(2) Investments

HGI’s investments consist of (1) marketable equity 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. 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 adjustments for value of business acquired (“VOBA”), deferred acquisition costs (“DAC”) and deferred income taxes. The Company’s consolidated investments are summarized as follows:


	December 30, 2012
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Carrying Value
Fixed-maturity securities, available-for sale
Asset-backed securities	$	1,263.6	$	27.8	$	(0.7	)	$	1,290.7	$	1,290.7
Commercial mortgage-backed securities		526.4		39.0		(1.8	)		563.6		563.6
Corporates		9,161.3		724.1		(11.2	)		9,874.2		9,874.2
Hybrids		422.1		21.1		(1.7	)		441.5		441.5
Municipals		1,039.3		136.2		(1.2	)		1,174.3		1,174.3
Agency residential mortgage-backed securities		135.8		4.5		(0.3	)		140.0		140.0
Non-agency residential mortgage-backed securities		914.1		57.9		(2.8	)		969.2		969.2
U.S. Government		2,011.3		11.8		—			2,023.1		2,023.1

Total fixed-maturity securities		15,473.9		1,022.4		(19.7	)		16,476.6		16,476.6
Equity securities
Available-for-sale		253.8		11.7		(1.7	)		263.8		263.8
Held for trading		101.7		—		(53.4	)		48.3		48.3

Total equity securities		355.5		11.7		(55.1	)		312.1		312.1
Derivative investments		141.4		35.3		(20.3	)		156.4		156.4
Asset-backed loans		204.8		—		—			204.8		204.8
Other invested assets
U.S. Treasuries and certificate of deposit, held-to maturity		33.9		—		—			33.9		33.9
Policy loans and other invested assets		32.7		—		—			32.7		32.7

Total other invested assets		66.6		—		—			66.6		66.6

Total investments	$	16,242.2	$	1,069.4	$	(95.1	)	$	17,216.5	$	17,216.5


	September 30, 2012
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Carrying Value
Fixed-maturity securities, available-for-sale
Asset-backed securities	$	1,010.9	$	18.6	$	(1.6	)	$	1,027.9	$	1,027.9
Commercial mortgage-backed securities		520.0		36.2		(2.4	)		553.8		553.8
Corporates		10,211.8		807.2		(10.0	)		11,009.0		11,009.0
Hybrids		519.0		18.8		(9.6	)		528.2		528.2
Municipals		1,083.2		141.9		(1.1	)		1,224.0		1,224.0
Agency residential mortgage-backed securities		149.5		5.8		(0.3	)		155.0		155.0
Non-agency residential mortgage-backed securities		629.1		35.8		(4.3	)		660.6		660.6
U.S. Government		917.5		12.9		—			930.4		930.4

Total fixed-maturity securities		15,041.0		1,077.2		(29.3	)		16,088.9		16,088.9
Equity securities
Available-for-sale		237.5		11.9		(1.3	)		248.1		248.1
Held for trading		191.8		—		(45.0	)		146.8		146.8

Total equity securities		429.3		11.9		(46.3	)		394.9		394.9
Derivative investments		142.1		67.0		(8.4	)		200.7		200.7
Asset-backed loans		180.1		—		—			180.1		180.1
Other invested assets
U.S. Treasuries and certificate of deposit, held-to-maturity		35.0		—		—			35.0		35.0
Policy loans and other invested assets		18.8		—		—			18.8		18.8

Total other invested assets		53.8		—		—			53.8		53.8

Total investments	$	15,846.3	$	1,156.1	$	(84.0	)	$	16,918.4	$	16,918.4

Included in AOCI were unrealized gains of $0.9 and unrealized losses of $1.9 related to the non-credit portion of other-than-temporary impairments on non-agency residential-mortgage-backed securities at both December 30, 2012 and September 30, 2012.

Securities held on deposit with various state regulatory authorities had a fair value of $20.6 and $20.7 at December 30, 2012 and September 30, 2012, respectively.

Maturities of Fixed-maturity Securities

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.


	December 30, 2012
	Amortized Cost		Fair Value
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities:
Due in one year or less	$	622.0	$	624.7
Due after one year through five years		4,175.7		4,263.1
Due after five years through ten years		3,419.4		3,690.8
Due after ten years		4,333.0		4,850.4

Subtotal		12,550.1		13,429.0
Other securities which provide for periodic payments:
Asset-backed securities		1,263.7		1,290.7
Commercial-mortgage-backed securities		526.5		563.6
Structured hybrids		83.6		84.0
Agency residential mortgage-backed securities		135.8		140.0
Non-agency residential mortgage-backed securities		914.2		969.3

Total fixed maturity available-for-sale securities	$	15,473.9	$	16,476.6

Securities in an Unrealized Loss Position

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, FGL has concluded that the fair values of the securities presented in the table below were not other-than-temporarily impaired as of December 30, 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’s 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:


	December 30, 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	$	7.6	$	(0.1	)	$	186.9	$	(0.6	)	$	194.5	$	(0.7	)
Commercial-mortgage-backed securities		7.1		(1.7	)		14.4		(0.1	)		21.5		(1.8	)
Corporates		98.4		(2.3	)		709.5		(8.9	)		807.9		(11.2	)
Hybrids		40.1		(1.6	)		6.4		(0.1	)		46.5		(1.7	)
Municipals		—		—			103.7		(1.2	)		103.7		(1.2	)
Agency residential mortgage-backed securities		6.5		(0.2	)		3.3		(0.1	)		9.8		(0.3	)
Non-agency residential mortgage-backed securities		77.9		(2.1	)		65.4		(0.7	)		143.3		(2.8	)
Equities		40.5		(1.1	)		6.7		(0.6	)		47.2		(1.7	)

