Leading US analysts have predicted that a hardening reinsurance market will drive Bermuda insurance giant XL Capital's earnings higher this year.

The Lehman Brothers investment thesis, compiled by analysts, said they were maintaining their "1 Strong Buy" rating on shares of XL Capital following their first quarter earnings for 2001.

The analysts, Paul Newsome, Robin Albanese and Vincent Foley, said they believed investors will pay more for XL's shares "as evidence emerges... that the reinsurance market is indeed hardening in 2001 and as XL reports strong earnings in line with expectations."

The analysts kept a 12-month price target at $95 a share for XL. The market range for the past year has been a high of $90 and a low of $49.

The report said: "XL reported that prices in all of the businesses (both reinsurance and insurance) were rising sharply. The price increases vary substantially by segment, with property coverage prices rising first and currently more quickly and liability coverage prices beginning to rise more slowly so far."

The analysts said that XL's experience squares with what most of the companies covered by Lehman and their industry contacts suggest.

But they added: "XL appears to be seeing slightly higher prices than other companies."

Lehman continued to peg the general rise in reinsurance prices at 15 to 20 percent, which is higher than those seen recently in commercial which the analysts put at between ten and 15 percent.

XL did well with reinsurance prices rising between 15 and 25 percent.

The analysts added it was "... a clear positive factor if true since it would indicate that the nature of XL's book makes it better available to leverage the improved market."

Lehman also said that the company's stock remained inexpensive by XL's standards. It said that currently shares trade at 165 percent of book value, but their target price is 200 percent.

But the analysts said that the better-than-expected quarter was slightly offset by weakness at XL's Lloyds operation that it says is suffering from worse-than-expected claims loss development from years past.

They added: "The recognition that lower interest rates depress the growth of XL's net investment income since its positive cash flow is being reinvested at lower rates; lower rates are a double-edged sword since they benefit book value, but hurt reinvestment rates."

They said that if they had heard only the good news, they would have considered raising their estimates, "but the offsetting problems at Lloyds and low interest rates have led us to maintain our estimates."

The report added: "If we were pushed to make a comment on the quarter with respect to our estimates, we would say that we feel more confident today about our estimates than we did before the conference call."

The report was based on the first quarter earnings in which XL's operating earnings per share of $1.24, compared to a consensus estimate of $1.23.