HARTFORD, Conn. (Bloomberg)—The 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 Monday.

“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.

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.

No intention to sell

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.

CEO Liam McGee said in an interview last month that he was looking for deals in the U.S. property market amid “attractive pricing.” Mr. 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 Mr. McGee's arrival. The insurer repaid its $3.4 billion U.S. bailout in March.

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