Rates for the top levels of reinsurance risks increased in line with market expectations when customers renewed their policies at the end of 2000, but there is still significant ground to make up before prices return to previous high levels, according to Henry C.V. Keeling, president and chief executive officer of XL Mid Ocean Reinsurance (XLMO).

Mr. Keeling's remarks were made during an investment conference call organised by Merrill Lynch & Company yesterday and echoed similar predictions from other industry leaders.

An XLMO statement said the outlook pertained to the general state of the reinsurance market, and did not necessarily reflect the company's operations in excess of loss reinsurance, which is bought by insurers to cover all losses beyond a certain point.

Mr. Keeling said the higher prices reflected changing market conditions and added that in marine, aviation, energy and space specialty lines of business, rate increases had averaged approximately 15 to 40 percent, while analysts said more general lines of business had only experienced increases of ten percent. Mr. Keeling predicted overall rises in resinsurance prices through 2001, possibly at an even higher level if capacity continues to shrink.

Robert Hartwig, the chief economist at the Insurance Information Institute in New York, agreed with Mr. Keeling's prediction and explained that reinsurance prices peaked in 1993 after Hurricane Andrew and steadily declined for the next seven years. During that time, the bull market increased the availability of capital, while a number of reinsurance alternatives entered the arena, adding more capacity and competition for traditional companies. In all, capacity in the sector grew by double-digit percentage rates from 1995 through 2000, while the going rate for coverage fell as much as 40 percent below 1993 levels.

But with a dismal 2000 on Wall Street and a string of disasters, especially in 1999, reinsurers lost much of their capital and were forced to limit their exposure. Extensive share buyback programmes also affected companies' bottom lines and reduced the amount of reinsurance available.

Yet rates were slow to catch up, and reinsurers remained prudent with their risks. Brian O'Hara, president and chief executive officer of XL Capital, MOXL's parent company, threatened to turn down business if pricing did not harden.

Reinsurers hiked premiums for the first time since 1993 following 1999's high payouts and sighed relief as the 2000 season came to an end without any major world catastrophes.

In August, XL announced a 140 percent year-over-year rise in income for the second quarter and said net premiums earned rose almost $90 million to $503.4 million. Mr. Hartwig said reinsurers, which had been paying out an average of $1.12 for every dollar in premium, will be forced to continue increasing rates until Wall Street becomes satisfied with earnings.

The new pricing cycle has piqued investor interest and made reinsurance stocks among the best performers in the market during 2000. Mr. Hartwig said that while reinsurance companies had not met Wall Street's earnings expectations, investors were keen to get in on the ground floor, predicting improved returns on their investments.

Mr. Keeling will expand his comments on market conditions next week in New York at a discussion of the January renewals and the outlook for property and casualty pricing. The event will be sponsored by the Association of Insurance and Financial Analysts.