Hartford Asked By SEC Why Holdings Not Marked Down

By Andrew Frye
Bloomberg Businessweek
July 26, 2010

(Updates with accountant's comment in the fifth paragraph.)

July 26 (Bloomberg) -- Hartford Financial Services Group Inc., whose investment losses in 2008 led to a U.S. bailout, was asked by regulators to explain why it expects its worst- performing holdings to rebound.

The U.S. Securities and Exchange Commission instructed Hartford to provide more details on $2.1 billion of securities that have traded at less than half of what the company says they're worth for more than a year. The unrealized loss on these investments, held by Hartford's life insurance subsidiary, totaled $1.5 billion as of Dec. 31, the SEC said in a letter to the company dated April 13 and disclosed today.

"Please revise your disclosure to indicate the nature of these securities and to explain why these unrealized losses, which appear to be significantly greater than credit spreads in the marketplace, are apparently not indicative of credit losses and/or other-than-temporary impairment," Jim Rosenberg, senior assistant chief accountant, said in the letter to Glenn Lammey, chief financial officer of Hartford's life insurer.

Life insurers buy corporate debt and mortgage-backed securities to fund obligations to policyholders that may take decades to mature. When bond prices fall in the market, carriers aren't required to take losses if they expect the securities to pay off over time.

"It's certainly a yellow flag any time you've got that big of a bucket of unrealized losses that you haven't taken a charge on," said Jay Hanson, partner and national director of accounting at McGladrey & Pullen LLP. "Investors gotta question, ‘Are those just really charges waiting to happen?'"

No Intention to Sell

The insurer fell 3 cents to $23.40 at 4:01 p.m. in New York Stock Exchange composite trading. The stock is little changed this year.

Hartford agreed to include more information on the securities in its quarterly filings, according to a reply from the insurer to the SEC dated April 27. The holdings are primarily commercial mortgage-backed securities and collateralized debt obligations tied to commercial property and have floating coupon rates, said Hartford, which is based in the Connecticut city of the same name.

The drop in market prices reflects "market illiquidity and risk premiums," Hartford said. The company "has concluded that no credit impairment exists for these securities. Furthermore, the company neither has an intention to sell nor does it expect to be required to sell these securities."

Losses on the investments "may be significant" if property values perform worse than the company expects, Hartford said. The SEC told Hartford in a June 9 letter that it completed its review. Such correspondence may be released about six weeks after a review is closed. SEC questions about companies' practice of writing down securities are "pretty common," Hanson said of McGladrey & Pullen.

Chief Executive Officer Liam McGee said in an interview last month that he was looking for deals in the U.S. property market amid "attractive pricing." McGee was hired in October to reduce risk at the insurer. In his first six months on the job, he cut Hartford's holdings of commercial mortgage bonds.

Hartford lost more than $4 billion in the five quarters prior to McGee's arrival. The insurer repaid its $3.4 billion U.S. bailout in March.

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