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Fair Value of Financial Instruments | 9 Months Ended
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Jul. 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, including financial assets and liabilities measured and carried at fair value on a recurring basis, are summarized according to the hierarchy previously described as follows:
|  | July 1, 2012 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |  |  | Carrying Amount |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer Products and Other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 262,261 |  |  | $ | — |  |  | $ | — |  |  | $ | 262,261 |  |  | $ | 262,261 |
Contingent purchase price reduction receivable |  |  | — |  |  |  | — |  |  |  | 41,000 |  |  |  | 41,000 |  |  |  | 41,000 |
Short-term investments (including related interest receivable of $8) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities — trading |  |  | 162,518 |  |  |  | — |  |  |  | — |  |  |  | 162,518 |  |  |  | 162,518 |
Fixed maturity securities — held-to-maturity |  |  | — |  |  |  | 35,005 |  |  |  | — |  |  |  | 35,005 |  |  |  | 35,006 |
Fixed maturity securities — trading |  |  | — |  |  |  | 6,725 |  |  |  | — |  |  |  | 6,725 |  |  |  | 6,725 |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward agreements |  |  | — |  |  |  | 5,556 |  |  |  | — |  |  |  | 5,556 |  |  |  | 5,556 |
Insurance and Financial Services |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 1,560,481 |  |  |  | 10,084 |  |  |  | — |  |  |  | 1,570,565 |  |  |  | 1,570,565 |
Fixed maturity securities, available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  |  | — |  |  |  | 63,610 |  |  |  | 759,076 |  |  |  | 822,686 |  |  |  | 822,686 |
Commercial mortgage-backed securities |  |  | — |  |  |  | 538,523 |  |  |  | — |  |  |  | 538,523 |  |  |  | 538,523 |
Corporates |  |  | — |  |  |  | 10,831,535 |  |  |  | 147,243 |  |  |  | 10,978,778 |  |  |  | 10,978,778 |
Hybrids |  |  | — |  |  |  | 621,675 |  |  |  | 5,181 |  |  |  | 626,856 |  |  |  | 626,856 |
Municipals |  |  | — |  |  |  | 1,246,045 |  |  |  | 55 |  |  |  | 1,246,100 |  |  |  | 1,246,100 |
Agency residential mortgage-backed securities |  |  | — |  |  |  | 168,026 |  |  |  | — |  |  |  | 168,026 |  |  |  | 168,026 |
Non-agency residential mortgage-backed securities |  |  | — |  |  |  | 549,212 |  |  |  | 615 |  |  |  | 549,827 |  |  |  | 549,827 |
U.S. Government |  |  | 139,156 |  |  |  | — |  |  |  | — |  |  |  | 139,156 |  |  |  | 139,156 |
Equity securities — available-for-sale |  |  | — |  |  |  | 242,264 |  |  |  | — |  |  |  | 242,264 |  |  |  | 242,264 |
Derivative financial instruments |  |  | — |  |  |  | 160,565 |  |  |  | — |  |  |  | 160,565 |  |  |  | 160,565 |
Asset-backed loans and other invested assets |  |  | — |  |  |  | — |  |  |  | 92,424 |  |  |  | 92,424 |  |  |  | 92,424 |
Total financial assets |  | $ | 2,124,416 |  |  | $ | 14,478,825 |  |  | $ | 1,045,594 |  |  | $ | 17,648,835 |  |  | $ | 17,648,836 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer Products and Other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total debt |  | $ | 510,000 |  |  | $ | 1,957,870 |  |  | $ | — |  |  | $ | 2,467,870 |  |  | $ | 2,324,655 |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward agreements |  |  | — |  |  |  | 4,037 |  |  |  | — |  |  |  | 4,037 |  |  |  | 4,037 |
Commodity swap and option agreements |  |  | — |  |  |  | 2,693 |  |  |  | — |  |  |  | 2,693 |  |  |  | 2,693 |
Equity conversion feature of preferred stock |  |  | — |  |  |  | — |  |  |  | 199,360 |  |  |  | 199,360 |  |  |  | 199,360 |
Redeemable preferred stock, excluding equity conversion feature |  |  | — |  |  |  | — |  |  |  | 366,600 |  |  |  | 366,600 |  |  |  | 313,450 |
Insurance and Financial Services |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FIA embedded derivatives, included in contractholder funds |  |  | — |  |  |  | — |  |  |  | 1,486,465 |  |  |  | 1,486,465 |  |  |  | 1,486,465 |
Investment contracts, included in contractholder funds |  |  | — |  |  |  | — |  |  |  | 12,339,474 |  |  |  | 12,339,474 |  |  |  | 13,799,351 |
