on the reserves, but shows a market in rude health."

Standard & Poor's has assigned its A long-term insurer financial strength rating to Lloyd's Reinsurance Co (China), the newly-approved underwriting subsidiary of Lloyd's.