LONDON (Bloomberg) — Lloyd’s of London, the world’s biggest insurance market, returned to profit in 2006, helped by lower claims and higher rates for hurricane coverage.Pretax profit last year was $3.7 billion ($7.3 billion), compared with a loss of $103 million in 2005, Lloyd’s said in a statement yesterday. Rates increased for property and energy risks in regions hit by hurricanes, while rates outside the US are under pressure, Lloyd’s said.

Founded 319 years ago, Lloyd’s started a programme in 2005 to modernise underwriting and control costs to keep business from migrating to Bermuda, where taxes and regulation are lower.

Bermuda’s reinsurance market boasted net income of $11.6 billion in 2006 according to Benfield’s Bermuda Quarterly.

Lloyd’s, which boosted gross premiums by 9.6 percent to $16.4 billion in 2006, will use electronic processing for all new business claims by the end of this year, and for new policies by 2009, the company said yesterday.

“We are not creating an electronic market,” said chief executive officer Richard Ward in an interview. “We are improving business processes.” Lloyd’s now processes a fifth of claims and a quarter of new policies electronically, Ward said.

US and wind-storm underwriting will fuel increased profit this year, Lloyd’s said. “We are still seeing strength in that class of business,” Ward said.

On the other hand, non-US property and casualty insurance and aviation are coming under pressure, said finance director Luke Savage in an interview.

“The biggest challenge Lloyd’s faces is managing the downturn in premium rates, which are coming off, and making sure people don’t write too much business,” Geoff Miller, an analyst at Bridgewell Securities in London, said yesterday.

Lloyd’s completed a reinsurance agreement this week to limit the potential asbestos claims that threatened its existence in the early 1990s. Warren Buffett’s Berkshire Hathaway Inc. assumed as much as $7 billion of risks held by former investors in Lloyd’s of London, whose financial-strength rating rose one level to A+ at Fitch Ratings yesterday following completion of the deal.

In return, Berkshire Hathaway is paid a premium and gets the $8.7 billion already set aside for claims by Equitas Inc., established by Lloyd’s to protect it from claims before 1993.

The combined ratio at Lloyd’s, or claims and expenses as a percentage of premiums, declined to 83.1 percent in 2006, from 111.8 percent in 2005, the market said. The lower the combined ratio, the more profitable an insurer’s underwriting.

Lloyd’s profit was hurt in 2005, when hurricanes Katrina, Wilma and Rita contributed to the worst-ever season. Lloyd’s loss in 2005 was the first since the terrorist attacks in 2001. In 2006, an absence of storm claims brought Lloyd’s combined ratio to the lowest in at least five years.

“2006 was an exceptional year, 2005 was an exceptional year,” Ward said. Lloyd’s doesn’t expect a repeat of 2006’s unusually benign hurricane season this year.

“Initial predictions indicate that the 2007 hurricane season will be more active than average,” Lloyd’s said in the statement. It forecasts “a relatively high probability of a major hurricane making landfall in the US and an above average chance in the Caribbean.”

Ward acknowledged the difficulty that Lloyd’s faces in competing against Bermuda. In the last year, Lloyd’s insurers such as Kiln Plc and Hiscox Plc have moved their headquarters to Bermuda to pay lower taxes.

“We can’t compete with a zero percent tax rate,” Ward said. Still, Lloyd’s can make itself more competitive, he said.

“We need to accelerate the pace of change,” Ward said in the statement. “We recognise that underwriters, brokers and policyholders have a choice as to where they operate.”

Atrium Underwriting Plc, a Lloyd’s insurer, said today that profit last year rose almost fourfold to $32.2 million, as claims from natural disasters declined.

Lloyd’s, which began as a place where merchants, ship owners and captains exchanged shipping news, now has member syndicates that insure everything from satellites, art and jewellery to commercial buildings and aeroplanes.

Lloyds, which plans to expand into the Middle East and India, will open an office in Shanghai next month to sell reinsurance. “China is an extraordinarily fast-growing economy,” Ward said. “We do recognise we need to have a presence in China. It is early days.”

Ward was paid $703,000 in 2006, his first year at Lloyds. Chairman Peter Levene’s pay rose 1 percent to $665,000. The highest paid director was Rolf Tolle, who received $1.1 million in 2006, a 12 percent increase.

Lloyd’s expenses rose 18 percent last year to $4.3 billion, and its solvency ratio, a measure of financial strength, jumped to 785 percent from 384 percent.