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Investments | 12 Months Ended
--- | ---
Sep. 30, 2012
Investments | (5) Investments Consumer Products and Other The Company’s short-term investments are summarized as follows:
|  | September 30, |
|  | 2012 |  |  | 2011 |
Trading: |  |  |  |  |  |  |  |
Marketable equity securities |  | $ | 146,842 |  |  | $ | 262,085 |
Marketable debt securities |  |  | — |  |  |  | 12,665 |
|  |  | 146,842 |  |  |  | 274,750 |
Held to maturity: |  |  |  |  |  |  |  |
U.S. Treasury securities |  |  | 34,735 |  |  |  | 75,638 |
Certificate of deposit |  |  | 251 |  |  |  | 250 |
|  |  | 34,986 |  |  |  | 75,888 |
Total short-term investments |  | $ | 181,828 |  |  | $ | 350,638 |
There were $45,004 and $44,030 of net unrealized losses recognized in “Short-term investments” that relate to trading securities held at September 30, 2012 and 2011, respectively. Insurance and Financial Services Investments of FGL and Salus at September 30, 2012 and 2011 are summarized as follows:
|  | September 30, 2012 |
|  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value and Carrying Value |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  | $ | 1,010,938 |  |  | $ | 18,553 |  |  | $ | (1,609 | ) |  | $ | 1,027,882 |
Commercial mortgage-backed securities |  |  | 520,043 |  |  |  | 36,178 |  |  |  | (2,407 | ) |  |  | 553,814 |
Corporates |  |  | 10,211,804 |  |  |  | 807,175 |  |  |  | (9,968 | ) |  |  | 11,009,011 |
Equities |  |  | 237,499 |  |  |  | 11,860 |  |  |  | (1,272 | ) |  |  | 248,087 |
Hybrids |  |  | 519,009 |  |  |  | 18,836 |  |  |  | (9,550 | ) |  |  | 528,295 |
Municipals |  |  | 1,083,231 |  |  |  | 141,854 |  |  |  | (1,090 | ) |  |  | 1,223,995 |
Agency residential mortgage-backed securities |  |  | 149,455 |  |  |  | 5,769 |  |  |  | (334 | ) |  |  | 154,890 |
Non-agency residential mortgage-backed securities |  |  | 629,122 |  |  |  | 35,799 |  |  |  | (4,262 | ) |  |  | 660,659 |
U.S. Government |  |  | 917,452 |  |  |  | 12,915 |  |  |  | — |  |  |  | 930,367 |
Total available-for-sale securities |  |  | 15,278,553 |  |  |  | 1,088,939 |  |  |  | (30,492 | ) |  |  | 16,337,000 |
Derivative investments |  |  | 142,123 |  |  |  | 66,973 |  |  |  | (8,429 | ) |  |  | 200,667 |
Asset-backed loans and other invested assets |  |  | 198,868 |  |  |  | — |  |  |  | — |  |  |  | 198,868 |
Total investments |  | $ | 15,619,544 |  |  | $ | 1,155,912 |  |  | $ | (38,921 | ) |  | $ | 16,736,535 |
|  | September 30, 2011 |
|  | Amortized Cost |  |  | Gross Unrealized Gains |  |  | Gross Unrealized Losses |  |  | Fair Value and Carrying Value |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  | $ | 501,469 |  |  | $ | 1,785 |  |  | $ | (2,770 | ) |  | $ | 500,484 |
Commercial mortgage-backed securities |  |  | 580,313 |  |  |  | 3,427 |  |  |  | (18,163 | ) |  |  | 565,577 |
Corporates |  |  | 11,479,862 |  |  |  | 506,264 |  |  |  | (130,352 | ) |  |  | 11,855,774 |
Equities |  |  | 292,112 |  |  |  | 3,964 |  |  |  | (9,033 | ) |  |  | 287,043 |
Hybrids |  |  | 699,915 |  |  |  | 10,429 |  |  |  | (51,055 | ) |  |  | 659,289 |
Municipals |  |  | 824,562 |  |  |  | 111,929 |  |  |  | (7 | ) |  |  | 936,484 |
Agency residential mortgage-backed securities |  |  | 217,354 |  |  |  | 4,966 |  |  |  | (295 | ) |  |  | 222,025 |
Non-agency residential mortgage-backed securities |  |  | 465,666 |  |  |  | 1,971 |  |  |  | (23,120 | ) |  |  | 444,517 |
U.S. Government |  |  | 175,054 |  |  |  | 8,270 |  |  |  | — |  |  |  | 183,324 |
Total available-for-sale securities |  |  | 15,236,307 |  |  |  | 653,005 |  |  |  | (234,795 | ) |  |  | 15,654,517 |
