For the 1988 accident year, loss reserves showed a full 16 points of favorable development from the initial report to its ultimate resting place of a loss ratio in the high 50s, he explained.

And Mr. Wilt suggested that there are meaningful parallels between 2003 and 2004 and 10 to 14 years ago.

Further, there are "a host of macro factors that we think are going to drive that loss ratio down and keep it down?at least arguably, for a couple of years," Mr. Wilt added.

He said these macro factors include rating agency downgrades, increased focus on creditworthiness, new management in the reinsurance sector, and continual pressure from the rating agencies to show capital increases and underwriting discipline.

As a result, Morgan Stanley thinks "the casualty excess of loss cycle is going to last longer and prove more profitable," which is not being reflected in stock prices, Mr. Wilt said.

Vinay Saqi, vice president, with Morgan Stanley, said casualty players tend to benefit during the latter stages of the cycle. Reserve deficiencies within casualty reinsurance tend to work their way though the system slowly due to time lags in reporting, he said.

As a result pricing for these products tends to pick up with a lag as well, which means earnings growth from the sector will show up in later years, Mr. Saqi said.

During the last two years, a lot of the reserve deficiencies have come through for the reinsurers and the primary companies alike, Mr. Saqi said.

Looking forward to 2004 and 2005, some of the stronger companies should benefit from the rate increases that they've put forth in the last two years, he said.

After the last hard market in the mid-1980s, casualty-oriented insurers and reinsurers performed better "from 1986 though the beginning of the 1990s," he said. These were companies like AIG, Chubb and General Re?all of them did better relative to other insurers and reinsurers, he added.

Despite the positive fundamentals for the strongest reinsurers, Espen Nordhus, executive director with Morgan Stanley, emphasized that stock prices have not responded accordingly.

"Clearly there are other issues around but it's safe to say the market has not really gotten very excited about this upswing," he said.

"We dispute the apparent market conclusion that for want of a better phrase, it's all over for reinsurance stocks in Europe," said Rob Proctor, managing director, for Morgan Stanley in London. "In fact, we believe pretty much the converse may be the case, in that, for the first time in many years?, 2004 could be a strong year for earnings, given [the convergence] of both good underwriting results and also a stabilization and arguably an improvement of investment results."

Reinsurers, at this point in the cycle, benefit from several leverage effects, versus the exposure of the primary industry, he said.

He pointed to the aftermath of the hard market in 1988 to 1991, when reinsurers had loss ratios at around 10 points lower on average than the primary insurance industry, which could lead to a theoretical combined ratio of 80 percent for some European reinsurers.

While he didn't expect European reinsurers to publish or print combined ratios as low as 80 (due to inherent reporting lags), it "does demonstrate the potential scale of the positive surprise here."

Mr. Proctor said Morgan Stanley is estimating an average combined ratio of around 97 for the European reinsurers next year, while it is expecting combined ratios in the area of 93 in the United States. "Roughly a 3-point surprise in combined ratios can equate to up to 30 percent in terms of earnings surprise."

The leverage effects on the reinsurance industry were discussed in a recent reinsurance report issued by Morgan Stanley on Oct. 1.