Life insurers seek some of bailout funds

NEW YORK - Life insurance companies, nervous over massive investment losses that could ultimately threaten their viability, are hoping they are next in line to get a piece of the US financial bailout.

They argue federal funds could stabilize their trillions in investments and warn that any failure of a life insurer could dry up a key source of corporate financing.

But US officials are not convinced.

Treasury Secretary Henry Paulson said yesterday he had not yet decided whether other insurers would get federal funds. The only insurer to get government help so far is American International Group, which was saved from bankruptcy with a rescue package that has ballooned to $152 billion.

As the biggest buyers of US corporate bonds, life insurers say they grease the wheel of corporate America. Industry officials insist the failure of a large US life insurer would drastically shrink bond financing, potentially creating another hurdle to the nation's economic recovery.

While no big life insurer has collapsed, companies have tightened their purse strings after heavy investment losses eroded their capital levels in the third quarter.

Hartford Financial Services Group Inc., which sells both life and property insurance, reported a $2.6 billion quarterly loss on Oct. 30, the 189-year-old insurer's worst-ever result, mainly from bad investments in financial companies.

Prudential Financial Inc., the number two US life insurer, had a $108 million net loss, and withdrew its 2008 earnings forecast, citing market volatility. Genworth, a smaller insurer, recorded a $258 million net loss.

Analysts warned that the fourth-quarter outlook for the sector is even gloomier, with growing concerns that their investments in commercial mortgages will lead to more red ink as values drop.

In recent months, life insurers have scaled back the size of investments, trimmed dividends to hold on to cash, and girded for further losses and possible rating downgrades, which would trigger higher capital requirements.

Jittery investors have sent the Dow Jones U.S. Life Insurance index falling more than 60 percent since mid-September. Shares of Genworth Financial Inc. and Hartford have fallen 90 percent in that period. Prudential has dropped nearly 80 percent.

Life insurers had more than $1.8 trillion invested in corporate bonds, $462 billion in government bonds, $302 billion in commercial mortgage investments, and $20 billion in real estate holdings at the end of 2007, according to the American Council of Life Insurers.

Analysts say US officials still need to be convinced.

"It is far from clear that Treasury views the possible collapse of a major insurer as posing anywhere near the systemic risk that a collapse of Citi[group] would have posed," said Barclays analyst Eric Berg in a Monday research note.