Derivative investments |  |  | 171,612 |  |  |  | 405 |  |  |  | (119,682 | ) |  |  | 52,335 |
Other invested assets |  |  | 44,279 |  |  |  | — |  |  |  | — |  |  |  | 44,279 |
Total investments |  | $ | 15,452,198 |  |  | $ | 653,410 |  |  | $ | (354,477 | ) |  | $ | 15,751,131 |
Included in AOCI were cumulative unrealized gains of $851 and $524 and unrealized losses of $1,880 and $24 related to the non-credit portion of other-than-temporary impairments on non-agency residential-mortgage-backed securities at September 30, 2012 and 2011, respectively. Securities held on deposit with various state regulatory authorities had a fair value of $20,692 and $17,867 at September 30, 2012 and 2011, respectively. The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.
|  | September 30, 2012 |
|  | Amortized Cost |  |  | Fair Value |
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities: |  |  |  |  |  |  |  |
Due in one year or less |  | $ | 700,491 |  |  | $ | 703,931 |
Due after one year through five years |  |  | 3,230,602 |  |  |  | 3,324,453 |
Due after five years through ten years |  |  | 3,692,333 |  |  |  | 3,995,811 |
Due after ten years |  |  | 4,972,233 |  |  |  | 5,532,389 |
Subtotal |  |  | 12,595,659 |  |  |  | 13,556,584 |
Other securities which provide for periodic payments: |  |  |  |  |  |  |  |
Asset-backed securities |  |  | 1,010,938 |  |  |  | 1,027,882 |
Commercial-mortgage-backed securities |  |  | 520,043 |  |  |  | 553,814 |
Structured hybrids |  |  | 135,837 |  |  |  | 135,084 |
Agency residential mortgage-backed securities |  |  | 149,455 |  |  |  | 154,890 |
Non-agency residential mortgage-backed securities |  |  | 629,122 |  |  |  | 660,659 |
Total fixed maturity available-for-sale securities |  | $ | 15,041,054 |  |  | $ | 16,088,913 |
As part of FGL’s ongoing securities monitoring process, FGL evaluates whether securities in an unrealized loss position could potentially be other-than-temporarily impaired. Excluding the non-credit portion of other-than-temporary impairments on non-agency residential-mortgage backed securities above, FGL has concluded that the fair values of the securities presented in the table below were not other-than-temporarily impaired as of September 30, 2012. This conclusion is derived from the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms along with the expectation that they will continue to do so. Also contributing to this conclusion is FGL’s determination that it is more likely than not that FGL will not be required to sell these securities prior to recovery, an assessment of the issuers’ financial condition, and other objective evidence. As it specifically relates to asset-backed securities and commercial mortgage-backed securities, the present value of cash flows expected to be collected is at least the amount of the amortized cost basis of the security and FGL’s management has the intent to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value. The fair value and gross unrealized losses of available-for-sale securities, aggregated by investment category, were as follows:
|  | September 30, 2012 |
|  | Less than 12 months |  |  | 12 months or longer |  |  | Total |
|  | Fair Value |  |  | Gross Unrealized Losses |  |  | Fair Value |  |  | Gross Unrealized Losses |  |  | Fair Value |  |  | Gross Unrealized Losses |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  | $ | 169,794 |  |  | $ | (1,042 | ) |  | $ | 7,533 |  |  | $ | (567 | ) |  | $ | 177,327 |  |  | $ | (1,609 | )
Commercial-mortgage-backed securities |  |  | 813 |  |  |  | (853 | ) |  |  | 10,716 |  |  |  | (1,554 | ) |  |  | 11,529 |  |  |  | (2,407 | )
