The task of Lloyd’s insurers may be to provide financial protection to their policyholders but over the past year they have done a pretty good job of protecting their shareholders, too.

The non-life insurance sector is one of the few corners of the stock market that has actually risen in 2008: up 3 per cent, against the 37 per cent slide in the FTSE all-share index. Since the sector’s trough in October, that trend has been even more pronounced: up 25 per cent, relative to the 1 per cent advance of the wider market.

The most tangible sign of that strength came with this week’s promotion of Amlin – now valued at £1.8 billion – to the FTSE 100, the first time in the index’s history that a Lloyd’s vehicle has won blue-chip status. Further down, that pattern was repeated in the elevation of Chaucer and Novae, formerly SVB Holdings, to the FTSE 250.

That progress says much about the peculiar dynamics of the non-life market that serve to insulate it from the wider woes of the financial services industry: whether from banks, asset managers – which they in some ways resemble – or even general and life insurers. But it also demonstrates the extent to which the unusual conjunction of credit crunch and a harsher than expected US hurricane season – a perfect storm, if you like – has played straight into its hands.

Non-life insurance is odd in that it has a cycle that is driven by catastrophe rather than by the economy’s ebb and flow: typically a disastrous event, such as Hurricane Andrew in 1992 or the attacks on the World Trade Centre in 2001, that trigger big payouts to policyholders and huge losses for the underwriters, take capacity out of the market (from the payment of claims and the failure of those insurers not strong enough to take the hit) and, by dint of reduced supply, sends premium rates steadily higher.

That so-called “hardening” of rates boosts insurers’ profitability but also attracts new capital into the industry such that, over time, increased competition for underwriting causes premium rates to fall. So it was that, before the events of this September, nonlife insurers were 18 months into a downturn – the latter end of the cycle started by September 11 2001 – that might otherwise have been expected to run another four years or so.

But that cycle was abruptly reset this autumn. The immediate cause was turbulence in financial markets in the wake of Lehman Brothers’ collapse that left insurers nursing estimated $100 billion losses in their investment portfolios. The casualties included AIG, previously the world’s biggest insurer, which was rescued by the US Government, XL Capital, whose shares lost 90 per cent of their value, and Hartford, which sought an emergency cash injection from Allianz of Germany.

But disaster simultaneously struck elsewhere: in the Gulf of Mexico, where damage from Hurricane Ike proved worse than expected. After two quiet years in the aftermath of Hurricane Katrina, catastrophe losses have suddenly soared again – this year’s losses are now put at $40 billion. The problem is that while insurers might usually be able to replenish their balance sheets with fresh funds, distress in the capital markets means that is not an option. Meanwhile, the weakening of AIG means that there should be less competition for new business.

The upshot is that analysts now predict that premium rates will start to head higher. One harbinger of that trend can be seen in reinsurance markets, where a lack of capacity to back “high level” business – risks of $20 billion and above – has sent rates up between 10 per cent and 20 per cent.

In a heavyweight circular issued this week, Numis Securities said it expects average nonlife premium rates to rise 5 per cent in each of the next two years – a sharp turnaround from an estimated 8 per cent fall in 2008. As a result, Nick Johnson, an analyst, has raised next year’s profit forecasts for the sector by an average 15 per cent, and those for 2010 by a heady 21 per cent.

But how recession-proof can nonlife insurers prove? Tougher times should, in theory, make businesses more risk-averse and more inclined to take out cover for assets they otherwise could not afford to replace. The flipside is that the incidence of insurance fraud tends to rise in a downturn and that severe pressure on cashflows could even cause businesses to cancel their policies. The broader worry is the potential lessening of demand from a slowdown in global trade, a decrease in spending on private sector capital projects and a straightforward decrease in the number of companies through insolvency. Shareholders should also prepare for equity fundraisings from insurers: a process begun by this week’s £130 million share placing by Omega Insurance.

The broader comfort is that Lloyd’s insurers are being helped by a stronger US dollar – the currency in which they do roughly 60 per cent of their business – and that the sector’s share prices typically peak between 18 months to two years after the bottom of the cycle: a point by common consensus that was passed two months ago.

So where to invest? Numis picks out Beazley, Brit Insurance, Hardy Underwriting and Lancashire Holdings – all of which, apart from the latter, also come with a yield.

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