Speaking one year after Lloyd's launched its modernisation plans, chairman Lord Levene said the "cool, hard and critical look" Lloyd's had taken at its business was beginning to pay dividends.

Levene said that as the sixth largest reinsurer in the world, and with its comparatively small exposure to the plunging equity markets over the past two years, Lloyd's was in an enviable position, but was not complacent.

He said that despite underwriting conditions that were the "best in recent memory", evidence was emerging of capacity returning in certain classes and the industry must "ensure discipline is maintained" when the market cycle softens. Levene singled out marine hull as one "area of concern".

He cited the establishment of the Lloyd's Franchise Board as a key achievement in modernising the market. Of controversial franchise performance director Rolf Tolle, Levene said: "He's certainly got my backing."

Levene also pointed to the decision to cut quota share arrangements in 2004 as yet another sign that Lloyd's had become tougher. "We want to ensure that, as the market begins to flatten, syndicates focus on getting the level of permanent capital right."

Levene said the industry faced four challenges : achieving sustainable profits, the changing risk environment, embracing technology and recruiting and keeping the best people.

He said that increasing litigiousness in society underpinned the changing risk environment, and said the industry had a "duty" to fight for the reform of tort and litigation systems. "I believe that the importance of reform cannot be understated," Levene said.

"We will not flinch from taking tough decisions."

Levene said that rather than its past role as market regulator, Lloyd's was now a franchise manager with an active interest in enforcing underwriting standards.