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Life and annuity insurers, including

American International Group

(AIG) - Get American International Group, Inc. Report



(MET) - Get MetLife, Inc. Report



(ALL) - Get Allstate Corporation Report

would need an additional $20 billion to cover potential losses during an extended, severe recession, according to an analysis by Ratings.

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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 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.

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) - Get Prudential Financial, Inc. Report

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, with $2.8 billion.


( AZ) would have to raise $1.6 billion, and

Manulife Financial

(MFC) - Get Manulife Financial Corporation Report

, $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. 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


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.

To determine an excess or shortfall in capital, Ratings reviewed companies' resources that could be used to cover losses. Higher marks were given for insurers that used conservative reserve assumptions and other "hidden capital." So-called target capital to cover potential losses took into account a company's spread of risk in the diversification of its investment portfolio and businesses, and the size and number of policies written. The difference between capital resources available and target capital provided the amount of excess or required capital that would be needed to withstand a severe-loss scenario.

As for other insurers,

Genworth Financial

(GNW) - Get Genworth Financial, Inc. Class A Report

would need to put $771 million in additional capital into Genworth Life and Genworth Life of New York.

Hartford Financial Services

(HIG) - Get Hartford Financial Services Group, Inc. Report

would have to inject $1.1 billion into Hartford Life.

Lincoln National

(LNC) - Get Lincoln National Corporation Report

has caused concern among annuity holders because of a writedown. It would need to increase its capital by $320 million. Ratings doesn't rate bonds, which make up the bulk of insurance holdings. Therefore, it must rely on bond ratings of other ratings agencies, some of which underestimated the credit bubble. That's one reason it has stricter capital requirements for insurance companies. After all, an insurer may need extra protection in case a top-rated bond may not be as safe as it appeared.

Insurance companies' ability to raise capital may not be difficult. Some groups, such as Lincoln Financial, might have taken steps to bolster their capital since Dec. 31, the most recent data available for use in Ratings' stress test. During times of financial distress, companies often have access to capital through contributions from a parent company, current profits or reductions in policyholder dividends. AIG would be an exception.

Gavin Magor joined Ratings in 2008, and is the senior analyst responsible for assigning financial strength ratings to health insurers and supporting other health care-related consumer products, including Medicare supplement insurance, long-term care insurance and elder care information. He conducts industry analysis in these areas. He has more than 20 years' international experience in credit risk management, commercial lending and analysis, working in the U.K., Sweden, Mexico, Brazil and the U.S. He holds a master's degree in business administration from The Open University in the U.K.