Profits for Lloyd's insurers may be on the verge of a decline according to Keefe, Bruyette & Woods.
The company said that although underwriting conditions have been benign in the first half, it sees adverse currency movements, bond losses and higher reinsurance costs as likely to cause first half profits for 2006 from the Lloyd's insurers to be below the "excellent" results seen in the first half of 2005.
Keefe, Bruyette & Woods, said: "The key to full year outcomes, in our view, will be claims experience in the second half. However, pricing conditions in 2007 probably depend on this rather less than the market believes – or is discounted in current cautious share ratings."
Keefe, Bruyette & Woods expects the Lloyd's insurers to report an average combined ratio of 87% for the first half of 2006, 3 points worse than the 84% for the corresponding period in 2005.
It said: "2005 gained not only from high prices and benign claims conditions but also, for many insurers, significant releases from 2003 and 2004 account reserves.
"Prices have been generally high in the first half of 2006 and, while reinsurance costs have risen, claims conditions were as good.
"We do not see material additions to 2005 hurricane reserves, as has been the case for Bermudans. However, we doubt that the first half of 2006 will see 2005's level of prior year releases. This may leave underwriting results trailing.
The report concluded: "Updates on rating trends should confirm that increases accelerated since the spring renewals. With capacity driven by nervous rating agencies, the hard market in catastrophe-impacted classes is likely to be sustained into 2007 irrespective of how hard the wind blows over the next few months. More credible 2006 and 2007 book value forecasts will demonstrate value."
