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Investments

6 Months Ended

Apr. 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:


	April 1, 2012		September 30, 2011
Trading:
Marketable equity securities	$	177,113	$	262,085
Marketable debt securities		6,625		12,665

		183,738		274,750

Held-to-maturity:
U.S. Treasury securities		34,746		75,638
Certificate of deposit		250		250

		34,996		75,888

Total short-term investments	$	218,734	$	350,638

Insurance and Financial Services

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 and Salus at April 1, 2012 and September 30, 2011 are summarized as follows:


	April 1, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value and Carrying Value
Available-for-sale securities
Asset-backed securities	$	585,839	$	4,579	$	(2,659	)	$	587,759
Commercial mortgage-backed securities		525,105		19,270		(5,154	)		539,221
Corporates		10,577,039		454,530		(27,457	)		11,004,112
Equities		231,932		5,571		(1,112	)		236,391
Hybrids		674,398		12,273		(14,268	)		672,403
Municipals		841,132		120,971		(222	)		961,881
Agency residential mortgage-backed securities		178,540		4,564		(298	)		182,806
Non-agency residential mortgage-backed securities		474,149		2,626		(13,358	)		463,417
U.S. Government		86,605		8,347		(11	)		94,941

Total available-for-sale securities		14,174,739		632,731		(64,539	)		14,742,931
Derivative investments		147,724		63,469		(24,646	)		186,547
Asset-backed loans and other invested assets		55,569		—		—			55,569

Total investments	$	14,378,032	$	696,200	$	(89,185	)	$	14,985,047


	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 $1,880 and $24 related to the non-credit portion of other-than-temporary impairments on non-agency residential-mortgage-backed securities at April 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, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.


	April 1, 2012
	Amortized Cost		Fair Value
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities:
Due in one year or less	$	832,022	$	833,577
Due after one year through five years		2,575,171		2,634,039
Due after five years through ten years		3,766,969		3,943,316
Due after ten years		4,859,646		5,181,065

Subtotal		12,033,808		12,591,997
Other securities which provide for periodic payments:
Asset-backed securities		585,839		587,759
Commercial-mortgage-backed securities		525,105		539,221
Structured hybrids		145,366		141,340
Agency residential mortgage-backed securities		178,540		182,806
Non-agency residential mortgage-backed securities		474,149		463,417

Total fixed maturity available-for-sale securities	$	13,942,807	$	14,506,540

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 April 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:


	April 1, 2012
	Fair Value		Gross Unrealized Losses
Available-for-sale securities
Asset-backed securities	$	149,232	$	(2,659	)
Commercial-mortgage-backed securities		70,198		(5,154	)
Corporates		1,394,724		(27,457	)
Equities		29,751		(1,112	)
Hybrids		296,946		(14,268	)
Municipals		16,857		(222	)
Agency residential mortgage-backed securities		12,399		(298	)
Non-agency residential mortgage-backed securities		343,401		(13,358	)
U.S Government		3,697		(11	)

Total available-for-sale securities	$	2,317,205	$	(64,539	)

Total number of available-for-sale securities in an unrealized loss position				282


	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 April 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 $64,539 and $234,795 at April 1, 2012 and September 30, 2011, respectively. Financial sector-related exposure represents the largest component of the unrealized loss position in the portfolio at April 1, 2012 and September 30, 2011. The improvement in unrealized loss positions in corporate debt instruments from September 30, 2011 to April 1, 2012 was primarily result of a decline in risk aversion by market participants during the period driven by the coordinated efforts of global central banks in late 2011 to provide liquidity to European institutions. The continued rally in risk assets during the March 2012 quarter helped drive further improvement in corporate debt instruments. During the fiscal 2012 six month period, spreads on “A” rated corporate bonds declined by 65 basis points. As capital market and economic conditions have improved, prices on the portfolio’s mortgage-related securities have risen. Similarly, prices on the portfolio’s hybrid and subordinated securities have improved, reflecting the recovery of the more economically sensitive asset classes along with that of the broader market. 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.

