Insurers await Fed OK for cash amid capital drain

NEW YORK (Reuters) - Life insurers, needing to rebuild capital drained away by investment losses, are joining the long line of U.S. companies seeking to borrow under the government's $700 billion financial rescue program.

Insurers now face a nail-biting wait for government approval. And regardless of the answer, they may need to find additional sources of capital at a time when investors have little appetite for new stock or debt offerings.

"We would view capital injections from the Treasury as a positive, but we believe insurers that have little excess capital and large exposures to variable annuity equity market guarantees might still need to raise additional capital," Deutsche Bank analyst Darin Arita said in a research note on Monday.

Life insurers have been hit hard by large investment losses, and equity market declines are also eroding funds set aside to cover costs for variable annuities, a popular retirement product that accounts for a large portion of the industry's sales.

So far, three U.S. life insurers have applied for a preferred-stock scheme being rolled out as part of the government rescue.

"Qualifying for federal money is one thing, actually getting the money is quite another," Barclays Capital analyst Eric Berg said in a research note on Hartford Financial Services Group Inc (HIG.N). He noted there has been "considerable competition for the government's limited cash," including from the cash-strapped U.S. auto industry.

Hartford, a large life and property insurer that has been among the worst hit by investment losses, said on Friday it was buying a small savings and loan, making it eligible to receive up to $3.4 billion from the government.

Since then, Genworth Financial Inc (GNW.N), a life and mortgage insurer, and Lincoln National Corp (LNC.N), one of the nation's largest life insurers, have announced their own plans to buy small savings and loans and apply for federal funds. It is not clear if these applications were submitted by the government's initial Nov. 14 deadline.

More insurers may seek federal funds, said Deutsche Bank's Arita. Among those that may be eligible are MetLife Inc (MET.N), the No. 1 U.S. life insurer; its closest rival, Prudential Financial Inc (PRU.N); and Principal Financial Group Inc (PFG.N).

Insurers with a federally regulated unit are eligible to apply. But this leaves many insurers on the sidelines since insurance regulation is generally handled by states.

Shares of Hartford Financial fell 21 percent, or $2.70, to $9.95 afternoon trading on the New York Stock Exchange, while Lincoln National fell 7.25 percent, of $1.04, to $13.31, and Genworth rose 4 cents to $1.51.

The Dow Jones U.S. life insurance index has fallen more than 60 percent since January and was down 5 percent on Monday.

(Reporting by Lilla Zuill; editing by John Wallace)