Outsized profits managed by Bermuda-based primary insurers and reinsurers in the last decade will inevitably drop this year in light of falling rates in the marketplace, a major reinsurance brokerage has concluded.

The findings are contained in the Guy Carpenter & Company LLC Managing Prosperity: 2008 Bermuda Update Report, which said the 18.4 percent return on equity and 14.2 percent increase in capital last year, by the 25 companies studied, is a "high hurdle" for the coming year.

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

Matching the past performance given the current softness in insurance and reinsurance markets is "a daunting proposition," Guy Carpenter said.

Cliff Rich, managing director and head of market information at the firm, commented, "The low catastrophe losses we witnessed in 2006 and 2007 have caused balance sheets to swell, but on the other hand, the opportunities to deliver the outsized returns that investors desire have nearly vanished."

"Assuming current market conditions remain, the profit rate of Bermudian companies will almost certainly decline in the coming year, and Bermuda-based entities will face new challenges in an era of more modest returns," he added.

The report said gross written premiums for Bermuda companies in 2007 grew at a modest pace of 5.1 percent.

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

Guy Carpenter Chief Economist Sean Mooney said to maintain their current rates of return Bermuda companies would need to substantially increase earnings and, "While the low level of insured losses from catastrophes certainly played a key role in delivering strong financial results in 2006 and 2007, it is unrealistic to expect a third benign catastrophe year in a row," he warned.

Among the report's other key findings:

o Reinsurance sidecar use dropped in Bermuda in 2007, as rates declined from the record highs of 2006, discouraging the entry of new reinsurance capacity into the industry. Sidecars, which facilitate the flow of capital into and out of reinsurers without disrupting balance sheets, may regain prominence if catastrophe losses increase or the market hardens.

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

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

Comparing the individual companies, Guy Carpenter said that in 2007 more than 50 percent of the gross written premium by the Bermuda Composite companies studied was for primary insurance. It said ACE accounted for 28.3 percent of the Bermuda Composite, and XL Capital had a 12.9 percent share.

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

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

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

Special Reports /

Bermuda Profits Will Drop This Year Says Guy Carpenter

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