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 stabilise 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 on Tuesday 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 Inc, which was saved from bankruptcy with a rescue package that has ballooned to US$152 billion (S$230 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, which sells both life and property insurance, reported a US$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, the No. 2 US life insurer, had a US$108 million net loss, and withdrew its 2008 earnings forecast, citing market volatility. Genworth, a smaller insurer, recorded a US$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 US life insurance index .DJUSIL plummeting more than 60 per cent since mid-September. Shares of Genworth Financial Inc and Hartford have fallen 90 per cent in that period, and Prudential has dropped nearly 80 per cent.

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

'Life insurers are the number one purchasers of corporate bonds,' said Mr Jack Dolan, an ACLI spokesman. 'They grease the wheels for financing corporate America. In essence, they are the wholesalers of credit, while banks are the retailers,' he said.

The insurers are susceptible to the credit crisis through their investment portfolios, real estate holdings, and higher costs for reserves and hedging related to investment-linked retirement products they sell.

Life and retirement policy holders are largely protected if an insurer fails through state guaranty funds into which all insurers pay to insure that obligations are met.

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.

'Life insurers, while major lenders to business through their public and private bonds, are simply not as important to the day-to-day working of the economy, especially of smaller businesses, as are banks,' he added.

Mr Berg said Treasury officials have been briefed on insurers' plight in meetings with industry executives.

Federal support for life insurers would 'provide a level of confidence to return to investment activities,' said the ACLI's Dolan.

The government may have enough on its plate for now, though. Just days ago, the government stepped in with a major rescue of Citigroup, the second largest US bank by assets, injecting US$20 billion in new capital and guaranteeing some US$300 billion in potentially toxic assets. -- REUTERS