The Lloyd’s of London insurance market posted a decline in headline first-half profit after falling bond prices hit investment returns, offsetting robust trading by its members.

In a trading statement on Thursday, Lloyd’s said that investment returns fell to 247 million pounds ($397 million) from 619 million pounds in the same period last year, citing “continued challenging economic conditions.”

In an interview with Reuters, Chief Executive Richard Ward attributed the investment loss in part to falling bond prices.

Bonds have fallen and their yields rose this year as investors anticipated a winding down of the U.S. Federal Reserve’s bond-buying programme, introduced to stimulate the economy after the financial crisis.

“On our bond portfolio, a slight rise in yields … led to a mark-to-market writedown on our capital. Over time that will be reversed out,” said Ward, who steps down as CEO at the end of the year.

Lloyd’s financial performance represents the combined results of more than 80 competing insurance and reinsurance syndicates that operate under its banner, writing business in its modernist building in the City of London.

Listed companies that operate syndicates at Lloyd’s include Catlin, Hiscox and Amlin.

Headline profit for the Lloyd’s market was 1.38 billion pounds, against 1.53 billion pounds in the first half of 2012.

Ward called the economic environment “quite a difficult situation,”highlighting sluggish economic growth in established western markets while emerging economies are slowing.

The combined ratio, a measure of profitability showing how much insurance premium income is paid out in claims and expenses, improved to 86.9 percent from 88.7 percent in 2012.

Gross written premiums were up 5 percent at 15.5 billion pounds.

Analysts have warned that some Lloyd’s members are likely to have profits squeezed by a glut of capital put into insurance-linked products by investment funds seeking higher yields in the current low interest rate environment.

The money is flowing into assets such as so-called “catastrophe bonds,”sold by insurers to share the risk they take on for natural disasters.

However, the trend is leaving the industry awash with capital at a time when demand for insurance is sluggish because of the weak global economy, driving down prices and potentially hitting profits.

Ward said that growing demand from developing markets will ease the problem in the longer term and that downward pressure on pricing will ease in time.

“Everybody’s looking for the emerging markets to generate that demand, but it’s a slow burn,” he said.

Lloyd’s chairman John Nelson warned this month that the flood of investment capital into structures linked to insurance could lead to instability and spark a new financial crisis if left unsupervised.