AIG, MetLife, Allstate Fail Our 'Stress Test'

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Life and annuity insurers, including American International Group(AIG Quote), MetLife(MET Quote) and Allstate(ALL Quote) would need an additional $20 billion to cover potential losses during an extended, severe recession, according to an analysis by TheStreet.com Ratings.

Fourteen of the 21 U.S. life and annuity insurance groups with more than $50 billion in assets have at least one subsidiary that doesn't meet the conservative, risk-adjusted capital standards for TheStreet.com Ratings' own so-called stress test, similar to what the U.S. government put banks through. To be sure, the insurers exceed the industry regulator's minimum standards.

Billions in Shortfalls TheStreet.com Ratings

AIG, despite a government bailout, would require the most amount of money. Eight of its subsidiaries would need $6.8 billion, followed by Prudential Financial(PRU Quote), with $2.8 billion. Allianz(AZ Quote) would have to raise $1.6 billion, and Manulife Financial(MFC Quote), $1.5 billion.

With the government and investors focused on the banking industry, it's easy to overlook the pressures facing insurers, especially following disappointing first-quarter results compared with relatively upbeat bank earnings. The S&P 500 Life & Health Insurance index has underperformed most bank indexes during the past three months. It has trailed the consumer-finance index's 48% gain by 16 percentage points.

TheStreet.com Ratings' stress test assumes a contraction in gross domestic product similar to the 1981 to 1982 recession, but for an extended period of 36 months. That's more severe than the government's scenario for the bank stress tests, though it may be a likely scenario if the commercial real estate market deteriorates through next year, as some analysts predict.

The U.S. economy will contract at a 1.9% pace this quarter, and grow 0.5% in the third quarter and 1.8% in the fourth quarter, according to the median forecast of 61 economists surveyed by Bloomberg earlier this month. Gross domestic product started shrinking at the end of 2007, making the recession the longest on record since the Great Depression in the 1930s. Nouriel Roubini, the New York University professor known for predicting the credit crisis, said last week that the economy will contract through this year.