Total financial liabilities |  | $ | 510,000 |  |  | $ | 1,964,600 |  |  | $ | 14,391,899 |  |  | $ | 16,866,499 |  |  | $ | 18,130,011 |
|  | September 30, 2011 |
|  | Level 1 |  |  | Level 2 |  |  | Level 3 |  |  | Fair Value |  |  | Carrying Amount |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer Products and Other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  | $ | 321,352 |  |  | $ | — |  |  | $ | — |  |  | $ | 321,352 |  |  | $ | 321,352 |
Short-term investments (including related interest receivable of $9) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity securities — trading |  |  | 238,062 |  |  |  | 24,023 |  |  |  | — |  |  |  | 262,085 |  |  |  | 262,085 |
Fixed maturity securities — held to maturity |  |  | — |  |  |  | 75,899 |  |  |  | — |  |  |  | 75,899 |  |  |  | 75,897 |
Fixed maturity securities — trading |  |  | — |  |  |  | 12,665 |  |  |  | — |  |  |  | 12,665 |  |  |  | 12,665 |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward agreements |  |  | — |  |  |  | 3,189 |  |  |  | — |  |  |  | 3,189 |  |  |  | 3,189 |
Commodity swap and option agreements |  |  | — |  |  |  | 274 |  |  |  | — |  |  |  | 274 |  |  |  | 274 |
Insurance and Financial Services |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Cash and cash equivalents |  |  | 813,239 |  |  |  | 2,768 |  |  |  | — |  |  |  | 816,007 |  |  |  | 816,007 |
Fixed maturity securities, available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  |  | — |  |  |  | 125,966 |  |  |  | 374,518 |  |  |  | 500,484 |  |  |  | 500,484 |
Commercial mortgage-backed securities |  |  | — |  |  |  | 565,577 |  |  |  | — |  |  |  | 565,577 |  |  |  | 565,577 |
Corporates |  |  | — |  |  |  | 11,696,090 |  |  |  | 159,684 |  |  |  | 11,855,774 |  |  |  | 11,855,774 |
Hybrids |  |  | — |  |  |  | 654,084 |  |  |  | 5,205 |  |  |  | 659,289 |  |  |  | 659,289 |
Municipals |  |  | — |  |  |  | 936,484 |  |  |  | — |  |  |  | 936,484 |  |  |  | 936,484 |
Agency residential mortgage-backed securities |  |  | — |  |  |  | 218,713 |  |  |  | 3,312 |  |  |  | 222,025 |  |  |  | 222,025 |
Non-agency residential mortgage-backed securities |  |  | — |  |  |  | 440,758 |  |  |  | 3,759 |  |  |  | 444,517 |  |  |  | 444,517 |
U.S. Government |  |  | 183,324 |  |  |  | — |  |  |  | — |  |  |  | 183,324 |  |  |  | 183,324 |
Equity securities — available-for-sale |  |  | — |  |  |  | 287,043 |  |  |  | — |  |  |  | 287,043 |  |  |  | 287,043 |
Derivative financial instruments |  |  | — |  |  |  | 52,335 |  |  |  | — |  |  |  | 52,335 |  |  |  | 52,335 |
Other invested assets |  |  | — |  |  |  | — |  |  |  | 44,279 |  |  |  | 44,279 |  |  |  | 44,279 |
Total financial assets |  | $ | 1,555,977 |  |  | $ | 15,095,868 |  |  | $ | 590,757 |  |  | $ | 17,242,602 |  |  | $ | 17,242,600 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Consumer Products and Other |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Total debt |  | $ | 500,000 |  |  | $ | 1,635,528 |  |  | $ | — |  |  | $ | 2,135,528 |  |  | $ | 2,048,780 |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange forward agreements |  |  | — |  |  |  | 25,679 |  |  |  | — |  |  |  | 25,679 |  |  |  | 25,679 |
Interest rate swap agreements |  |  | — |  |  |  | 1,954 |  |  |  | — |  |  |  | 1,954 |  |  |  | 1,954 |
Commodity swap and option agreements |  |  | — |  |  |  | 1,232 |  |  |  | — |  |  |  | 1,232 |  |  |  | 1,232 |
Equity conversion feature of preferred stock |  |  | — |  |  |  | — |  |  |  | 75,350 |  |  |  | 75,350 |  |  |  | 75,350 |
Redeemable preferred stock, excluding equity conversion feature |  |  | — |  |  |  | — |  |  |  | 337,060 |  |  |  | 337,060 |  |  |  | 292,437 |
Insurance and Financial Services |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Derivatives: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FIA embedded derivatives, included in contractholder funds |  |  | — |  |  |  | — |  |  |  | 1,396,340 |  |  |  | 1,396,340 |  |  |  | 1,396,340 |
Futures contracts |  |  | — |  |  |  | 3,828 |  |  |  | — |  |  |  | 3,828 |  |  |  | 3,828 |
