An unprecedented number of natural catastrophes, weak investment returns and a generally sour economy severely impaired operating performance and growth for the commercial insurance and reinsurance segment of the U.S. property/casualty insurance industry in 2011, A.M. Best Co. Inc. said in a report released Monday.

Commercial property/casualty underwriters experienced an estimated $15.2 billion in underwriting losses in last year, the Oldwick, N.J.-based rating agency said, pushing the segment's combined ratio to an estimated 108.2% last year from 102.7% a year earlier.

Though greater industry focus on underwriting and pricing discipline boosted net premiums written by an estimated 3.9%—to $181.2 billion in 2011, the segment's first year-to-year increase since 2004—net income for commercial property/casualty insurers dropped an estimated 40.3%, to $11.7 billion in 2011, according to the report.

A large portion of the industry's underwriting losses, Best said, were due to severe U.S. storms, flooding and wildfires, as well as primary and contingent business interruption losses stemming from international natural catastrophe events, such the Japanese earthquake and tsunami and the Thailand flood.

Damage to the property/casualty industry was especially high in 2011 because many of the individual U.S. loss events were not great enough to trigger reinsurance programs, leaving underwriters liable for a greater percentage of the insured losses, Best said.

Combined ratio deterioration was worst among fire and allied and commercial multiperil insurance lines, which Best estimated rose to 103.2% in 2011 from 82.5% in 2010, and to 117.1% from 100.2%, respectively.

Workers compensation combined ratios increased to an estimated 118.5% from 116.8%, while ratios for inland marine lines increased to 95.2% in 2011 from 86.2% a year earlier.

Grouped together, combined ratios for professional risk, directors and officers, excess casualty, product liability, environmental risk, general liability and employer practices liability lines decreased in 2011, down to 105.1% from 109.8% in 2010.

Beyond insured losses, Best noted that macroeconomic conditions were also to blame for the commercial segment's lackluster performance in 2011. Investment income remained depressed for commercial property/casualty underwriters, yielding just 3.9% in 2011, Best said.

Moreover, the weakened state of the economy continues to constrict insurers' exposure bases, including payrolls, sales, new businesses and corporate expansions.

The report also noted that many underwriters may be reluctant to offset their losses with higher premium rates in a weakened economy.

Looking to the year ahead, Best reported that it will maintain its negative outlook for the commercial property/casualty segment despite some signs of recovery in the economy and price stabilization in the industry.

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The report said the apparent firming of premiums for some products is encouraging, but it has not convinced Best analysts that a long-term reversal of soft prices has arrived. Small and midsize accounts in particular will test the market's willingness to continue raising premium rates as long as broader economic recovery remains sluggish.

Nonetheless, Best said it does expect pricing to continue upward in 2012 for those products and geographies where loss experiences remain high, particularly catastrophe-exposed property liability and workers compensation.

Commercial property/casualty reinsurers faced similar struggles in 2011, but fared significantly better than direct commercial underwriters in some respects, Best reported. The reinsurance segment sustained underwriting losses of approximately $1 billion, and its combined ratio swelled by an estimated 8.4 points, to 103.4% in 2011 from 94.5 in 2010.

Best noted that the deterioration was likely held in check by generally favorable reserve development within the segment.

Net premiums written rose 8.5% to $26.0 billion in 2011 from $23.8 in the prior year, though net income declined to $9.7 billion from $10.3 billion.

Where the reinsurance segment significantly outperformed commercial underwriters was in investment returns, Best said. Reinsurers experienced a 26.4% rise in net investment income, suggesting the segment has been less averse to higher market or interest rate risks in the pursuit of better-performing investments, the report noted.