UPDATE 1-Insurers await Fed OK for cash amid capital drain

(Adds Aegon, lawyer comment, background, byline; updates share activity)

By Lilla Zuill

NEW YORK, Nov 17 (Reuters) - Life insurers, needing to rebuild capital after being drained 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 battered by large investment losses. 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 and Dutch insurer Aegon NV (AEGN.AS) -- on behalf of its U.S. unit Transamerica -- have applied to take part in the government rescue.

The applications were a red flag to investors, already jittery about the capital constraints facing these companies. The shares of all four insurers, and others in the sector, fell on Monday.

The Dow Jones U.S. Life Insurance Index, already down more than 60 percent since January, slid another 12 percent.

UNDER FED MICROSCOPE

"Qualifying for federal money is one thing, actually getting the money is quite another," Barclays Capital analyst Eric Berg said in a 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.

There is another sticking point. "It is a paradox, but institutions that seem to be more in need of capital are having a more challenging time obtaining it," said V. Gerard Comizio, a lawyer representing financial institutions, in the Washington D.C. office of Paul Hastings Janofsky & Walker.

In some cases, regulators have asked companies to revise their business plans to better address capital problems, which may include seeking additional capital from a third party, Comizio added.

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.

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).