Corporates |  |  | 411,310 |  |  |  | (8,124 | ) |  |  | 45,482 |  |  |  | (1,844 | ) |  |  | 456,792 |  |  |  | (9,968 | )
Equities |  |  | — |  |  |  | — |  |  |  | 44,513 |  |  |  | (1,272 | ) |  |  | 44,513 |  |  |  | (1,272 | )
Hybrids |  |  | 13,407 |  |  |  | (339 | ) |  |  | 107,707 |  |  |  | (9,211 | ) |  |  | 121,114 |  |  |  | (9,550 | )
Municipals |  |  | 71,160 |  |  |  | (1,090 | ) |  |  | — |  |  |  | — |  |  |  | 71,160 |  |  |  | (1,090 | )
Agency residential mortgage-backed securities |  |  | 1,754 |  |  |  | (199 | ) |  |  | 6,110 |  |  |  | (135 | ) |  |  | 7,864 |  |  |  | (334 | )
Non-agency residential mortgage-backed securities |  |  | 12,853 |  |  |  | (289 | ) |  |  | 101,777 |  |  |  | (3,973 | ) |  |  | 114,630 |  |  |  | (4,262 | )
Total available-for-sale securities |  | $ | 681,091 |  |  | $ | (11,936 | ) |  | $ | 323,838 |  |  | $ | (18,556 | ) |  | $ | 1,004,929 |  |  | $ | (30,492 | )
Total number of available-for-sale securities in an unrealized loss position |  |  |  |  |  |  | 100 |  |  |  |  |  |  |  | 56 |  |  |  |  |  |  |  | 156 |
|  | September 30, 2011 |
|  | Less than 12 months |  |  | 12 months or longer |  |  | Total |
|  | Fair Value |  |  | Gross Unrealized Losses |  |  | Fair Value |  |  | Gross Unrealized Losses |  |  | Fair Value |  |  | Gross Unrealized Losses |
Available-for-sale securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  | $ | 275,135 |  |  | $ | (2,770 | ) |  | $ | — |  |  | $ | — |  |  | $ | 275,135 |  |  | $ | (2,770 | )
Commercial-mortgage-backed securities |  |  | 338,865 |  |  |  | (18,163 | ) |  |  | — |  |  |  | — |  |  |  | 338,865 |  |  |  | (18,163 | )
Corporates |  |  | 3,081,556 |  |  |  | (130,352 | ) |  |  | — |  |  |  | — |  |  |  | 3,081,556 |  |  |  | (130,352 | )
Equities |  |  | 99,772 |  |  |  | (9,033 | ) |  |  | — |  |  |  | — |  |  |  | 99,772 |  |  |  | (9,033 | )
Hybrids |  |  | 450,376 |  |  |  | (51,055 | ) |  |  | — |  |  |  | — |  |  |  | 450,376 |  |  |  | (51,055 | )
Municipals |  |  | 1,137 |  |  |  | (7 | ) |  |  | — |  |  |  | — |  |  |  | 1,137 |  |  |  | (7 | )
Agency residential mortgage-backed securities |  |  | 25,820 |  |  |  | (295 | ) |  |  | — |  |  |  | — |  |  |  | 25,820 |  |  |  | (295 | )
Non-agency residential mortgage-backed securities |  |  | 375,349 |  |  |  | (23,120 | ) |  |  | — |  |  |  | — |  |  |  | 375,349 |  |  |  | (23,120 | )
Total available-for-sale securities |  | $ | 4,648,010 |  |  | $ | (234,795 | ) |  | $ | — |  |  | $ | — |  |  | $ | 4,648,010 |  |  | $ | (234,795 | )
Total number of available-for-sale securities in an unrealized loss position |  |  |  |  |  |  | 505 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  | 505 |
As the amortized cost of all investments was adjusted to fair value as of the FGL Acquisition Date, no individual securities had been in a continuous unrealized loss position greater than twelve months as of September 30, 2011. At September 30, 2012 and 2011, securities in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments, residential mortgage-backed securities and hybrids. Total unrealized losses were $30,492 and $234,795 at September 30, 2012 and 2011, respectively. Exposure to finance-related holdings represents the largest component of the unrealized loss position in the portfolio, as spreads for holdings in this industry sector remain above historical levels. Similar risk aversion effects have impacted prices of commercial mortgage-backed securities and non-agency residential mortgage-backed securities. FGL