UPDATE 1-Swiss Re sees challenging 2016 environment after Q1 earnings beat

* Q1 net income $1.2 bln vs $986 mln poll f’cast

* Q1 property casualty combined ratio 93.3 pct

* CEO sees “challenging environment” in 2016

* Swiss Re says on track to meet financial targets (Recasts, adds CEO quote, detail)

By Joshua Franklin

ZURICH, April 29 (Reuters) - The world’s second-largest reinsurer Swiss Re said on Friday it expected challenging market conditions to continue throughout 2016 as it posted a smaller-than-expected drop in first-quarter net income.

Reinsurers, which act as financial backstops for insurance companies and help them pay for large claims from hurricanes or earthquakes in exchange for part of the premiums, have been hampered by low interest rates and falling industry prices.

Against this background, Swiss Re posted net income of $1.2 billion for the first three months of 2016. This was ahead of an average forecast for $986 million in a Reuters poll of eight analysts but less than $1.4 billion a year earlier when numbers were boosted by healthy investment returns and low claims.

“In the first quarter of 2016, we have - once again - demonstrated our resilience in a soft market,” Chief Executive Officer Michel Lies, who will be replaced in July by the head of the group’s reinsurance business, Christian Mumenthaler, said in a statement.

“I expect that we will continue to operate amid a challenging environment throughout the year - but this plays to Swiss Re’s strengths.”

This follows downbeat comments earlier in the week from market leader Munich Re, which warned it expects a sharp drop in profits for the first three months of 2016 and that its full-year target was now looking “ambitious”.

Swiss Re’s property and casualty combined ratio, a measure of underwriting profitability, was 93.3 percent, missing a Reuters poll average of 87.6 percent. A figure below 100 percent indicates a profit.

Zurich-based Swiss Re said it saw an increase in the volume of renewed business in April and that prices fell at a slower pace in its property natural catastrophe business.

It also said it was on track to meet its targets for a 700 basis points return on equity above risk-free 10-year U.S. government bonds and economic net worth per share growth of 10 percent each year. (Editing by Richard Pullin)