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Fair Value of Financial Instruments
 3 Months Ended
Jan. 01, 2012
Fair Value of Financial Instruments [Abstract]  
Fair Value of Financial Instruments

(5) Fair Value of Financial Instruments

The Company’s measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which may include the Company’s own credit risk. The Company’s estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). The Company categorizes financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:

Level 1 — Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.

Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.

Level 3 — Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.

 

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lower level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.

The carrying amounts and estimated fair values of the Company’s consolidated financial instruments for which the disclosure of fair values is required were as follows (asset/(liability)):

 

                                 
    January 1, 2012     September 30, 2011  
    Carrying
Amount		     Fair Value     Carrying
Amount		     Fair Value  

Consumer Products and Other

                                

Cash and cash equivalents

   $ 360,444     $ 360,444     $ 321,352     $ 321,352  

Short-term investments (including related interest receivable of $3 and $9)

     293,751       293,745       350,647       350,649  

Total debt

     (2,276,764 )      (2,357,922 )      (2,048,780 )      (2,135,528 ) 

Derivatives:

                                

Interest rate swap agreements

     (993 )      (993 )      (1,954 )      (1,954 ) 

Commodity swap and option agreements

     (1,357 )      (1,357 )      (958 )      (958 ) 

Foreign exchange forward agreements

     (9,145 )      (9,145 )      (22,490 )      (22,490 ) 

Equity conversion feature of preferred stock

     (47,430 )      (47,430 )      (75,350 )      (75,350 ) 

Redeemable preferred stock, excluding equity conversion feature

     (300,040 )      (359,970 )      (292,437 )      (337,060 ) 

Insurance

                                

Cash and cash equivalents

     1,844,343       1,844,343       816,007       816,007  

Investments:

                                

Fixed maturities, available-for-sale

     14,204,403       14,204,403       15,367,474       15,367,474  

Equity securities, available-for-sale

     262,426       262,426       287,043       287,043  

Other invested assets

     19,292       19,292       44,279       44,279  

Derivatives:

                                

Call options

     82,932       82,932       52,335       52,335  

Future contracts

     (736 )      (736 )      (3,828 )      (3,828 ) 

Available-for-sale embedded derivatives

     (388 )      (388 )      (400 )      (400 ) 

Investment contracts, included in contractholder funds

     (14,853,421 )      (13,560,194 )      (14,549,970 )      (13,388,353 ) 

Note payable

     —         —         (95,000 )      (95,000 ) 

The carrying amounts of receivables, accounts payable, accrued investment income and portions of other insurance liabilities approximate fair value due to their short duration and, accordingly, they are not presented in the tables above.

The fair values of cash equivalents, short-term investments and debt set forth above are generally based on quoted or observed market prices. Investment contracts include deferred annuities, FIAs, universal life insurance (“UL”) and immediate annuities. The fair values of deferred annuity, FIAs, and UL contracts are based on their cash surrender value (i.e. the cost FGL would incur to extinguish the liability) as these contracts are generally issued without an annuitization date. The fair value of immediate annuities contracts is derived by calculating a new fair value interest rate using the updated yield curve and treasury spreads as of the respective reporting date. At January 1, 2012 and September 30, 2011, this resulted in lower fair value reserves relative to the carrying value. The Company is not required to and has not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosure of fair value. The fair value of FGL’s note payable at September 30, 2011 approximated its carrying value as it was settled at such carrying value in October 2011.

 

Goodwill, intangible assets and other long-lived assets are also tested annually or if a triggering event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).

Financial assets and liabilities measured and carried at fair value on a recurring basis in the accompanying Condensed Consolidated Balance Sheets are summarized, according to the hierarchy previously described, as follows:

 

                                 
    January 1, 2012  
    Level 1     Level 2     Level 3     Total  

Assets

                                

Fixed maturity securities, available-for-sale:

                                

Asset-backed securities

   $ —       $ 96,502     $ 400,703     $ 497,205  

Commercial mortgage-backed securities

     —         578,320       —         578,320  

Corporates

     —         10,662,053       138,553       10,800,606  

Hybrids

     —         647,215       5,138       652,353  

Municipals

     —         909,334       50       909,384  

Agency residential mortgage-backed securities

     —         194,547       3,312       197,859  

Non-agency residential mortgage-backed securities

     —         418,992       3,637       422,629  

U.S. Government

     146,047       —         —         146,047  

Fixed maturity securities - trading

     —         48,435       —         48,435  

Equity securities - available-for-sale

     —         262,426       —         262,426  

Equity securities - trading

     210,315       —         —         210,315  

Derivatives:

                                

Call options

     —         82,932       —         82,932  

Foreign exchange forward agreements

     —         5,610       —         5,610  

Commodity swap and option agreements

     —         9       —         9  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total assets carried at fair value

   $ 356,362     $ 13,906,375     $ 551,393     $ 14,814,130  
   

 

 

    

 

 

    

 

 

    

 

 

  
         

Liabilities

                                

Derivatives:

                                

FIA embedded derivatives, included in contractholder funds

   $ —       $ —       $ (1,455,073 )    $ (1,455,073 ) 

Future contracts

     —         (736 )      —         (736 ) 

Available-for-sale embedded derivatives

     —         —         (388 )      (388 ) 

Interest rate swap agreements

     —         (993 )      —         (993 ) 

Commodity swap and option agreements

     —         (1,366 )      —         (1,366 ) 

Foreign exchange forward agreements

     —         (14,755 )      —         (14,755 ) 

Equity conversion feature of preferred stock

     —         —         (47,430 )      (47,430 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Total liabilities carried at fair value