has added to its non-agency residential mortgage-backed holdings during the year by purchasing securities with an “A” credit rating or above at discounts. As of September 30, 2012, these securities were in an unrealized gain position. FGL has not added to its commercial mortgage-backed security exposure. The improvement in unrealized loss positions in corporate debt instruments from September 30, 2011 to September 30, 2012 was primarily a result of improving conditions for corporate issues. The combination of ongoing liquidity efforts by global central banks to stem contagion from a Eurozone slowdown, and accommodative monetary policy (especially in the U.S.) that is keeping base interest rates low, helped drive strong performance in risk assets in the September 2012 quarter. The prices of securities exposed to the residential real estate market in the U.S. also increased, which management believes is a result of the decline in risk aversion and data indicating that the housing market in the U.S. has begun to improve. At September 30, 2012 and 2011, securities with a fair value of $1,192 and $31,320, respectively, were depressed greater than 20% of amortized cost, which represented less than 1% of the carrying values of all investments. The improvement in unrealized loss positions from September 30, 2011 is primarily due to two factors: (i) securities at depressed prices were sold over the past fiscal year, reducing the size of holdings in an unrealized loss position and (ii) improving risk sentiment has lifted the market prices of investment grade bonds. Based upon FGL’s current evaluation of these securities in accordance with its impairment policy and its intent to retain these investments for a period of time sufficient to allow for recovery in value, FGL has determined that these securities are not other-than-temporarily impaired. The following table provides a reconciliation of the beginning and ending balances of the credit loss portion of other-than-temporary impairments on fixed maturity securities held by FGL at September 30, 2012 and 2011, for which a portion of the other-than-temporary impairment was recognized in AOCI:
|  | Year Ended September 30, |
|  | 2012 |  |  | 2011 |
Beginning balance |  | $ | 667 |  |  | $ | — |
Increases attributable to credit losses on securities: |  |  |  |  |  |  |  |
Other-than-temporary impairment was previously recognized |  |  | 112 |  |  |  | — |
Other-than-temporary impairment was not previously recognized |  |  | 1,902 |  |  |  | 667 |
Ending balance |  | $ | 2,681 |  |  | $ | 667 |
For the year ended September 30, 2012, FGL recognized impairment losses in operations totaling $22,807, including credit impairments of $5,712 and change-of-intent impairments of $17,095, as well as non-credit losses in other comprehensive income totaling $1,529, for investments which experienced other-than-temporary impairments and had an amortized cost of $162,349 and a fair value of $138,013 at the time of impairment. For the year ended September 30, 2011, FGL recognized impairment losses in operations totaling $17,966, including credit impairments of $5,059 and change-of-intent impairments of $12,907, as well as non-credit gains totaling $500 in other comprehensive income, for investments which experienced other-than-temporary impairments and had an amortized cost of $103,312 and a fair value of $85,846 at the time of impairment. Details underlying write-downs taken as a result of other-than-temporary impairments that were recognized in operations and included in net realized gains on securities were as follows:
