Net income for the U.S. property-casualty insurance sector plummeted nearly 50 percent in the first quarter of 2008, undermined by a net loss on underwriting, unusually high catastrophe losses and deteriorating investment results, two industry groups reported last week.

U.S. p-c net income was $8.2 billion for the quarter–down 49.3 percent from $16.2 billion in 2007, according to consolidated industry results reported by the Insurance Services Office Inc., in Jersey City, N.J., and the Property Casualty Insurers Association of America, based in Des Plaines, Ill.

A big factor was a $561 million net loss on underwriting, compared to $8.3 billion in net underwriting gains in the first quarter of 2007. As a result, the industry's combined ratio rose sharply to 99.9 from 91.7 in the first quarter of 2007.

ISO and PCI said the combined ratio is the highest for any first quarter since 102.2 in 2002, reflecting “imbalances between the declines in premiums and the increases in the costs of providing insurance.”

The industry's bottom line took another hit thanks to a weaker investment portfolio, with gains declining 18 percent–down $2.8 billion, to $12.2 billion, ISO and PCI noted.

An increase in insurers' holdings was more than offset by a decline in the annualized yield on their portfolios, according to David Sampson, PCI's president and chief executive officer.

“We may see further declines in investment income if softening prices in insurance markets cut into premiums and the new cash available to fund growth in investment portfolios,” he added.

Mr. Sampson said that weakness in the economy and problems in the credit markets may prompt the Federal Reserve Board to cut interest rates further, lowering returns on the industry's investment income.

Deterioration in results for mortgage and other financial guaranty insurers also hurt p-c industry results, according to Michael R. Murray, ISO's assistant vice president for financial analysis.

PCI and ISO also cited $3.4 billion in catastrophe losses through the quarter–the highest amount for any first quarter since 1994, when $12.5 billion in losses from the Northridge, Calif., earthquake sent the quarter's total soaring to $14.5 billion.

The softening market had its impact as well, with net written premiums actually falling nearly $800 million, to $110.5 billion in the quarter. Mr. Murray noted that written premiums have “now declined versus year-ago levels for four successive quarters. This is absolutely unprecedented based on ISO's quarterly data extending back to 1986.”

The p-c industry's annualized rate of return fell to 6.4 percent, down substantially from the 13.2 percent rate reported in 2007's first quarter, as well as 2005's 17.9 percent.

Still, it might not be as bad as it looks from the industrywide figures, according to an analysis by Robert P. Hartwig, president of the Insurance Information Institute.

Indeed, fallout from the housing collapse and the credit crunch on the mortgage and guaranty segments of the p-c industry have driven the negative results for the quarter, noted Mr. Hartwig. “Excluding this segment reveals a much more modest decline in profitability, more in keeping with the pace normally associated with cyclical downturns,” he said.

However, he observed, “one continued cause for concern in 2008 is that premium growth remains in negative territory and is, in fact, severely negative on an inflation-adjusted basis.”

But despite that threat, he added, “fundamentally…the p-c insurance industry remains quite strong financially, with policyholders' surplus close to all-time record highs.”

Indeed, PCI and ISO reported that policyholders' surplus fell only slightly–down 0.4 percent to $515.6 billion as of March 31, 2008. The $2.3 billion decrease contrasts with a $9.4 billion increase in first-quarter 2007, the groups noted.

“Even with the dip in surplus in first-quarter 2008, financial leverage ratios suggest the industry is well positioned for the hurricane season,” said Mr. Sampson.

John L. Del Santo, managing director of Accenture's insurance practice for North America, said the U.S. p-c sector's performance for the quarter is not surprising, and is in fact in line with the results of a recent survey of equity analysts conducted by his firm.

“It's time for many of the insurers in the U.S. to get serious about their operating models,” according to Mr. Del Santo, noting that modern technology and flexibility problems built into the way most insurance companies operate are hurting the industry.

He said the negative first-quarter results may be somewhat of a wakeup call for insurers with respect to soft market pricing, adding there are some signs that private passenger auto rates are already starting to bottom out.

“There is no question the industry is in tougher times,” Donald Light, senior analyst with Celent, said in a statement. “The real question is whether most insurers have gotten smart enough about pricing risks and adjusting claims to keep their heads above water for this swing of the cycle.”

Explaining the results, Mr. Light said, “the icy hand of the credit crisis was felt, as mortgage insurers and financial guaranty insurers contributed a substantial amount to the underwriting decline.”