Policyholder security at the majority of Lloyd's syndicates is better than it has been in over a decade, according to a new report.

The report, by credit ratings agency Moody's, found that the significant profits forecast for the 2002-2004 years of account should mean that Lloyd's can avoid the losses seen in previous market downturns.

Improvements in management processes and increased capital requirements were also credited in the report, Lloyd's of London: improved policyholder security and enhanced management processes.

But the report also concluded that Lloyd's continued to face a number of challenges, including significant reinsurance receivables, continued pressure on the central fund from run-off syndicates and contingent exposure to Equitas.

Report author and Moody's vice-president and senior analyst Robert Smith said: "The introduction of the franchise directorate, tasked with protecting Lloyd's central fund assets by ensuring that underwriting in the market is of a sufficient standard, has been a key element of market security since 2003."

With regard to underwriting margins for 2006 onwards, Moody's said it remained concerned about the extent of underwriting discipline that may be maintained by some of the weaker underwriting units.

But Smith said the franchise directorate should be able to curtail the extent of any potential losses.