|  | Year Ended September 30, |
|  | 2012 |  |  | 2011 |
Other-than-temporary impairments recognized in net income: |  |  |  |  |  |  |  |
Commercial mortgage-backed securities |  | $ | — |  |  | $ | 20 |
Corporates |  |  | 4,116 |  |  |  | 1,462 |
Equities |  |  | — |  |  |  | 11,007 |
Hybrids |  |  | 9,688 |  |  |  | — |
Non-agency residential mortgage-backed securities |  |  | 7,531 |  |  |  | 5,059 |
Other invested assets |  |  | 1,472 |  |  |  | 418 |
Total other-than-temporary impairments |  | $ | 22,807 |  |  | $ | 17,966 |
Asset-backed Loans Salus’ portfolio of asset-backed loans receivable, included in “Asset-backed loans and other invested assets” in the Consolidated Balance Sheet as of September 30, 2012, consisted of the following:
|  | September 30, 2012 |
Asset-backed loans, by major industry: |  |  |  |
Wholesale |  | $ | 77,217 |
Apparel |  |  | 70,073 |
Jewelry |  |  | 27,829 |
Other |  |  | 6,295 |
Total asset-backed loans |  |  | 181,414 |
Allowance for credit losses |  |  | 1,360 |
Total asset-backed loans, net |  | $ | 180,054 |
As further discussed in Note 2, Salus establishes its allowance for credit losses through a provision for credit losses based on its evaluation of the credit quality of its loan portfolio. The following table presents the activity in its allowance for credit losses for the year ended September 30, 2012:
|  | Year Ended September 30, 2012 |
Allowance for credit losses: |  |  |  |
Balance at beginning of year |  | $ | — |
Provision for credit losses |  |  | 1,360 |
Charge-offs |  |  | — |
Recoveries |  |  | — |
Balance at end of year |  | $ | 1,360 |
Salus monitors credit quality as indicated by various factors and utilizes such information in its evaluation of the adequacy of the allowance for credit losses. As of September 30, 2012, Salus had no outstanding loans that either were non-performing, in a non-accrual status, or had been subject to a troubled-debt restructuring. As of September 30, 2012, Salus had no outstanding loans that had been individually considered impaired, as all loans were in current payment status. Salus’ internal loan ratings provide information about the credit quality of its asset-based lending borrowers, and its risk of potential loss. The following tables present information about the credit quality of Salus’ asset-based loan portfolio, based on National Association of Insurance Commissioners (“NAIC”) risk rating, as of September 30, 2012: Asset-backed loans, by credit quality rating:
NAIC Designation |  | Credit Equivalent Rating |  | September 30, 2012 |  |  | Percent of Total |
1 |  | AAA/AA/A |  | $ | 75,737 |  |  |  | 42 | %
2 |  | BBB |  |  | 94,901 |  |  |  | 52 | %
3 |  | B |  |  | 10,773 |  |  |  | 6 | %
Not rated |  |  |  |  | 3 |  |  |  | — |
|  | Total asset-backed loans |  | $ | 181,414 |  |  |  | 100 | %
Net Investment Income The major sources of “Net investment income” in the accompanying Consolidated Statements of Operations were as follows:
|  | Year Ended September 30, |
|  | 2012 |  |  | 2011 |
Fixed maturity available-for-sale securities |  | $ | 707,132 |  |  | $ | 364,771 |
Equity available-for-sale securities |  |  | 13,966 |  |  |  | 10,190 |
Invested cash and short-term investments |  |  | 4,921 |  |  |  | 129 |
Policy loans |  |  | 707 |  |  |  | 1,511 |
Other investments |  |  | 7,736 |  |  |  | 326 |
Gross investment income |  |  | 734,462 |  |  |  | 376,927 |
External investment expense |  |  | (11,729 | ) |  |  | (7,087 | )
Net investment income |  | $ | 722,733 |  |  | $ | 369,840 |
