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Investments

9 Months Ended

Jul. 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:


	July 1, 2012		September 30, 2011
Trading:
Marketable equity securities	$	162,518	$	262,085
Marketable debt securities		6,725		12,665

		169,243		274,750

Held-to-maturity:
U.S. Treasury securities		34,747		75,638
Certificate of deposit		251		250

		34,998		75,888

Total short-term investments	$	204,241	$	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 July 1, 2012 and September 30, 2011 are summarized as follows:


	July 1, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value and Carrying Value
Available-for-sale securities
Asset-backed securities	$	821,203	$	6,112	$	(4,629	)	$	822,686
Commercial mortgage-backed securities		520,806		24,185		(6,468	)		538,523
Corporates		10,442,653		576,410		(40,285	)		10,978,778
Equities		237,440		7,362		(2,538	)		242,264
Hybrids		632,001		17,189		(22,334	)		626,856
Municipals		1,110,090		137,054		(1,044	)		1,246,100
Agency residential mortgage-backed securities		163,855		4,662		(491	)		168,026
Non-agency residential mortgage-backed securities		560,696		4,177		(15,046	)		549,827
U.S. Government		127,943		11,213		—			139,156

Total available-for-sale securities		14,616,687		788,364		(92,835	)		15,312,216
Derivative investments		145,871		39,027		(24,333	)		160,565
Asset-backed loans and other invested assets		92,424		—		—			92,424

Total investments	$	14,854,982	$	827,391	$	(117,168	)	$	15,565,205


	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 $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 July 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.


	July 1, 2012
	Amortized Cost		Fair Value
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities:
Due in one year or less	$	883,426	$	885,160
Due after one year through five years		2,425,302		2,483,897
Due after five years through ten years		3,491,058		3,687,917
Due after ten years		5,367,535		5,800,096

Subtotal		12,167,321		12,857,070
Other securities which provide for periodic payments:
Asset-backed securities		821,203		822,686
Commercial-mortgage-backed securities		520,806		538,523
Structured hybrids		145,366		133,820
Agency residential mortgage-backed securities		163,855		168,026
Non-agency residential mortgage-backed securities		560,696		549,827

Total fixed maturity available-for-sale securities	$	14,379,247	$	15,069,952

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 July 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.

The fair value and gross unrealized losses of available-for-sale securities, aggregated by investment category, were as follows:


	July 1, 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	$	372,352	$	(3,931	)	$	8,346	$	(698	)	$	380,698	$	(4,629	)
Commercial-mortgage-backed securities		17,426		(3,120	)		39,478		(3,348	)		56,904		(6,468	)
Corporates		1,237,999		(20,327	)		304,068		(19,958	)		1,542,067		(40,285	)
Equities		43,755		(2,029	)		15,752		(509	)		59,507		(2,538	)
Hybrids		111,544		(3,213	)		170,406		(19,121	)		281,950		(22,334	)
Municipals		109,336		(930	)		12,410		(114	)		121,746		(1,044	)
Agency residential mortgage-backed securities		9,499		(211	)		6,207		(280	)		15,706		(491	)
Non-agency residential mortgage-backed securities		161,839		(5,082	)		190,638		(9,964	)		352,477		(15,046	)

Total available-for-sale securities	$	2,063,750	$	(38,843	)	$	747,305	$	(53,992	)	$	2,811,055	$	(92,835	)

Total number of available-for-sale securities in an unrealized loss position														359


	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

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 July 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 $92,835 and $234,795 at July 1, 2012 and September 30, 2011, respectively. Financial sector-related exposure represents the largest component of the unrealized loss position in the portfolio at July 1, 2012 and September 30, 2011. The improvement in unrealized loss positions in corporate debt instruments from September 30, 2011 to July 1, 2012 was primarily a result of improving conditions for corporate issues.Liquidity efforts by global central banks continue to be supportive to European institutions and risk assets have strengthened as a result. Prices on the portfolio’s mortgage-related securities have also risen on a decline in risk aversion, as well as on signs that the housing market in the United States is believed to be at, or near, its bottom. The portfolio’s hybrid and subordinated securities have improved in price on better risk sentiment, as well as on actions on the part of banks (typical issuers of such securities) who have elected to call these securities at their issue price due to changing regulatory capital rules.

At July 1, 2012 and September 30, 2011, securities with a fair value of $27,016 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 nine months, reducing the size of holdings at 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 July 1, 2012 and July 3, 2011, for which a portion of the other-than-temporary impairment was recognized in AOCI:


	Three Month Period Ended				Nine Month Period Ended
	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011
Beginning balance	$	2,569	$	—	$	667	$	—
Increases attributable to credit losses on securities:
Other-than-temporary impairment was previously recognized		112		—		112		—
Other-than-temporary impairment was not previously recognized		—		395		1,902		395