Available-for-sale embedded derivatives |  |  | — |  |  |  | — |  |  |  | 400 |  |  |  | 400 |  |  |  | 400 |
Investment contracts, included in contractholder funds |  |  | — |  |  |  | — |  |  |  | 11,992,013 |  |  |  | 11,992,013 |  |  |  | 13,153,630 |
Note payable |  |  | — |  |  |  | 95,000 |  |  |  | — |  |  |  | 95,000 |  |  |  | 95,000 |
Total financial liabilities |  | $ | 500,000 |  |  | $ | 1,763,221 |  |  | $ | 13,801,163 |  |  | $ | 16,064,384 |  |  | $ | 17,094,630 |
The carrying amounts of trade 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 July 1, 2012 and September 30, 2011, this resulted in lower fair value reserves relative to the carrying value. FGL 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 or retired 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). FGL measures the fair value of its securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and FGL will then consistently apply the valuation methodology to measure the security’s fair value. FGL’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include a third-party pricing service, independent broker quotations or pricing matrices. FGL uses observable and unobservable inputs in its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators, industry and economic events are monitored and further market data will be acquired when certain thresholds are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. Management believes the broker quotes are prices at which trades could be executed based on historical trades executed at broker-quoted or slightly higher prices. FGL did not adjust prices received from third parties as of July 1, 2012 and September 30, 2011. However, FGL does analyze the third party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy. The fair value of derivative assets and liabilities is based upon valuation pricing models, which represents what FGL would expect to receive or pay at the balance sheet date if it cancelled the options, entered into offsetting positions, or exercised the options. The fair value of futures contracts represent the cumulative unsettled variation margin (open trade equity net of cash settlements). Fair values for these instruments are determined externally by an independent actuarial firm using market observable inputs, including interest rates, yield curve volatilities, and other factors. Credit risk related to the counterparty is considered when estimating the fair values of these derivatives. The fair values of the embedded derivatives in FGL’s FIA products are derived using market indices, pricing assumptions and historical data. Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value, were as follows:
|  | Fair Value at July 1, 2012 |  |  | Valuation technique |  | Unobservable input(s) |  | Range (Weighted average)
Assets |  |  |  |  |  |  |  |  |  |
Contingent purchase price reduction receivable |  | $ | 41,000 |  |  | Discounted cash flow |  | Probability of collection Expected term Discount rate Credit insurance risk premium |  | 88% - 96% (92%) 1 year 0.92% 11.7%
Asset-backed securities |  |  | 759,076 |  |  | Broker-quoted |  | Offered quotes |  | 76.77% - 100.53% (94.39%)
Corporates |  |  | 127,572 |  |  | Broker-quoted |  | Offered quotes |  | 0% - 121.15% (78.73%)
|  |  | 19,671 |  |  | Market pricing |  | Quoted prices |  | 101.07% - 150.08% (105.15%)
Hybrids |  |  | 5,181 |  |  | Market pricing |  | Quoted prices |  | 103.63%
Municipals |  |  | 55 |  |  | Broker-quoted |  | Offered quotes |  | 121.36% - 121.36% (121.36%)
Non-agency residential- mortgage-backed securities |  |  | 615 |  |  | Broker-quoted |  | Offered quotes |  | 34.34% - 34.34% (34.34%)
Total |  | $ | 953,170 |  |  |  |  |  |  |
Liabilities |  |  |  |  |  |  |  |  |  |
FIA embedded derivatives, included in contractholder funds |  | $ | 1,486,465 |  |  | Discounted cash flow |  | Market value of option |  | 0% - 35.40% (2.91%)
|  |  |  |  |  |  |  | SWAP rates Mortality multiplier Surrender rates |  | 0.97% - 1.79% (1.37%) 70% - 70% (70%) 2% - 50% (7%)
|  |  |  |  |  |  |  | Non-performance spread |  | 0.25% - 0.25% (0.25%)
