Net earned premiums were up by $39.6 billion11.4 percentto $388.1 billion last year.

Insurer investment income from stock dividends and bond interest rose 3.9 percent to $38.7 billion last year, while realized capital gains on investments increased to $6.9 billiona big turnaround from capital losses of $1.2 billion in 2002.

Industry surpluswhich stood at $347 billion at year-end 2003, compared with $285.4 billion at year-end 2002benefited from net income increases and $25.2 billion in unrealized capital gains on insurer investments, ISO and PCI said. The $61.6 billion increase in surplus in 2003 erased three years of declines, the groups noted.

The reporting groups attributed much of the improvement in insurers net income after taxes on a “steep decline” in net losses on underwritingdown 85 percent to $4.6 billion in 2003 from $30.8 billion in 2002. The 2003 net underwriting loss amounted to 1.2 percent of the $388.1 billion in premiums earned during the yeardown substantially from 8.8 percent of the $348.5 billion in premiums earned during 2002.

Solid underwriting generated a big improvement in the combined ratio despite catastrophe losses, which more than doubled to $12.9 billion from $5.9 billion in 2002, according to John Kollar, vice president for consulting and research at Jersey City, N.J.-based ISO.

But even as they reported the good news, executives with the two organizations warned that insurers cannot count on rising premium prices and higher capital gains to bolster their bottom lines indefinitely.

Indeed, ISO's “MarketWatch” data shows that commercial premium increases peaked in July 2002 and “have been losing momentum ever since,” according to Mr. Kollar. “At some point, growth in surplus and improvement in profitability will reinvigorate competition for market share, putting pressure on the price of insurance and undermining premium growth.”

He added that given the circumstances and the industry's cyclical history, “one has to wonder how soon price increases will become price decreases.”

Meanwhile, similar doubts were raised about the staying power of investment results in this volatile time for Wall Street.

The industrys pre-tax net investment gainthe sum of net investment income and realized capital gainsincreased 26.6 percent to $45.6 billion last year from $36 billion a year earlier. Combining realized and unrealized gains, insurers saw $32.1 billion in overall capital gains last yeara big change from the $22 billion in overall capital losses the year before.

However, last year's gains werent enough to offset three years of stock value declines, according to Roger Kenney, assistant vice president for research for the Des Plaines, Ill.-based PCI, who also warned that the outlook for continued growth is uncertain at best.

“Insurers certainly can't count on capital gains in 2004 being anywhere near as large asin 2003,” he said. “Stock markets have lost their momentum.”

Overall incurred loss and loss-adjustment expenses grew just 2.2 percent to $289.8 billion in 2003 from $283.6 billion a year earlier. Non-catastrophe loss and loss-adjustment expenses actually dipped 0.3 percent to $276.9 billion last year from $277.8 billion in 2002.

Underwriting expenses connected with acquisitions, underwriting, pricing and servicing insurance policies, as well as premium taxes increased 7.8 percent to $101.1 billion in 2003, up from $93.8 billion the year before.

Premiums returned to policyholders as dividends declined 3.7 percent in 2003 to $1.9 billion.

The industrys pre-tax operating incomethe sum of gains or losses on underwriting, net investment income, and miscellaneous other incomerose to $33.7 billion in 2003, over six times larger than the $5.6 billion reported the year before.

Meanwhile, improved insurer profitability benefited Uncle Sam, as p-c insurer federal income taxes increased to $10.8 billion in 2003, up from $1.3 billion the year before.

ISO and PCI figures are consolidated estimates for all private p-c insurers based on the reports of insurers that account for 96 percent of all U.S. p-c business.

Reproduced from National Underwriter Edition, April 16, 2004. Copyright 2004 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.