Difficulties in the UK motor and US medical expenses markets have contributed to a £6.2 million half year loss before tax for Lloyd's group Kiln.

A deterioration in the group's overall 1997 and 1998 accounts led to a one-off £5 million accounting charge resulting from a write-back of accrued profit commission.

David Gilchrist, executive chairman of Kiln – owners of RJ Kiln one of Lloyd's largest independent managing agencies – said: "There have been two areas of considerable difficulty, the UK motor market and our self-funded medical expenses business in the US."

But he added: "We anticipate that the medical expense and UK motor accounts will make a positive contribution to the bottom line during 2000."

The group's medical expense account was set for improvement after suffering from a combination of underwriting factors, low rates and unprofitable deductible limits.

And the group's UK motor insurance book has been boosted by recent rate increases in the market.

Kiln has also amassed an additional £43m of underwriting capacity after signing partnership agreements with two European reinsurers and one in North America.

The Lloyd's vehicle also joined the Johannesburg market earlier this year.

Gilchrist went on to sound a general warning about the retrocessional insurance market.

He predicted a tightening squeeze in this area following rising catastrophe claims flowing in part from the recent earthquake in Turkey.

He stressed: "A policy of writing at any price and buying at an even cheaper price is fine when there is plenty of acquiescent retrocessional market around, but a squeeze is on the way with higher prices and larger net retentions.

"This will force arbitrageurs to underwrite properly or withdraw from the market."

Gilchrist said the group had decided to change its investment policy after sustaining an unrealised £2.5 m loss on its investment returns.

Low interest rates persuaded the group to switch its investments from purely fixed interest bonds to a measure of fixed interest and equities.

The group has agreed to pay shareholders a dividend of 0.5p a share after freezing dividends for the same period last year when it made profits of only £1m before tax.