At April 1, 2012 and September 30, 2011, securities with a fair value of $9,844 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: (1) securities at depressed prices were sold over the past six months, reducing the size of holdings at an unrealized loss position and (2) the decline in fixed income spreads over the past six months, specifically spreads on investment grade bonds, as risk aversion by market participants declined and risk assets rallied, which contributed to an improvement in market values. 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 April 1, 2012, for which a portion of the other-than-temporary impairment was recognized in AOCI:


	April 1, 2012
	Three Months		Six Months
Beginning balance	$	2,132	$	667
Increases attributable to credit losses on securities:
Other-than-temporary impairment was previously recognized		—		—
Other-than-temporary impairment was not previously recognized		437		1,902

Balance at April 1, 2012	$	2,569	$	2,569

For the three and six months ended April 1, 2012, FGL recognized impairment losses in operations totaling $4,135 and $17,300, respectively, for investments which experienced other-than-temporary impairments and had an amortized cost of $86,937 and a fair value of $68,026 at April 1, 2012. 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:


	April 1, 2012
	Three Months		Six Months
Other-than-temporary impairments recognized in net income:
Corporates	$	—	$	696
Non-agency residential mortgage-backed securities		3,292		6,073
Hybrids		—		9,688
Other invested assets		843		843

Total other-than-temporary impairments	$	4,135	$	17,300

Net Investment Income

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


	April 1, 2012
	Three Months			Six Months
Fixed maturity available-for-sale securities	$	170,472		$	357,692
Equity available-for-sale securities		3,428			6,022
Policy loans		174			425
Invested cash and short-term investments		1,227			1,353
Other investments		851			567

Gross investment income		176,152			366,059
External investment expense		(3,181	)		(6,299	)

Net investment income	$	172,971		$	359,760

Net Investment Gains (Losses)

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


	April 1, 2012
	Three Months			Six Months
Net realized gain on fixed maturity available-for-sale securities	$	65,632		$	134,293
Realized gain on equity securities		46			366

Net realized gains on securities		65,678			134,659

Realized gains (losses) on certain derivative instruments		9,782			(5,706	)
Unrealized gains on certain derivative instruments		89,163			139,488

Change in fair value of derivatives		98,945			133,782

Realized loss on other invested assests		(1,045	)		(919	)

Net investment gains	$	163,578		$	267,522

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


	April 1, 2012
	Three Months			Six Months
Total other-than-temporary impairments	$	(4,823	)	$	(18,911	)
Less non-credit portion of other-than-temporary impairments included in other comprehensive income		(688	)		(1,611	)

Net other-than-temporary impairments		(4,135	)		(17,300	)
Gains on derivative instruments		98,945			133,782
Other realized investment gains		68,768			151,040

Net realized gains on securities	$	163,578		$	267,522

For the three and six months ended April 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 $1,416,970 and $3,150,150, gross gains on such sales totaled $70,110 and $162,439 and gross losses totaled $1,186 and $11,689, 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 available-for-sale securities above were $4,135 and $17,300 for the three and six months ended April 1, 2012, respectively.

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


	Six Months Ended
	April 1, 2012			April 3, 2011
Proceeds from investments sold, matured or repaid:
Available-for-sale	$	3,059,702		$	—
Held-to-maturity		74,900			37,955
Trading (acquired for holding)		9,211			—
Derivatives and other		79,339			—

	$	3,223,152		$	37,955

Cost of investments acquired:
Available-for-sale	$	(2,022,000	)	$	—
Held-to-maturity		(34,008	)		(51,918	)
Trading		(70,454	)		—
Derivatives and other		(67,863	)		—

	$	(2,194,325	)	$	(51,918	)

Concentrations of Financial Instruments

As of April 1, 2012, FGL’s most significant investment in one industry was FGL’s investment securities in the banking industry with a fair value of $2,112,484 or 14.1% of the invested assets portfolio. FGL’s holdings in this industry includes investments in 130 different issuers with the top ten investments accounting for 35% of the total holdings in this industry. As of April 1, 2012, FGL’s exposure to sub-prime and Alternative-A residential mortgage-backed securities was $243,487 and $36,446 or 1.6% and 0.2% of FGL’s invested assets, respectively.