Equity conversion feature of preferred stock |  |  | 199,360 |  |  | Monte Carlo simulation / Option model |  | Annualized volatility of equity Discount yield Non-cash accretion rate Calibration adjustment |  | 40% 12.0% - 12.7% (12.2%) 0% - 2% 15% - 17% (15.5%)
Total |  | $ | 1,685,825 |  |  |  |  |  |  |
The significant unobservable inputs used in the fair value measurement of the contingent purchase price reduction receivable are the probability of collection depending on the outcomes of litigation and regulatory action, the expected term until payment, discount rate and the credit insurance risk premium. Generally, an increase in the assumptions for the expected term, discount rate and credit insurance risk premium would decrease the fair value of the contingent purchase price receivable. An increase in the probability of collection would increase the fair value of the contingent purchase price reduction receivable. The significant unobservable inputs used in the fair value measurement of FIA embedded derivatives included in contractholder funds are market value of option, interest swap rates, mortality multiplier, surrender rates, and non-performance spread. The mortality multiplier is based on the 1983 annuity table and assumes the contractholder population is 50% female and 50% male. Significant increases (decreases) in the market value of option in isolation would result in a higher (lower) fair value measurement. Significant increases (decreases) in interest swap rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower (higher) fair value measurement. Generally, a change in any one unobservable input would not result in a change in any other unobservable input. The significant unobservable inputs used in the fair value measurement of the equity conversion feature of the Company’s preferred stock are annualized volatility of the market value of the Company’s listed shares of common stock, the discount yield as of the valuation date, a calibration factor to the issued date fair value of the Preferred Stock and the forecasted non-cash accretion rate. Significant increases (decreases) in any of the inputs in isolation would result in a significantly higher (lower) fair value measurement. Generally, an increase in the assumptions used for the volatility and discount yield assumptions would increase the fair value of the equity conversion feature of preferred stock, and maintaining a higher forecasted non-cash accretion rate, would also increase the fair value of the equity conversion feature of preferred stock. A decrease in the calibration factor would result in an increase in the fair value of the equity conversion feature of preferred stock. The following tables summarize changes to the Company’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the three and nine month periods ended July 1, 2012 and July 3, 2011. 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 July 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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent purchase price reduction receivable |  | $ | 41,000 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 41,000 |
Fixed maturity securities, available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  |  | 502,938 |  |  |  | — |  |  |  | 919 |  |  |  | 251,545 |  |  |  | 3,674 |  |  |  | 759,076 |
Corporates |  |  | 120,180 |  |  |  | 184 |  |  |  | (3,662 | ) |  |  | (9,747 | ) |  |  | 40,288 |  |  |  | 147,243 |
Hybrids |  |  | 5,100 |  |  |  | — |  |  |  | 81 |  |  |  | — |  |  |  | — |  |  |  | 5,181 |
Municipals |  |  | 10,308 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (10,253 | ) |  |  | 55 |
Agency residential mortgage-backed securities |  |  | 3,330 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (3,330 | ) |  |  | — |
Non-agency residential mortgage-backed securities |  |  | 1,217 |  |  |  | (126 | ) |  |  | 87 |  |  |  | (563 | ) |  |  | — |  |  |  | 615 |
Total assets at Level 3 fair value |  | $ | 684,073 |  |  | $ | 58 |  |  | $ | (2,575 | ) |  | $ | 241,235 |  |  | $ | 30,379 |  |  | $ | 953,170 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FIA embedded derivatives, included in contractholder funds |  | $ | (1,496,803 | ) |  | $ | 10,338 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1,486,465 | )
