The world's insurance industry is well positioned to survive the catastrophic events of September 11 - and may actually prosper according to a report published by Standard & Poors (S&P) this week.

According to the report - `Global Insurance Remains on Solid Ground Following Terrorist Attacks' - Insurers based in the US account for about 42 percent of current loss estimates, Germany 15 percent, the UK 13 percent, Switzerland 11 percent and Bermuda nine percent.

Director of S&P's insurance analytics team in New York, Don Watson, says in the report: "With capital-raising initiatives underway, we are confident the industry will not only survive, it will prosper going into 2002.

"Depending on new loss activity, we should see a very profitable year in 2002, and 2003 will be well positioned for a profitable performance based on expected rate increases."

The sharing of risk across the Atlantic Ocean accounts for much of the tenacity insurance ratings are showing, and Christian Dinesen, a director at S&P's Financial Services Ratings said: "European insurers, and particularly reinsurers, carry almost half of the current net loss estimates.

"This shows the inherent strength of the global insurance system, which has the ability to spread what is certainly the largest ever insured loss over a wide range of international reinsurers and insurers."

Mr. Watson notes that the 20 insurers and reinsurers with the greatest exposure to September 11, together accounting for about 80 percent of total loss estimates, command almost $300 billion in capital.

None is rated below the `A' category (strong), and none has exposure large enough to threaten its solvency.

Although some additional downgrades may follow the six that have occurred since the World Trade Center collapsed, the overwhelming majority of exposed companies are expected to maintain secure financial strength ratings. "We're seeing a handful of lower ratings and reduced capacity to shoulder another catastrophe, but the limited impact on ratings from this terrorist attack reflects the overall capital strength of the industry," said Mr. Watson.

In the wake of September 11, S&P has placed 23 insurance entities on CreditWatch, but Mr. Watson expects some of these to be resolved with an affirmation of the rating that existed prior to the attack, largely reflecting the successful efforts of insurers to raise capital.

A number of property/casualty and reinsurance companies are seeing their highest stock prices ever and are busy selling securities to raise capital. Hartford Financial Services Group Inc. was one of the first to do so with a $400 million equity offering.

To date, more than $5 billion has been earmarked for Bermuda-based insurance entities, notably XL Capital Ltd., ACE Ltd., and PartnerRe Ltd., along with three startup insurance operations.

Renaissance Re has created DaVinci Re Ltd., Marsh and McLennan have created Axis Specialty Ltd., and Arch Capital Group have created Arch Re.

Insurers American International Group Inc., and Chubb Corporation and investment bank Goldman Sachs are also preparing to set up a new Bermuda-based venture with $1 billion in capital.

This repeats the pattern of Hurricane Andrew (1992) and the Northridge Earthquake (1994), which together led to the successful creation of eight property/casualty startups which together raised about $5 billion.

In total, Mr. Watson expects up to $10 billion in new capital to flow into the insurance industry in the next six months, although he doubts Bermuda-based startups will fare as well as in the previous market turn, citing relocation difficulties and the strong level of capacity that remains among property/casualty insurers despite the industry's record losses.

The S&P report says that while the media and industry pundits continue to play a guessing game with regard to overall insurance losses, a top-down mentality, S&P tallies losses from the ground up, using insurers' net estimates. By this approach, the sum of net exposures stood at about $22 billion as of October 29, 2001- a total that has changed little in the past few weeks, with property/casualty companies accounting for about $7 billion of these losses and reinsurance companies for about $13 billion.

Ratings agency Fitch believes that many insurance companies that suffered losses from the events of Sept. 11 are planning to replace lost capital with new equity and hybrid equity offerings.

Fitch has published a new criteria report entitled `Hybrid Securities: Evaluating the Credit Impact' that discusses the impact of hybrid securities on an issuer's credit ratings and overall financial profile.

Hybrid securities combine features of both debt and equity and include a host of security types including traditional preferred stock, optionally convertible debt and preferred stock, mandatorily convertible securities, and instruments with deferrable interest and dividends such as trust preferred stock.

In the report, Fitch analyses the debt-like or equity-like features of a hybrid security based greatly on the cash flow flexibility provided to the issuer and provides examples of adjustments to credit ratios for different types of hybrids. On the Web: www.standardandpoors.com and www.fitchratings.com.