This week’s launch by Lloyd’s of London of a strategic review — its biggest for seven years — provides the latest indication of upheaval among the world’s biggest insurers.

By most measures, Lloyd’s has had a good credit crunch. The failure of AIG, once the sector’s behemoth, and the travails of XL Capital, the Bermudan reinsurer that is carrying $4 billion (£2.5 billion) of unrealised losses, has enabled the 320-year-old London institution to steal a march on its transatlantic rivals.

The strengths of its subscription-based model — which spreads risk across numerous counterparties — has come to the fore at a time when buyers of insurance are wary of tying up too much business with a single entity. Equally, Lloyd’s reputation and capital strength remain intact.

Even so, Richard Ward, Lloyd’s chief executive, says he is keen to ensure the market is doing all it can to take advantage of changed circumstances, and has brought in Deloitte to provide external advice.

Shareholders in the dozen or so quoted brokers and underwriters that are connected to Lloyd’s might also pause for thought. Non-life insurers were one of the few corners of the stock market actually to rise in value last year, outperforming the FTSE all-share index by nearly 40 per cent in 2008. However, since the start of the year, the one-time leader has become its conspicuous laggard, falling 13 per cent since January against the 4 per cent drop in the wider market. In confirmation of that reverse, Amlin, the first Lloyd’s insurer to secure blue-chip status, was last month ejected from the FTSE 100 index after a stay of just six months.

But if investors are looking to the forthcoming half-year results season — opened by Beazley on July 27 — to lift sentiment, such hopes would appear forlorn. That’s not least because this year’s numbers are set to be marked by heavy foreign exchange losses.

America accounts for about 60 per cent of Lloyd’s business, which meant that, under industry accounting standards, last year’s strong advance of the US dollar against sterling produced substantial currency gains — both in premium income and the value of the dollar-denominated holdings with insurers’ investment portfolios. Now that sterling has recovered some of its ground, such gains have turned to losses. Royal Bank of Scotland points out that the impact is non-monetary, rather than a cash item, but concedes that swings in year-on-year reported pre-tax profits will create unhelpful “noise” around half-year numbers — with the exception of Catlin Group and Lancashire Holdings, both of which report in US dollars.

Neither is there likely to be much evidence of an improvement in insurers’ underlying investment returns. True, the drag from equities, corporate bonds and hedge fund assets that hit last year’s returns so hard — and pushed Chaucer into a £26 million loss — has moderated after the recent stabilisation in financial markets. However, paltry returns from so-called “risk free” assets, such as cash and government bonds, means that investment yields at the half-year stage are likely to be stuck in the very low single digits — around 2 per cent, on most estimates.

Finally, premium rates — the other key determinant of an underwriter’s profitability — have stubbornly failed to rise at the pace that was predicted at the end of last year. Although the June and July renewals season has witnessed increases of about 15 per cent in the reinsurance of some big-ticket catastrophe losses, most lines of business, including the closely watched casualty market, remain little better than flat on the year. Seasoned observers claim that the insurance cycle rarely turns swiftly. This time round, the lack of across-the-board rate rises can be partly pinned on AIG, which has competed more aggressively than expected to hang on to some of its traditional lines, such as US property cover. Then there are the straightforward effects of recession.

Although the flight of capital from the sector since last autumn has caused underwriting capacity to fall around 15 per cent year-on-year, tougher times have meant that demand for insurance has fallen too. Not only are there fewer companies doing less business, but the pace of trade in many insurance-dependent activities — such as shipping and private sector construction — has slowed markedly.

If investors have been unwilling to chase non-life insurers higher, that is also because of a plentiful supply of fresh equity in the first six months of this year that has served to blunt demand: nearly £700 million in rights issues and share placings, including Amlin’s recent fundraising to acquire Fortis Corporate Insurance.

Seasonal factors are also at work. The sector can tend to drift during the summer months as investors hold off buying ahead of the conclusion of hurricane season. However, as Numis Securities points out, extremes of storm activity produce a “win-win” situation: large hurricane losses tend to send rates higher, while no hurricanes have a beneficial effect on earnings.

The frustration for investors is that, on current trends, it will not be until next year that stronger premium rates start to feed through. The consolation, through the sector’s hefty dividend yields, is that they are at least getting paid while they wait.

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