No major natural disasters in the past two years helped send annual profits at Lloyd's of London soaring to £3.85 billion today, but the world's largest insurance market warned that 2008 will be a tougher year.

Chief executive Richard Ward said "favourable underwriting conditions" had helped fuel the rise in profits, up 5% from £3.66 billion in 2006. Investment returns rose 21% to £2 billion.

Ward cautioned that underwriters at Lloyd's are already seeing a softening of rates as the global economy slows, which is having a knock-on effect. He added: "The entire insurance industry expects it to be tough in 2008." Analysts have also warned that profits may suffer as more insurers have flocked to Lloyd's to compete for business.

Lloyd's increased its insurance rates in the wake of Hurricane Katrina, which hit New Orleans in 2005, but since then it has not had significant exposure to any major global catastrophe.

Ward warned that it was inevitable there would be another disaster at some point, although he said the floods across England last summer had not had a dramatic impact on Lloyd's.

He admitted that the financial turmoil in the US was having an impact.

About 40% of its underwriters' income from premiums comes from the States. However, he said Lloyd's had virtually no risk associated with subprime investments and only "limited" exposure to insurance claims.

Finance director Luke Savage added that Lloyd's had reduced its exposure to US financial institutions in the wake of the Enron scandal and the bursting of the dot-com bubble.