OLDWICK, N.J.—The U.S. property/casualty insurance industry's first-quarter net income dropped 87% to $1.2 billion as underwriting losses and investment returns dragged down results, a rating agency said Friday.

Net income for commercial lines dropped 52.9% to $1.6 billion in the first quarter of this year compared with the same quarter last year, A.M. Best Co. Inc. said in a special report to be released Monday.

Net premiums written for commercial lines fell 7.8% to $46 billion in the quarter, the Oldwick, N.J.-based rating agency said. Underwriting losses decreased from $1.5 billion in the first quarter of last year to $500 million in the first quarter of this year.

Policyholder surplus dropped 14.6% to $197.6 billion, according to the report.

This year “is shaping up to be another challenging year,” Best said of its overall outlook for the U.S. property/casualty industry. “Unfavorable economic, investment and underwriting environments are expected to continue straining underwriting and operating results through the remainder of the year.”

Despite the industry's challenges and barring major catastrophe losses, Best projects the commercial lines segment—excluding mortgage guarantee and financial guarantee insurers—still will post an underwriting profit this year.

However, margins likely will face continued pressure from premium erosion, loss-cost inflation, losses in the mortgage and financial guarantee segments, and capital market volatility, the report said.

Copyright © 2009 Crain Communications, Inc.