expects the company's stock prices to go up in the next year or two. Mairi Mallon reports XL Capital has been given the thumbs-up by a leading research and investment company, stating the Bermuda insurance giant is in pole position to take advantage of rising reinsurance prices.

The insurance company has kept its `1 Strong Buy' position given by Lehman Brothers and got top marks for coming out on top in a hardening market.

And it said it expected the company's stock prices, which it said were currently depressed, to go up in the next year or two.

It added that the price of reinsurance was going up beyond expectations, and rising between 15 and 25 percent.

In a company update, the investment bank said: "XL Capital is, perhaps, the best positioned large capitalisation insurer to take advantage of rising reinsurance prices among US-listed stock.'' The move comes after Henry Keeling, Chief Executive Officer of XL's reinsurance operations, XL Midocean, spoke at an industry briefing with two other reinsurance industry participants on the pricing environment in property/casualty.

The research said: "Our prediction that reinsurance prices are rising -- much as prices rose in US commercial insurance -- appears to have come true.'' Lehman Brothers said that the overall message from the luncheon held by the AIFA was that the reinsurance market had turned and insurers were paying meaningfully higher prices from January 1, 2001 for their reinsurance.

But the investment bank said that pricing was "disorderly'' and not rising in a uniform way.

It said: "Almost all product lines are still being written at rates inadequate to deliver reasonable returns on equity.

"If anything, the level of rate increases appears to be higher than we expected. We were looking for rate increases such as in US commercial insurance (10-15 percent), but we are hearing that rates are rising more in the 15 to 25 percent range.'' Lehman Brothers added that investor disappointment stemmed from "less-than-elated comments made by many reinsurance participants that, often, are still writing policies at unprofitable rates -- despite rate increases.'' It added that many industry participants were used to traditional `turns' in which capacities crises caused 100 percent-plus overnight rate increases that returned unprofitable reinsurers to profitability.

"We believe that at current depressed stock prices, reinsurers' stock prices, such as XL Capital's, should do very well as price increases slowly turn into higher earnings over the next year or two. Bottom line: The underlying fundamentals of the business are improving.'' Lehman Brothers gave the stock price a target of $95. It currently stands around $75. It has a 52-week range of $89 -- $39 and a market capitalisation of $9.3 billion.

Lehman Brothers also said that the slow price increases bode well for the stronger profitable companies. But it warned that the weak unprofitable reinsurers "will find it increasingly hard to maintain their existence in the market''.

CHART In line for success: XL Capital's Stock Price. Top graph: XL's stock price in the past 12 months. Below: The volume of sales of XL shares in the last 12 months.