The purpose of this paper is to explore the impact of 1956-72 capital gains and losses upon the risk/return and solvency positions of randomly selected samples of stock and mutual nonlife insurers. The results indicate that for most of the insurers the risk/retum relationships deteriorated when capital gains and losses were included in earnings. If the risk dimension is ignored, however, most of the insurers appeared to be heavily dependent upon capital gains for average earnings improvements. The study also reveals that ample capital and/or surplus margins were available to enable most of the insurers to absorb substantially greater capital losses than those which had occurred. The main conclusion is that equity investments provided additional regulatory problems but did not on the average contribute to the efficiency of these firms. Capital gains and losses on the bond portfolio are not included in this study. Some recent discussion has occurred regarding the reliance of nonlife insurance companies upon investment results for maintenance of profitability and solvency. Greene, for example, has observed in his 1973 edition that "investment profits have been the mainstay of leading property and liability insurers and that had it not been for these profits, most insurers could not have continued in business."' Taking a different approach to the problem, Cooper has noted that insurance regulations have made the maintenance of solvency more difficult by allowing insurers to engage in unnecessary investment risk. He has argued that the capital and surplus requirements of nonlife insurers could be reduced substantially if insurers had no need to protect themselves against fluctuations in the prices of assets.3 Considerable debate has prevailed as to whether unrealized capital gains and losses should be included in reported earnings. The argument has Stephen WV. Forbes is Associate Professor of Finance in the University of Illinois at Urbana-Champaign. 'Mark R. Greene, Risk and Insurance, 3d. Ed. (Cincinnati: South-Western Publishing Co., 1973), pp. 687-88. 2 Robert WV. Cooper, Investment Return in Property-Liability Insurance Ratenaking (Homewood, Ill.: Richard D. Irwin, Inc., 1974), p. 21. s ibid.