A colossal green statue squashed your main hero to death along with Caed Nua. Goddess Woedica returns hero’s soul from the wheel, literally resurrecting the dead protagonist, if he agrees to pursue the green statue. Sooo it is “some” explanation as to why the hero loses all XP in the sequel

Lol, I don't know how many playthroughs I've had of that game, north of two dozen at least, at that literally never once occurred to me! 100% canon now, as far as I'm concerned