The life insurance industry, whose standing Fitch ratings dropped last fall from stable to negative, has been shown in a new Fitch report to have taken a serious hit in statutory capital, due at least in part to the value of the insurers’ own investments. With many of those investments falling, the cost of debt rising, and obligations in the form of guarantees for variable annuities holding firm, insurance firms are hurting. But, of course, their problems aren’t due just to the equities in which they parked their, cash.

According to the report, Analyzing Changes in Statutory Capital for U.S. Life Insurers, companies’ statutory capital–the amount of statutory surplus, capital, and mandatory securities valuation reserve–has dropped substantially. The report looked at the largest 25 insurance groups in the U.S., which account for more than 80% of the industry’s total admitted assets, and the news isn’t cheery.

While some companies’ capital has actually increased, others’ has dropped by large margins, margins that would be even greater if not for corporate action, bailout funds, and capital relief transactions. AXA U.S. Insurance Group, for instance, saw its TAC decline by 52%. By far the predominant trend in the industry was down, since Fitch reports that only six of the 25 groups saw their reported TAC increase, while 19 saw theirs decline.

The report takes into account such adjustments as domicile state permitted/prescribed accounting practices, net capital contributions (which includes TARP money), and dividends paid.

The tables in the report are fascinating in what they reveal. When adjusted for management actions (defined in the report as the sum of regulatory benefit and net capital contribution), the declines show one picture; but when those actions are backed out of the equation, what emerges is another picture entirely. That’s particularly so in the case of AIG, whose absolute decline (not counting TARP funds and other measures) tumbled from 267% to a negative 225%. Allstate Life Group fell, in absolute terms, from 278% to 53%, and Sun Life Assurance U.S. Group dropped from 232% to 78%. Both of these latter companies would therefore, without management actions, have less than 100% of NAIC-required risk-based capital. AIG would have been in a negative capital position without the capital contributions made in 2008.

Fitch also says in its report that, when adjusted to exclude management actions, TAC for this group declined more than $63 billion, a 30% drop. This in itself is a significant change from past performance, it points out, since even in the downturn in 2001 and 2002, TAC did not suffer so badly. In fact, it declined only 2% in 2001 and actually increased by 1% in 2002, with the industry “generat[ing] positive net income during that period.” TAC during the other years before 2008, measured by the same standards in backing out management actions, increased by 10% in 2003; 12% in 2004; 11% in 2005; 13% in 2006; and 11% in 2007.

AIG skewed the results substantially, however, as Fitch explains. When its drop of 450% is subtracted from the aggregate 12 % decline, the average decline for the other 24 companies comes to 82% of minimum required capital. In this group of 24, 10 companies experienced a drop in TAC, excluding management actions, that dropped them below the minimum required capital at the beginning of the period. However, the report goes on to say that “the average RBC ratio at the beginning of 2008 was 428% of company action-level-required capital for this universe of companies. Therefore, in total, the decline in capital did not threaten solvency as a whole.”

Marlene Y. Satter, a freelance business writer who can be reached at