Available-for-sale embedded derivatives |  |  | (376 | ) |  |  | 376 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Equity conversion feature of preferred stock |  |  | (73,820 | ) |  |  | (125,540 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (199,360 | )
Total liabilities at Level 3 fair value |  | $ | (1,570,999 | ) |  | $ | (114,826 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1,685,825 | )
|  | Nine Month Period Ended July 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 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Contingent purchase price reduction receivable |  | $ | — |  |  | $ | 41,000 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | 41,000 |
Fixed maturity securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  |  | 374,518 |  |  |  | — |  |  |  | 6,985 |  |  |  | 363,076 |  |  |  | 14,497 |  |  |  | 759,076 |
Corporates |  |  | 159,684 |  |  |  | 207 |  |  |  | (5,927 | ) |  |  | (36,664 | ) |  |  | 29,943 |  |  |  | 147,243 |
Hybrids |  |  | 5,205 |  |  |  | — |  |  |  | (24 | ) |  |  | — |  |  |  | — |  |  |  | 5,181 |
Municipals |  |  | — |  |  |  | (2 | ) |  |  | 72 |  |  |  | 10,177 |  |  |  | (10,192 | ) |  |  | 55 |
Agency residential mortgage-backed securities |  |  | 3,312 |  |  |  | — |  |  |  | 18 |  |  |  | — |  |  |  | (3,330 | ) |  |  | — |
Non-agency residential mortgage-backed securities |  |  | 3,759 |  |  |  | (126 | ) |  |  | 4 |  |  |  | (777 | ) |  |  | (2,245 | ) |  |  | 615 |
Total assets at Level 3 fair value |  | $ | 546,478 |  |  | $ | 41,079 |  |  | $ | 1,128 |  |  | $ | 335,812 |  |  | $ | 28,673 |  |  | $ | 953,170 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FIA embedded derivatives, included in contractholder funds |  | $ | (1,396,340 | ) |  | $ | (90,125 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1,486,465 | )
Available-for-sale embedded derivatives |  |  | (400 | ) |  |  | 400 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Equity conversion feature of preferred stock |  |  | (75,350 | ) |  |  | (124,010 | ) |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (199,360 | )
Total liabilities at Level 3 fair value |  | $ | (1,472,090 | ) |  | $ | (213,735 | ) |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1,685,825 | )
(a) | The net transfers in and out of Level 3 during the three and nine month periods ended July 1, 2012 were exclusively to or from Level 2.
|  | Three and Nine Month Periods Ended July 3, 2011 |
|  | Balance at FGL Acquisition Date |  |  | 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 |  | $ | 399,967 |  |  | $ | — |  |  | $ | 6,385 |  |  | $ | (8,128 | ) |  | $ | (10,206 | ) |  | $ | 388,018 |
Corporates |  |  | 188,439 |  |  |  | — |  |  |  | 10,722 |  |  |  | (2,635 | ) |  |  | — |  |  |  | 196,526 |
Hybrids |  |  | 8,305 |  |  |  | — |  |  |  | (38 | ) |  |  | — |  |  |  | (3,038 | ) |  |  | 5,229 |
Agency residential mortgage-backed securities |  |  | 3,271 |  |  |  | — |  |  |  | (8 | ) |  |  | — |  |  |  | — |  |  |  | 3,263 |
Non-agency residential mortgage-backed securities |  |  | 18,519 |  |  |  | — |  |  |  | 2,351 |  |  |  | (1,119 | ) |  |  | — |  |  |  | 19,751 |
Total assets at Level 3 fair value |  | $ | 618,501 |  |  | $ | — |  |  | $ | 19,412 |  |  | $ | (11,882 | ) |  | $ | (13,244 | ) |  | $ | 612,787 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
FIA embedded derivatives, included in contractholder funds |  | $ | (1,466,308 | ) |  | $ | 21,802 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | (1,444,506 | )
Available-for-sale embedded derivatives |  |  | (419 | ) |  |  | 8 |  |  |  | — |  |  |  | — |  |  |  | — |  |  |  | (411 | )
Equity conversion feature of preferred stock |  |  | — |  |  |  | 5,960 |  |  |  | — |  |  |  | (85,700 | ) |  |  | — |  |  |  | (79,740 | )
Total liabilities at Level 3 fair value |  | $ | (1,466,727 | ) |  | $ | 27,770 |  |  | $ | — |  |  | $ | (85,700 | ) |  | $ | — |  |  | $ | (1,524,657 | )
(a) | The net transfers in and out of Level 3 during the three and nine month periods ended July 3, 2011 were exclusively to or from Level 2.
