NEW YORK (Dow Jones Newswires) - Rate increases appear to be slowing in property-insurance lines, and underwriting discipline may be deteriorating somewhat, particularly among reinsurers, according to a new Williams Capital Group report.

In a research note on Monday, Williams Capital insurance analyst Chris Winans said anecdotal evidence is emerging that the "hard market" - a period of rising rates and tighter underwriting - may have peaked.

"The challenge for insurance investors is to pick individual names that are best positioned to enter the next soft market with an ability to grow earnings and maintain double-digit (returns on equity)," Winans said.

"Insurers that have yet to put up adequate reserves for underpriced exposures from the 1990s are the least attractive, in our view." Winans said the marketplace during the January renewal season appears to be increasingly competitive, particularly in property lines.

Also, at least one reinsurer has told Winans there is too much capacity in the marketplace, and a primary insurer said reinsurers have been willing to quote coverage for nuclear, biological and chemical events - an area many have said is uncoverable, he said.

"One of the largest top-rated reinsurers tells us its effort to focus on limiting exposures and getting higher rates is being hampered by the rest who are scrambling to put on as much new business as possible," Winans said.

"In the rush to grow the top line as long as the hard-market window stays open, many of the newer players in the reinsurance market are reviving the 1990s practice of adding in certain coverages for free - particularly terrorism-related risks excluded under the newly enacted federal Terrorism Risk Insurance Act." One underwriter told Winans that the nice thing about this stage of the cycle is that he can write all the business he wants, knowing he'll be retired or dead when his pricing mistakes come to light.

Winans said new capacity in Bermuda may be the major reason for a disappointment in pricing.

Reinsurers will likely fall into one of two groups in the next 18 months - those that limit their risk to achieve higher rates of return, such as Munich Re and Berkshire Hathaway Inc.'s (BRKA, BRKB) General Re, versus those that are willing to take riskier bets, he said.

"Historically, this second group has tended to ruin it for the first group," Winans said. "In the 1990s, even the most disciplined reinsurers caved in rather than lose huge chunks of business."

At the same time, primary insurers are maintaining more risk than they have in the past to save money. However, they too don't expect 2003 rate hikes to match those in 2002.

As an example, Philadelphia Consolidated Holding Co. (PHLY) said last week that rates will likely rise 5 percent to 15 percent in 2003, compared with 15 percent to 20 percent hikes in 2002, Winans said.

The company said it was able to renew most of its reinsurance without increasing its costs and will retain the first $2 million of 2003 property-catastrophe loses, compared with retaining $500,000 a year ago, he said.

"The question is whether Philadelphia Consolidated and other primary insurers are reducing their own exposures and increasing rates enough to cover increased risk retention," he said.

Winans doesn't own any insurance stocks.