May 15 (Bloomberg) -- Prudential Financial Inc. and Hartford Financial Services Group Inc. are among the insurers granted access to U.S. aid as the government moves to shore up an industry battered by investment losses.

Hartford won preliminary approval for $3.4 billion in capital from the Treasury’s Troubled Asset Relief Program, the Connecticut-based insurer said yesterday in a statement. Prudential, Allstate Corp. and Principal Financial Group Inc. also are eligible for funds, said Andrew Williams, a spokesman for the Treasury. Lincoln National Corp. said it may receive $2.5 billion.

Life insurers have clamored for six months to get into a program that the nation’s biggest banks are trying to flee to avoid government restrictions. Insurers need the money to quell doubts about whether they can pay claims and retirement stipends after falling stock and bond markets depleted capital.

“If you had some of these companies, the bigger ones like Hartford, go into a spiral, that would just cause another round of panic,” said Robert Haines, a New York-based analyst at CreditSights Inc. “I don’t like the idea of the government getting involved with these companies. You’re making to an extent a deal with the devil, but your options are really limited at this point.”

Credit-rating downgrades and stock drops across the industry eroded client confidence and made it harder to raise money from private investors. The dwindling funds available to the industry also contributed to the credit market freeze as life insurers, which hold about $1 trillion in corporate debt, had to scale back on purchases of new bonds.

‘The Right Step’

“Treasury is taking the right step toward helping restore lending and liquidity to the marketplace,” said Frank Keating, president of the American Council of Life Insurers, in a statement.

Hartford fell 15 cents, or 1 percent, to $14.60 at 4 p.m. in New York Stock Exchange composite trading. Principal slipped 1.5 percent. Prudential dropped 4.1 percent, Allstate slid 3.8 percent. Lincoln National declined 12 cents to $16.12. The 24- company KBW Insurance Index has plunged about 48 percent in the past 12 months.

The government is preparing to expand its involvement amid the bailout of American International Group Inc., once the world’s largest insurer. Treasury and the Federal Reserve have drawn fire from Congress and taxpayers for that rescue, which has grown to $182.5 billion in eight months.

Seeking Rescue

Discussions about a life insurer bailout began last year as stock values plummeted and the cost to protect debt issued by carriers soared. Henry Paulson, the former Treasury secretary who worked on the initial bank bailout in September, instructed life insurers to buy federally regulated lenders to qualify for a U.S. rescue, according to the ACLI.

Hartford and Philadelphia-based Lincoln announced deals in November to acquire local savings and loans and filed their TARP applications. Hartford reported a $2.6 billion third-quarter loss, and agreed on Oct. 6 to sell $2.5 billion of debt and equity to Germany’s Allianz SE.

Prudential, Allstate of Northbrook, Illinois, and Principal in Des Moines, Iowa, already owned lenders, as did MetLife Inc., the biggest U.S. life insurer. New York-based MetLife, led by Chief Executive Officer Robert Henrikson, strengthened its balance sheet with a $2.3 billion share sale in early October and has said it doesn’t need TARP funds.

‘All Options’

Prudential said in a statement the insurer is considering “all options.” The insurer is leaning against accepting government capital, said a person familiar with the matter. Prudential hasn’t ruled out taking aid, said the person, who declined to be identified because a final decision hadn’t been made.

Prudential, buoyed by a stock price that’s more than tripled from lows in March, is considering selling shares or debt to private investors, CEO John Strangfeld told investors last week.

Ameriprise Financial Inc., the investment adviser spun off from American Express Co., declined Treasury’s offer for a capital injection, CEO Jim Cracchiolo said today in a statement. The company, whose approval for TARP was announced last night, said it’s capital is “more than adequate.”

Ameriprise shares gained 1.4 percent to $25.40.

TARP Paybacks

At least nine banks that took TARP have paid back funds or announced plans to do so. Goldman Sachs Group Inc. raised $5 billion in April to help exit the program.

The U.S. bailout wasn’t made available to all insurers that applied. Genworth Financial Inc., the Richmond, Virginia-based life insurer and mortgage guarantor, was shut out. Protective Life Corp. dropped out after concerns about a potential bailout scuttled its agreement to buy a bank. Twelve insurers were waiting on TARP applications, ACLI’s Keating said in March.

Allstate will “undertake a prudent review of our participation in the capital purchase program in light of market conditions and our current capital position before responding,” Chief Executive Officer Tom Wilson said today in a statement. Principal also said it’s considering whether to accept government money.

Allstate, the biggest publicly traded U.S. home and auto insurer, has reported three straight quarterly losses on investment declines at the life unit. Wilson said in February that while Allstate was eligible for TARP money, he didn’t “like the terms and conditions.”

Shoring Up Capital

Since October, Allstate cut its dividend by 50 percent, halted share buybacks and announced plans to cut 1,000 jobs at its money-losing life insurance unit. Lincoln completed a 1,000- worker reduction in April, and Hartford, Principal and Prudential have slashed dividends.

Principal and Prudential may pass on the federal funds, said Randy Binner, an analyst at FBR Capital Markets, in a note to investors today. Prudential may be eligible to receive about $5 billion and Principal $2 billion, he said. As much as $22 billion is available to help the insurers, according to Treasury data.

To contact the reporters on this story: Andrew Frye in New York at afrye@bloomberg.net; Rebecca Christie in Washington at Rchristie4@bloomberg.net.

Last Updated: May 15, 2009 16:21 EDT