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Investments

3 Months Ended

Jan. 01, 2012

(3) Investments

Consumer Products and Other

HGI’s short-term investments consist of (1) marketable equity and debt securities classified as trading and carried at fair value with unrealized gains and losses recognized in earnings, including certain securities for which the Company has elected the fair value option under Accounting Standards Codification (“ASC”) Topic 825, Financial Instruments, which would otherwise have been classified as available-for-sale, and (2) U.S. Treasury securities and a certificate of deposit classified as held to maturity and carried at amortized cost, which approximates fair value. The Company’s short-term investments are summarized as follows:


	January 1,		September 30,
	2012		2011
Trading:
Marketable equity securities	$	210,315	$	262,085
Marketable debt securities		48,435		12,665

		258,750		274,750

Held to maturity:
U.S. Treasury securities		34,748		75,638
Certificate of deposit		250		250

		34,998		75,888

Total investments	$	293,748	$	350,638

Insurance

FGL’s debt and equity securities have been designated as available-for-sale and are carried at fair value with unrealized gains and losses included in AOCI, net of associated VOBA, DAC and deferred income taxes. Investments of FGL at January 1, 2012 and September 30, 2011 are summarized as follows:


	January 1, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value and Carrying Value

Available-for-sale securities
Asset-backed securities	$	504,277	$	1,485	$	(8,557	)	$	497,205
Commercial mortgage-backed securities		571,275		14,809		(7,764	)		578,320
Corporates		10,429,399		473,276		(102,069	)		10,800,606
Equities		268,441		3,444		(9,459	)		262,426
Hybrids		682,310		7,283		(37,240	)		652,353
Municipals		811,230		98,159		(5	)		909,384
Agency residential mortgage-backed securities		193,979		4,317		(437	)		197,859
Non-agency residential mortgage-backed securities		444,783		1,821		(23,975	)		422,629
U.S. Government		136,770		9,277		—			146,047

Total available-for-sale securities		14,042,464		613,871		(189,506	)		14,466,829
Derivative investments		148,484		7,669		(73,221	)		82,932
Other invested assets		19,292		—		—			19,292

Total investments	$	14,210,240	$	621,540	$	(262,727	)	$	14,569,053


	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 unrealized gains of $769 and $524 and unrealized losses of $1,192 and $24 related to the non-credit portion of other-than-temporary impairments on non-agency residential-mortgage-backed securities at January 1, 2012 and September 30, 2011, respectively.

The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, were as follows:


	January 1, 2012
	Amortized Cost		Fair Value
Corporate, Municipal and U.S. Government securities:
Due in one year or less	$	348,869	$	348,570
Due after one year through five years		2,730,848		2,749,866
Due after five years through ten years		3,989,327		4,115,965
Due after ten years		4,308,355		4,641,636

Subtotal		11,377,399		11,856,037
Other securities which provide for periodic payments:
Asset-backed securities		504,277		497,205
Commercial-mortgage-backed securities		571,275		578,320
Hybrids		682,310		652,353
Agency residential mortgage-backed securities		193,979		197,859
Non-agency residential mortgage-backed securities		444,783		422,629

Total fixed maturity available-for-sale securities	$	13,774,023	$	14,204,403

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

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 tables below were not other-than-temporary impairments as of January 1, 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 management has the intent to hold these securities for a period of time sufficient to allow for any anticipated recovery in fair value.

As the amortized cost of all investments was adjusted to fair value as of the FGL Acquisition date, no individual securities have been in a continuous unrealized loss position greater than twelve months. The fair value and gross unrealized losses, of available-for-sale securities, aggregated by investment category, were as follows:

		00,000,000		00,000,000
	January 1, 2012
	Fair Value		Gross Unrealized Losses
Available-for-sale securities
Asset-backed securities	$	381,483	$	(8,557	)
Commercial-mortgage-backed securities		190,983		(7,764	)
Corporates		2,444,570		(102,069	)
Equities		85,879		(9,459	)
Hybrids		398,139		(37,240	)
Municipals		286		(5	)
Agency residential mortgage-backed securities		20,912		(437	)
Non-agency residential mortgage-backed securities		322,672		(23,975	)

Total available-for-sale securities	$	3,844,924	$	(189,506	)


Total number of available-for-sale securities in an unrealized loss position				421

		00,000,000		00,000,000
	September 30, 2011
	Fair Value		Gross Unrealized Losses
Available-for-sale securities
Asset-backed securities	$	275,135	$	(2,770	)
Commercial-mortgage-backed securities		338,865		(18,163	)
Corporates		3,081,556		(130,352	)
Equities		99,772		(9,033	)
Hybrids		450,376		(51,055	)
Municipals		1,137		(7	)
Agency residential mortgage-backed securities		25,820		(295	)
Non-agency residential mortgage-backed securities		375,349		(23,120	)

Total available-for-sale securities	$	4,648,010	$	(234,795	)


Total number of available-for-sale securities in an unrealized loss position				505

At January 1, 2012 and September 30, 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 $189,506 and $234,795 at January 1, 2012 and September 30, 2011, respectively. Financial sector-related exposure represents the largest component of the unrealized loss position in the portfolio at January 1, 2012 and September 30, 2011. Elevated risk aversion in capital markets during the most recent period continues to affect prices of commercial mortgage-backed securities and non-agency residential mortgage-backed securities, including the earlier vintage generally investment grade rated securities currently owned. FGL has not added to any exposure in these sectors and will continue to monitor existing positions carefully.