Ending balance	$	2,681	$	395	$	2,681	$	395

For the three and nine months ended July 1, 2012, FGL recognized impairment losses in operations totaling $2,487 and $19,787, respectively, for investments which experienced other-than-temporary impairments and had an amortized cost of $101,887 and a fair value of $80,570 at July 1, 2012. For the three and nine month periods ended July 3, 2011, FGL recognized impairment losses in operations totaling $1,259 respectively, for investments which experienced other-than-temporary impairments and had an amortized cost of $12,140 and a fair value of $10,737 at July 3, 2011. Details underlying write-downs taken as a result of other-than-temporary impairments that were recognized in earnings and included in net realized gains on securities were as follows:


	Three Month Period Ended				Nine Month Period Ended
	July 1, 2012		July 3, 2011		July 1, 2012		July 3, 2011
Other-than-temporary impairments recognized in net income:
Corporates	$	1,538	$	—	$	2,234	$	—
Non-agency residential mortgage-backed securities		828		1,259		6,901		1,259
Hybrids		—		—		9,688		—
Other invested assets		121		—		964		—

Total other-than-temporary impairments	$	2,487	$	1,259	$	19,787	$	1,259

Net Investment Income

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


	Three Month Period Ended						Nine Month Period Ended
	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Fixed maturity available-for-sale securities	$	172,741		$	174,181		$	530,433		$	174,181
Equity available-for-sale securities		4,817			5,641			10,839			5,641
Policy loans		125			800			550			800
Invested cash and short-term investments		2,105			72			3,458			72
Other investments		2,409			(291	)		2,976			(291	)

Gross investment income		182,197			180,403			548,256			180,403
External investment expense		(2,900	)		(3,518	)		(9,199	)		(3,518	)

Net investment income	$	179,297		$	176,885		$	539,057		$	176,885

Net Investment Gains (Losses)

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


	Three Month Period Ended						Nine Month Period Ended
	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Net realized gains on fixed maturity available-for-sale securities	$	37,895		$	15,137		$	172,188		$	15,137
Realized gains (losses) on equity securities		417			(105	)		783			(105	)

Net realized gains on securities		38,312			15,032			172,971			15,032

Realized losses on certain derivative instruments		(26,295	)		(3,258	)		(32,001	)		(3,258	)
Unrealized gains (losses) on certain derivative instruments		(24,839	)		(10,546	)		114,649			(10,546	)

Change in fair value of derivatives		(51,134	)		(13,804	)		82,648			(13,804	)

Realized losses on other invested assests		(84	)		—			(1,003	)		—

Net investment gains (losses)	$	(12,906	)	$	1,228		$	254,616		$	1,228

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


	Three Month Period Ended						Nine Month Period Ended
	July 1, 2012			July 3, 2011			July 1, 2012			July 3, 2011
Total other-than-temporary impairments	$	(2,406	)	$	(1,403	)	$	(21,317	)	$	(1,403	)
Less non-credit portion of other-than-temporary impairments included in other comprehensive income		81			(144	)		(1,530	)		(144	)

Net other-than-temporary impairments		(2,487	)		(1,259	)		(19,787	)		(1,259	)
(Losses) gains on derivative instruments		(51,134	)		(13,804	)		82,648			(13,804	)
Other realized investment gains		40,715			16,291			191,755			16,291

Net investment gains (losses)	$	(12,906	)	$	1,228		$	254,616		$	1,228

For the three and nine month periods ended July 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 $1,216,158 and $4,366,308 gross gains on such sales totaled $49,469 and $211,908 and gross losses totaled $9,208 and $20,897, respectively. For the three and nine month periods ended July 3, 2011, proceeds from the sale of available-for-sale securities totaled $461,506, gross gains on the sale of available-for-sale securities totaled $12,866 and gross losses totaled $1,815.

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 $2,487 and $19,787 for the three and nine month periods ended July 1, 2012, respectively. For the three and nine month periods ended July 3, 2011, underlying write-downs taken to residential mortgage-backed securities investments 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 were $1,259.

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


	Nine Month Period Ended
	July 1, 2012			July 3, 2011
Proceeds from investments sold, matured or repaid:
Available-for-sale	$	4,208,621		$	648,243
Held-to-maturity		75,649			70,792
Trading (acquired for holding)		12,027			331,417
Derivatives and other		90,031			64,089

	$	4,386,328		$	1,114,541

Cost of investments acquired:
Available-for-sale	$	(3,696,967	)	$	(730,468	)
Held-to-maturity		(34,758	)		(52,682	)
Trading		(22,924	)		(433,810	)
Derivatives and other		(105,964	)		(37,527	)

	$	(3,860,613	)	$	(1,254,487	)

Concentrations of Financial Instruments

As of July 1, 2012, FGL’s most significant investment in one industry was FGL’s investment securities in the banking industry with a fair value of $1,982,603 or 12.8% of the invested assets portfolio. FGL’s holdings in this industry includes investments in 121 different issuers with the top ten investments accounting for 38% of the total holdings in this industry. As of July 1, 2012, FGL’s exposure to sub-prime and Alternative-A residential mortgage-backed securities was $236,441 and $87,073 or 1.5% and 0.6% of FGL’s invested assets, respectively.