Outsized profits managed by Bermuda-based primary insurers andreinsurers in the last decade will inevitably drop this year inlight of falling rates in the marketplace, a major reinsurancebrokerage has concluded.

The findings are contained in the Guy Carpenter & CompanyLLC Managing Prosperity: 2008 Bermuda Update Report, which said the18.4 percent return on equity and 14.2 percent increase in capitallast year, by the 25 companies studied, is a "high hurdle" for thecoming year.

After a ten-year record of outperforming the Standard &Poor's 500 in generating shareholder value--driven by low taxrates, experienced executives and a friendly regulatory regime--theBermuda market faces significant challenges to prosperity in 2008,the report concluded.

Matching the past performance given the current softness ininsurance and reinsurance markets is "a daunting proposition," GuyCarpenter said.

Cliff Rich, managing director and head of market information atthe firm, commented, "The low catastrophe losses we witnessed in2006 and 2007 have caused balance sheets to swell, but on the otherhand, the opportunities to deliver the outsized returns thatinvestors desire have nearly vanished."

"Assuming current market conditions remain, the profit rate ofBermudian companies will almost certainly decline in the comingyear, and Bermuda-based entities will face new challenges in an eraof more modest returns," he added.

The report said gross written premiums for Bermuda companies in2007 grew at a modest pace of 5.1 percent.

Underwriting profits were strong for the sector in 2007, with acombined ratio for the group studied by the brokerage recording arecord low of 84.9 percent.

Guy Carpenter Chief Economist Sean Mooney said to maintain theircurrent rates of return Bermuda companies would need tosubstantially increase earnings and, "While the low level ofinsured losses from catastrophes certainly played a key role indelivering strong financial results in 2006 and 2007, it isunrealistic to expect a third benign catastrophe year in a row," hewarned.

Among the report's other key findings:

o Reinsurance sidecar use dropped in Bermuda in 2007, as ratesdeclined from the record highs of 2006, discouraging the entry ofnew reinsurance capacity into the industry. Sidecars, whichfacilitate the flow of capital into and out of reinsurers withoutdisrupting balance sheets, may regain prominence if catastrophelosses increase or the market hardens.

o Though the Bermuda Composite retention ratio increased in theearly years of the decade, reflecting the harder market conditions,it has remained relatively flat since 2005. A shortage ofretrocessional capacity has been among the factors impacting theretention of premium.

o Gross written premium and net written premium for Bermudacompanies grew by a moderate 5.1 percent in 2007 to $67.6 billion,continuing a slow growth trend that began in 2005 and is consistentwith worldwide trends. Gross written premium growth occurred in theprimary insurance sector of the Bermuda Composite, which was up 9percent from 2006 to 2007. Reinsurance, by contrast, waseffectively flat with a modest 0.2 percent growth declineyear-over-year.

Comparing the individual companies, Guy Carpenter said that in2007 more than 50 percent of the gross written premium by theBermuda Composite companies studied was for primary insurance. Itsaid ACE accounted for 28.3 percent of the Bermuda Composite, andXL Capital had a 12.9 percent share.

It noted that both are concentrated in the primary insurancesector and for ACE 81.5 percent of written premium is in theprimary insurance sector comprising 40.8 percent of the BermudaComposite's primary insurance premium written.

Sixty-six percent of XL Capital's written premium is in theprimary sector, constituting 15.1 percent of Bermuda Compositeprimary insurance premium written, the report said.

A full copy of the report can be downloaded atwww.guycarp.com.