At January 1, 2012 and September 30, 2011, securities with a fair value of $46,220 and $31,320, respectively, were depressed greater than 20% of amortized cost, which represented less than 1% of the carrying values of all investments. Based upon FGL’s current evaluation of these securities in accordance with its impairment policy and FGL’s 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 January 1, 2012, for which a portion of the other-than-temporary impairment was recognized in AOCI:


Balance at September 30, 2011	$	667
Increases attributable to credit losses on securities:
Other-than-temporary impairment was previously recognized		—
Other-than-temporary impairment was not previously recognized		1,465

Balance at January 1, 2012	$	2,132

For the three months ended January 1, 2012, FGL recognized impairment losses in operations totaling $13,165, which experienced other-than-temporary impairments and had an amortized cost of $66,873 and a fair value of $52,785 at the time of impairment. Details underlying write-downs taken as a result of other-than-temporary impairments that were recognized in net income and included in realized gains on investments were as follows:


	Three Months Ended January 1, 2012
Other-than-temporary impairments recognized in net income:
Corporates	$	696
Non-agency residential mortgage-backed securities		2,781
Hybrids		9,688

Total other-than-temporary impairments	$	13,165

Net Investment Income

The major sources of “Net investment income” on the accompanying Condensed Consolidated Statements of Operations were as follows:


	Three Months Ended January 1, 2012
Fixed maturity available-for-sale securities	$	187,220
Equity available-for-sale securities		2,594
Policy loans		251
Invested cash and short-term investments		126
Other investments		(284	)

Gross investment income		189,907
Investment expense		(3,118	)

Net investment income	$	186,789

Net Investment Gains (Losses)

Details underlying “Net investment gains” reported on the accompanying Condensed Consolidated Statements of Operations were as follows:


	Three Months Ended January 1, 2012
Net realized gain on fixed maturity available-for-sale securities	$	68,661
Realized gain on equity securities		320

Net realized gains on securities		68,981

Realized (loss) on certain derivative instruments		(15,488	)
Unrealized gain on certain derivative instruments		50,325

Change in fair value of derivatives		34,837

Realized gain on other invested assests		126

Net investment gains	$	103,944

Additional detail regarding the net investment gains on securities is as follows:


	Three Months Ended January 1, 2012
Total other-than-temporary impairments	$	(14,088	)
Less non-credit portion of other-than-temporary impairments included in other comprehensive income		(923	)

Net other-than-temporary impairments		(13,165	)
Gains on derivative instruments		34,837
Other realized investment gains		82,272

Net realized gains on securities	$	103,944

For the three months ended January 1, 2012, principal repayments, calls, tenders and proceeds from the sale of fixed maturity available-for-sale securities, including assets transferred to Wilton Re as discussed in Note 9, totaled $1,733,180, gross gains on such sales totaled $92,329 and gross losses totaled $10,503.

Underlying write-downs taken to fixed maturity available-for-sale securities as a result of other-than-temporary impairments that were recognized in net income and included in net realized gains on available-for-sale securities above were $13,165 for the three months ended January 1, 2012.

Cash flows from consolidated investing activities by security classification were as follows:


	Three Months Ended
	January 1, 2012			January 2, 2011
Proceeds from investments sold, matured or repaid:
Available-for-sale	$	1,605,932		$	—
Held-to-maturity		70,900			33,954
Trading (acquired for holding)		21,427			—
Derivatives and other		41,487			—

	$	1,739,746		$	33,954


Cost of investments acquired:
Available-for-sale	$	(536,564	)	$	—
Held-to-maturity		(30,010	)		(51,927	)
Trading		(54,143	)		—
Derivatives and other		(33,762	)		—

	$	(654,479	)	$	(51,927	)

Concentrations of Financial Instruments

As of January 1, 2012, FGL’s most significant investment in one industry was FGL’s investment securities in the banking industry with a fair value of $1,828,608, or 12.6% of the invested assets portfolio. As of January 1, 2012, FGL’s exposure to sub-prime and Alternative-A residential mortgage-backed securities was $253,449 and $31,609 or 1.7% and 0.2% of FGL’s invested assets, respectively.