Net Investment Gains (Losses) Details underlying “Net investment gains (losses)” reported in the accompanying Consolidated Statements of Operations were as follows:
|  | Year Ended September 30, |
|  | 2012 |  |  | 2011 |
Net realized gains on fixed maturity available-for-sale securities |  | $ | 264,408 |  |  | $ | 16,912 |
Realized gains (losses) on equity securities |  |  | 924 |  |  |  | (10,977 | )
Net realized gains on securities |  |  | 265,332 |  |  |  | 5,935 |
Realized losses on certain derivative instruments |  |  | (10,280 | ) |  |  | (44,776 | )
Unrealized gains (losses) on certain derivative instruments |  |  | 156,332 |  |  |  | (125,976 | )
Change in fair value of derivatives |  |  | 146,052 |  |  |  | (170,752 | )
Realized losses on other invested assets |  |  | (1,384 | ) |  |  | (2,074 | )
Net investment gains (losses) |  | $ | 410,000 |  |  | $ | (166,891 | )
Additional detail regarding the net investment losses is as follows:
|  | Year Ended September 30, |
|  | 2012 |  |  | 2011 |
Total other-than-temporary impairments |  | $ | (24,336 | ) |  | $ | (17,466 | )
Less non-credit portion of other-than-temporary impairments included in other comprehensive income |  |  | (1,529 | ) |  |  | 500 |
Net other-than-temporary impairments |  |  | (22,807 | ) |  |  | (17,966 | )
Gains (losses) on derivative instruments |  |  | 146,052 |  |  |  | (170,752 | )
Other realized investment gains |  |  | 286,755 |  |  |  | 21,827 |
Net investment gains (losses) |  | $ | 410,000 |  |  | $ | (166,891 | )
For the years ended September 30, 2012 and 2011, proceeds from the sale of fixed maturity available-for-sale securities, including assets transferred to Wilton Re as discussed in Note 15 totaled $4,602,958 and $1,803,964, gross gains on such sales totaled $295,923 and $41,989 and gross losses totaled $13,842 and $17,109, respectively. Underlying write-downs taken to fixed maturity available-for-sale securities as a result of other-than-temporary impairments that were recognized in earnings and included in net realized gains on securities above were $22,807 and $17,966 for the year ended September 30, 2012 and 2011, respectively. The portion of other-than-temporary impairments recognized in AOCI is disclosed in Note 14. Cash flows from consolidated investing activities by security classification were as follows:
|  | Year Ended September 30, |
|  | 2012 |  |  | 2011 |  |  | 2010 |
Proceeds from investments sold, matured or repaid: |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale |  | $ | 5,833,423 |  |  | $ | 1,482,195 |  |  | $ | — |
Held-to-maturity |  |  | 109,636 |  |  |  | 101,755 |  |  |  | 30,094 |
Trading (acquired for holding) |  |  | 106,074 |  |  |  | 29,532 |  |  |  | — |
Derivatives and other |  |  | 157,563 |  |  |  | 86,437 |  |  |  | — |
|  | $ | 6,206,696 |  |  | $ | 1,699,919 |  |  | $ | 30,094 |
Cost of investments acquired: |  |  |  |  |  |  |  |  |  |  |  |
Available-for-sale |  | $ | 5,640,090 |  |  | $ | 1,285,951 |  |  | $ | — |
Held-to-maturity |  |  | 68,733 |  |  |  | 123,428 |  |  |  | 3,989 |
Trading |  |  | 122,289 |  |  |  | 332,715 |  |  |  | — |
Derivatives and other |  |  | 141,603 |  |  |  | 66,905 |  |  |  | — |
|  | $ | 5,972,715 |  |  | $ | 1,808,999 |  |  | $ | 3,989 |

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- Definition The entire disclosure for cash, cash equivalents, investments in debt and equity instruments (including cost and equity investees and related income statement amounts), equity and cost method investments, investments in joint ventures and any other investment. + References No definition available. + Details
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