By Donna Kardos
Of DOW JONES NEWSWIRES

NEW YORK (Dow Jones)--Life insurance stocks surged Wednesday on hopes the U.S. Treasury Department will soon announce plans to extend bailout funds to a number of the sector's struggling companies.

Treasury is expected to announce the expansion of the Troubled Asset Relief Program to the ailing industry within the next several days, The Wall Street Journal reported Wednesday, citing people familiar with the matter.

"An injection of capital similar to the banks would provide enough capital for even the most thinly capitalized institutions to weather a prolonged and protracted credit cycle," Credit Suisse analyst Thomas Gallagher told clients in a note Wednesday. He added "one major caveat," however: an assumption that the S&P 500 does not drop materially below the 600 level.

Gallagher added, "The positive impact of increased capital flexibility would outweigh what we estimate would be 25% average dilution for the industry."

The Dow Jones U.S. Life Insurance Index rallied 12% in early trading Wednesday. However, it is still down 35% year to date and 67% from a year ago.

Insurers that own federally chartered banks will qualify for the program, the Journal report said. Treasury had said last year that life insurers could be eligible for TARP funds if they owned bank-holding companies, but it hadn't officially decided to give funds to these companies as it focused on banks and auto makers.

TARP help "matters to insurers facing real (or just perceived) near-term capital/liquidity constraints," such as Genworth Financial Inc. (GNW), Hartford Financial Services Group Inc. (HIG) and Lincoln National Corp. (LNC), UBS analyst Andrew Kligerman told clients in a Wednesday note.

Lincoln National led the sector's gains in early trading Wednesday, soaring 38% to $9.50 recently. Principal Financial Group Inc. (PFG) rallied 24.5% to $12.64, while Hartford rallied 23% to $10.42 and Genworth climbed 14% to $2.39. Phoenix Cos. (PNX) jumped 13% to $1.70. All have bank-holding company or savings-and-loan status or own a thrift.

The hopes for life insurers to fall under TARP come as the sector has struggled with losses related to their guarantees on variable annuities as well as their portfolios that are largely exposed to the financial sector and equities in general. Their troubles led to a string of rating-agency downgrades that, in a vicious cycle, made it more difficult for some insurers to raise funds. How much money would now be available to the insurers, and which particular insurers would be beneficiaries, remains unclear, the Journal report said. The Treasury says it has about $130 billion remaining in TARP money.

However, UBS's Kligerman warned clients that TARP "likely will temporarily boost investor confidence, but TARP funds alone cannot eliminate the capital/liquidity pressures caused by weak credit, equity market, and economic conditions." He added it "has not proven to be a cure-all" for prior recipients.

Kligerman said UBS continues to prefer "better-capitalized life names," such as Ameriprise Financial Inc. (AMP) and MetLife Inc. (MET). "They possess solid excess capital and liquidity, and are bank or thrift holding companies," Kligerman added.

Ameriprise rose 5% in recent trading to $21.62, while MetLife gained 5% to $25.35.

-By Donna Kardos, donna.kardos@dowjones.com

http://online.wsj.com/article/BT-CO-200 ... 08953.html