An XL Capital subsidiary, XL Mid Ocean Reinsurance, is one of six reinsurers being sued by Lloyd's of London as a result of claims arising from the loss of the World Trade Centre on September 11, 2001.

Lloyd's central fund faces being depleted by up to ?290 million ($460 million) because six reinsurers, including XL Mid Ocean Reinsurance, have refused to pay claims from the World Trade Centre attacks.

The London insurance market revealed its dispute with Swiss Re, Employers Re, St. Paul, Hannover Re, US insurer Chubb and XL Mid Ocean Reinsurance, as the first projection of Lloyd's 2002 profits came in at a record ?1.48 billion ($2.3 billion). It is the first time Lloyd's has made a profit since 1996.

Lloyd's, which now expects to lose ?2.4 billion ($3.8 billion) for 2000 and ?1.65 billion ($2.6 billion) for 2001, is taking the dispute to binding arbitration. It warned that if nothing more were recovered, its central fund would fall from an expected ?812 million ($1.3 billion) to ?522 million ($835 million) by the end of this year.

Lloyd's chief executive Nick Prettejohn said: "?290 million is the worst case. If we fail to make any recoveries, this is as bad as it can get. But we are confident of our position, given that the central fund will still be very strong."

Excluding the amount in dispute, Lloyd's said its central fund would still be three times as high as at the end of 1999, when it held ?154 million ($246 million). The fund is the last reserve if syndicates run out of money. Lloyd's chairman Lord Levene said he was disappointed by the dispute but was very confident of Lloyd's case.

Mr. Prettejohn added: "We do not fundamentally regard this as our problem. There is a contract; it is a lawyered contract; the wording of the contract is crystal clear; and the nature of the contract has been in the public domain for the past four years. Before the World Trade Centre, we did not think we would claim on the policy but that was exactly the sort of occurrence that we paid the premiums for."

Lloyd's took out the five-year reinsurance policy in 1999 at a cost of ?78 million ($125 million). The policy protects the central fund against unrecovered losses of more than ?100 million ($160 million) up to ?500 million ($800 million) in any calendar year.

Lloyd's claimed the maximum of ?350 million ($560 million) in respect of 2002, when it had a flood of late claims from September 11. However, the reinsurers have paid out ?134 million ($214 million). That leaves ?216 million ($346 million), which Lloyd's said could increase to ?290 million ($460 million) as claims came through this year.

Swiss Re, the lead reinsurer on the policy with 32.5 per cent of the underwriting, said: "The reinsurers entered into the contract to pay policyholders' claims in the event that a Lloyd's syndicate became insolvent and the central guarantee fund was unable to do so.

"Lloyd's has submitted claims for discretionary payments from the central guarantee funds used to protect members' solvency and to fund liquidity requirements, particularly in the United States. This is not the purpose for which the insurance cover was intended and, as such, the reinsurers strongly dispute these claims."

Separately, Lloyd's has announced details of its return to profitability during 2002.

Under its new annual accounting system, the world's oldest insurance market recorded a profit of ?834 million ($1.3 billion) for the year.

Lloyd's, which traditionally reports its results on a three-year basis, credited its performance to a combination of steep increases in insurance premiums, very low claims and disciplined underwriting by the market.

It is the first time the market has made profit since 1996. Lloyd's recorded a loss of ?3.11 billion ($5 billion) for 2001, following the September 11 terrorist attacks and other catastrophes including the Petrobras oil rig accident and the attacks on an airport in Sir Lanka.

Mr. Prettejohn said: "These results demonstrate a very strong performance. It was the market's resilience and disciplined approach, at a time when the industry as a whole has faced many difficulties, that generated 2002's healthy result."

Lloyd's switched to reporting its results on an annual basis last year as part of a programme of reforms aimed at modernising the market and making it more transparent and easier to compare with other major insurance centres, such as Bermuda.

Other changes included introducing a new franchise structure to the market and phasing out the number of Names (private individuals) who backed the market with unlimited liability. Mr. Prettejohn said Lloyd's had outperformed its international peers, with a combined ratio for 2002 of 98.6 percent. This means that for every ?100 in premiums Lloyd's took in, it paid out ?98.60 in claims and costs.