   $ —       $ (17,850 )    $ (1,502,891 )    $ (1,520,741 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  
                                 
    September 30, 2011  
    Level 1     Level 2     Level 3     Total  

Assets

                                

Fixed maturity securities, available-for-sale:

                                

Asset-backed securities

   $ —       $ 125,966     $ 374,518     $ 500,484  

Commercial mortgage-backed securities

     —         565,577       —         565,577  

Corporates

     —         11,696,090       159,684       11,855,774  

Hybrids

     —         654,084       5,205       659,289  

Municipals

     —         936,484       —         936,484  

Agency residential mortgage-backed securities

     —         218,713       3,312       222,025  

Non-agency residential mortgage-backed securities

     —         440,758       3,759       444,517  

U.S. Government

     183,324       —         —         183,324  

Fixed maturity securities - trading

     —         12,665       —         12,665  

Equity securities - available-for-sale

     —         287,043       —         287,043  

Equity securities - trading

     238,062       24,023       —         262,085  

Derivatives:

                                

Call options

     —         52,335       —         52,335  

Foreign exchange forward agreements

     —         3,189       —         3,189  

Commodity swap and option agreements

     —         274       —         274  
   

 

 

    

 

 

    

 

 

    

 

 

  

Total assets carried at fair value

   $ 421,386     $ 15,017,201     $ 546,478     $ 15,985,065  
   

 

 

    

 

 

    

 

 

    

 

 

  
         

Liabilities

                                

Derivatives:

                                

FIA embedded derivatives, included in contractholder funds

   $ —       $ —       $ (1,396,340 )    $ (1,396,340 ) 

Future contracts

     —         (3,828 )      —         (3,828 ) 

Available-for-sale embedded derivatives

     —         —         (400 )      (400 ) 

Interest rate swap agreements

     —         (1,954 )      —         (1,954 ) 

Commodity swap and option agreements

     —         (1,232 )      —         (1,232 ) 

Foreign exchange forward agreements

     —         (25,679 )      —         (25,679 ) 

Equity conversion feature of preferred stock

     —         —         (75,350 )      (75,350 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Total liabilities carried at fair value

   $ —       $ (32,693 )    $ (1,472,090 )    $ (1,504,783 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

The following tables summarize changes to financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy, all of which are held by FGL except for the equity conversion feature of HGI’s Preferred Stock. This summary excludes any impact of amortization of VOBA and DAC. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.

 

                                                 
    Three Month Period Ended January 1, 2012  
    Balance at
Beginning
of Period		    

 

Total Gains (Losses)

     Net
Purchases,
Sales &
Settlements		     Net
Transfer  In
(Out) of
Level 3 (a)		     Balance at
End of
Period		  
    Included in
Earnings		     Included in
AOCI		        

Assets

                                                

Fixed maturity securities available-for-sale:

                                                

Asset-backed securities

   $ 374,518     $ —       $ (4,575 )    $ 30,760     $ —       $ 400,703  

Corporates

     159,684       (66 )      (856 )      (9,811 )      (10,398 )      138,553  

Hybrids

     5,205       —         (67 )      —         —         5,138  

Municipals

     —         (1 )      —         (10 )      61       50  

Agency residential mortgage-backed securities

     3,312       —         —         —         —         3,312  

Non-agency residential mortgage-backed securities

     3,759       —         (25 )      (97 )      —         3,637  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total assets at fair value

   $ 546,478     $ (67 )    $ (5,523 )    $ 20,842     $ (10,337 )    $ 551,393  
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  
             

Liabilities

                                                

FIA embedded derivatives, included in contractholder funds

   $ (1,396,340 )    $ (58,733 )    $ —       $ —       $ —       $ (1,455,073 ) 

Available-for-sale embedded derivatives

     (400 )      12       —         —         —         (388 ) 

Equity conversion feature of preferred stock

     (75,350 )      27,920                               (47,430 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

Total liabilities at fair value

   $ (1,472,090 )    $ (30,801 )    $ —       $ —       $ —       $ (1,502,891 ) 
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

  

 

(a) The net transfers in and out of Level 3 during the three month period ended January 1, 2012 were exclusively to or from Level 2.

 

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. There were no transfers between Level 1 and Level 2 for the period ended January 1, 2012.

During the three months ended January 1, 2012, primary market issuance and secondary market activity for certain corporate securities increased the market observable inputs used to establish fair values for similar securities. These factors, along with more consistent pricing from third-party sources, resulted in FGL’s conclusion that there is sufficient trading activity in similar instruments to support classifying these securities as Level 2 as of January 1, 2012. Accordingly, FGL’s assessment resulted in a transfer out of Level 3 of $10,398 related to corporate and a transfer into Level 3 of $61 related to municipal securities during the three months ended January 1, 2012.

The following table presents the gross components of purchases, sales, and settlements, net, of Level 3 financial instruments during the three month period ended January 1, 2012. There were no issuances during this period.

 

                                 
    Three Month Period Ended January 1, 2012  
    Purchases     Sales     Settlements     Net purchases, sales
& settlements		  

Assets

                                

Fixed maturity, securities available-for-sale:

                                

Asset-backed securities

   $ 38,829     $ —       $ (8,069 )    $ 30,760  

Corporates

     —         (7,011 )      (2,800 )      (9,811 ) 

Municipals

     —         —         (10 )      (10 ) 

Non-agency residential mortgage-backed securities

     —         —         (97 )      (97 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Total assets

   $ 38,829     $ (7,011 )    $ (10,976 )    $ 20,842