FGL 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 three and nine month periods ended July 1, 2012 and July 3, 2011. During the three and nine month periods ended July 1, 2012, primary market issuance and secondary market activity for certain non-agency residential mortgage-backed securities and 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 concluding that there is sufficient trading activity in similar instruments to support classifying these securities as Level 2 as of July 1, 2012. Accordingly, FGL’s assessment resulted in a net transfer out of Level 3 of $2,245 related to non-agency residential mortgage-backed securities and corporate securities during the nine months ended July 1, 2012. There were also net transfers in to Level 3 of $30,379 and $30,918 related to asset-backed securities, corporates, municipal and agency residential mortgage-backed securities during the three and nine months ended July 1, 2012, respectively. The following tables present the gross components of purchases, sales, and settlements, net, of Level 3 financial instruments for the three and nine month periods ended July 1, 2012 and July 3, 2011. There were no issuances during these periods.
|  | Three Month Period Ended July 1, 2012 |
|  | Purchases |  |  | Sales |  |  | Settlements |  |  | Net Purchases, Sales & Settlements |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity, securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  | $ | 262,536 |  |  | $ | — |  |  | $ | (10,991 | ) |  | $ | 251,545 |
Corporates |  |  | — |  |  |  | (7,713 | ) |  |  | (2,034 | ) |  |  | (9,747 | )
Non-agency residential mortgage-backed securities |  |  | — |  |  |  | (475 | ) |  |  | (88 | ) |  |  | (563 | )
Total assets at Level 3 fair value |  | $ | 262,536 |  |  | $ | (8,188 | ) |  | $ | (13,113 | ) |  | $ | 241,235 |
|  | Nine Month Period Ended July 1, 2012 |
|  | Purchases |  |  | Sales |  |  | Settlements |  |  | Net Purchases, Sales & Settlements |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity, securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  | $ | 394,887 |  |  | $ | — |  |  | $ | (31,811 | ) |  | $ | 363,076 |
Corporates |  |  | 1,326 |  |  |  | (24,398 | ) |  |  | (13,592 | ) |  |  | (36,664 | )
Municipals |  |  | 10,197 |  |  |  | — |  |  |  | (20 | ) |  |  | 10,177 |
Non-agency residential mortgage-backed securities |  |  | — |  |  |  | (475 | ) |  |  | (302 | ) |  |  | (777 | )
Total assets at Level 3 fair value |  | $ | 406,410 |  |  | $ | (24,873 | ) |  | $ | (45,725 | ) |  | $ | 335,812 |
|  | Three and Nine Month Periods Ended July 3, 2011 |
|  | Purchases |  |  | Sales |  |  | Settlements |  |  | Net Purchases, Sales & Settlements |
Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturity, securities available-for-sale: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Asset-backed securities |  | $ | — |  |  | $ | — |  |  | $ | (8,128 | ) |  | $ | (8,128 | )
Corporates |  |  | — |  |  |  | — |  |  |  | (2,635 | ) |  |  | (2,635 | )
Municipals |  |  | — |  |  |  | — |  |  |  | — |  |  |  | — |
Non-agency residential mortgage-backed securities |  |  | — |  |  |  | — |  |  |  | (1,119 | ) |  |  | (1,119 | )
Total assets at Level 3 fair value |  | $ | — |  |  | $ | — |  |  | $ | (11,882 | ) |  | $ | (11,882 | )
Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity conversion option of preferred stock |  | $ | — |  |  | $ | (85,700 | ) |  | $ | — |  |  | $ | (85,700 | )

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 16 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13504-108611 Reference 2: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15C, 15D -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 3: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44A, 44B -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 4: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15A -Subparagraph a-d -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 5: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 3, 10, 14, 15 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 6: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 10 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13433-108611 Reference 7: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 159 -Paragraph 17-22, 27, 28 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 8: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 825 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=7491637&loc=d3e13537-108611 Reference 9: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 107 -Paragraph 15B -Subparagraph a, b -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 10: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 157 -Paragraph 32, 33, 34 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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