The first quarter, with huge investment losses and a worsening recession, was the worst on record for private U.S. property-casualty insurers since quarterly results began to be compiled in 1986, according to a new analysis.

The industry’s $1.3 billion net loss and its net written premium growth were the worst for a first quarter since 1986, according to ISO and the Property Casualty Insurers of America.

The minus 3.6% in the first quarter eclipsed the minus 0.8% for the first quarter of last year, according to ISO’s research. Market surveys and U.S. government data indicate that declining demand and declines in the price of commercial insurance cut into premiums. According to the Council of Insurance Agents and Brokers’ first-quarter 2009 market survey, commercial premium rates fell 5.1% on average for all sizes of accounts. And as net written premiums fell in first-quarter 2009, the nation’s current-dollar gross domestic product GDP, which takes into account both inflation and real growth, also dropped 0.4%.

Yet the insurers remain well capitalized in the first quarter, despite statutory net worth sliding 4.2% from the fourth quarter in large part from a deepening recession and stock market losses.

The policyholders’ surplus decreased by $19 billion, from $456.1 billion on Dec. 31, 2008.

Not surprisingly, the decline was in part caused by insurers suffering a $1.3 billion net loss after taxes and $16.4 billion in unrealized capital losses on investments (not included in net income after taxes).

Other deductions from surplus in first-quarter 2009 included $2.1 billion in dividends paid to stockholders and $100 million in miscellaneous other surplus changes. Partially offsetting the deductions from surplus, insurers raised $0.9 billion in new funds paid in (new capital).

Property-casualty insurers faced $554.4 billion in loss and loss adjustment expense reserves to cover the cost of settling claims that had already occurred and another $201.5 billion in unearned premium reserves set aside to cover losses arising during the remaining term of policies in effect on March 31, bringing the total funds available to cover losses and other contingencies to just under $1.2 trillion.

The property-casualty insurance industry’s $1.3 billion net loss after taxes for first-quarter 2009 constitutes a $9.8 billion adverse swing from the industry’s $8.5 billion in net income after taxes in first-quarter 2008. And reflecting the swing to a net loss after taxes, the insurance industry’s annualized overall rate of return on average policyholders’ surplus dropped to -1.2% in the first quarter. It had been 6.6% in the first quarter of 2008.

Insurers’ net loss after taxes for the first three months of 2009 resulted from a combination of losses on underwriting and deterioration in investment results. In first-quarter 2009, insurers withstood $2.5 billion in net losses on underwriting — more than four times the $600 million in net losses on underwriting in first-quarter 2008. The combined ratio — a key measure of losses and other underwriting expenses per dollar of premium — worsened to 102.2% in the first three months of this year from 99.9 percent in the first three months of 2008.

Insurers’ net investment gains — the sum of net investment income and realized capital gains (or losses) on investments — fell 69.9%, to $3.7 billion, in the first quarter, compared to the same quarter in 2008.

Partially offsetting the deterioration in underwriting and investment results, insurers’ miscellaneous other income rose to $0.4 billion in the first three months of 2009 from $200 million in the corresponding portion of 2008, and insurers’ federal income taxes declined to $2.9 billion from $3.6 billion.

The figures are consolidated estimates for all private U.S. property/casualty insurers based on reports accounting for at least 96% of all business written by such insurers.

Net written premiums dropped $4 billion, or 3.6%, in the first three months of 2009 from $110.4 billion in the first three months of 2008. Net earned premiums declined $2.3 billion, or 2.2%, to $105.6 billion in the first quarter.