Total available-for-sale securities	$	278.1	$	(9.1	)	$	1,096.3	$	(12.3	)	$	1,374.4	$	(21.4	)

Total number of available-for-sale securities in an unrealized loss position				158					62					220


	September 30, 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	$	169.8	$	(1.0	)	$	7.5	$	(0.6	)	$	177.3	$	(1.6	)
Commercial-mortgage-backed securities		0.8		(0.8	)		10.7		(1.6	)		11.5		(2.4	)
Corporates		411.3		(8.1	)		45.5		(1.9	)		456.8		(10.0	)
Hybrids		13.4		(0.4	)		107.7		(9.2	)		121.1		(9.6	)
Municipals		71.1		(1.1	)		—		—			71.1		(1.1	)
Agency residential mortgage-backed securities		1.8		(0.2	)		6.1		(0.1	)		7.9		(0.3	)
Non-agency residential mortgage-backed securities		12.9		(0.3	)		101.8		(4.0	)		114.7		(4.3	)
Equities		—		—			44.5		(1.3	)		44.5		(1.3	)

Total available-for-sale securities	$	681.1	$	(11.9	)	$	323.8	$	(18.7	)	$	1,004.9	$	(30.6	)

Total number of available-for-sale securities in an unrealized loss position				100					56					156

At December 30, 2012 and September 30, 2012, 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 $21.4 and $30.6 at December 30, 2012 and September 30, 2012, respectively. Exposure to finance-related holdings represents the largest component of the unrealized loss position in the portfolio, as spreads for holdings in this industry sector remain above historical levels. Elevated spreads in certain structured asset classes have also affected prices of commercial mortgage-backed securities and non-agency residential mortgage-backed securities. With evidence that the housing sector in the U.S. is recovering, FGL has added to its non-agency residential mortgage-backed holdings during the year by purchasing securities with a National Association of Insurance Commissioners (“NAIC”) 1 equivalent rating. As of December 30, 2012, these securities were in an unrealized gain position. The improvement in unrealized loss positions in hybrids from September 30, 2012 to December 30, 2012 was primarily a result of greater availability of capital for firms and regulatory changes which have encouraged certain issuers to retire their outstanding securities, thereby moving prices higher.

The combination of ongoing liquidity efforts by global central banks to stem contagion from a Eurozone slowdown, and accommodative monetary policy (especially in the U.S.) that is keeping base interest rates low, helped drive strong performance in risk assets in the December 30, 2012 quarter. The prices of securities exposed to the residential real estate market in the U.S. also increased, which management believes is a result of the decline in risk aversion and data indicating that the housing market in the U.S. has improved.

At December 30, 2012 and September 30, 2012, securities with a fair value of $0.7 and $1.2, respectively, were depressed greater than 20% of amortized cost (excluding United States Government and United States Government sponsored agency securities), which represented less than 1% of the carrying values of all investments. The improvement in unrealized loss positions from September 30, 2012 is primarily due to two factors: (i) securities at depressed prices were sold over the past fiscal quarter, 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.

Credit Loss Portion of Other-than-temporary Impairments

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 December 30, 2012 and January 1, 2012, for which a portion of the other-than-temporary impairment was recognized in AOCI:


	Three Months Ended
	December 30, 2012		January 1, 2012
Balance at the beginning of the period	$	2.7	$	0.7
Increases attributable to credit losses on securities:
Other-than-temporary impairment was not previously recognized		—		1.5

Balance at the end of the period	$	2.7	$	2.2

For the three months ended December 30, 2012, FGL recognized impairment losses in operations totaling $0.5, including credit impairments of $0.2 and change-of-intent impairments of $0.3 and had an amortized cost of $1.6 and a fair value of $1.1 at the time of impairment. For the three months ended January 1, 2012, FGL recognized impairment losses in operations totaling $13.2, solely caused by change-of-intent, and non-credit losses in other comprehensive income totaling $0.9, for investments which experienced other-than-temporary impairments and had an amortized cost of $66.9 and a fair value of $52.8 at the time of impairment. 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 Months Ended
	December 30, 2012		January 1, 2012
Other-than-temporary impairments recognized in net income:
Corporates	$	—	$	0.7
Non-agency residential mortgage-backed securities		0.5		2.8
Hybrids		—		9.7

Total other-than-temporary impairments	$	0.5	$	13.2

Asset-backed Loans

Salus’ portfolio of asset-backed loans receivable, included in “Asset-backed loans” in the Condensed Consolidated Balance Sheets as of December 30, 2012 and September 30, 2012, consisted of the following:


	December 30, 2012		September 30, 2012
Asset-backed loans, by major industry:
Wholesale	$	101.9	$	77.2
Apparel		49.1		70.1
Jewelry		23.0		27.9
Other		33.4		6.3

Total asset-backed loans		207.4		181.5
Less: Allowance for credit losses		2.6		1.4

Total asset-backed loans, net	$	204.8	$	180.1

Salus establishes its allowance for credit losses through a provision for credit losses based on its evaluation of the credit quality of its loan portfolio. The following table presents the activity in its allowance for credit losses for the three months ended December 30, 2012 and January 1, 2012:


	Three Months Ended
	December 30, 2012		January 1, 2012
Allowance for credit losses:
Balance at beginning of period	$	1.4	$	—
Provision for credit losses		1.2		—
Charge-offs		—		—
Recoveries		—		—

Balance at end of period	$	2.6	$	—

Salus monitors credit quality as indicated by various factors and utilizes such information in its evaluation of the adequacy of the allowance for credit losses. As of December 30, 2012 and September 30, 2012, Salus had no outstanding loans that either were non-performing, in a non-accrual status, or had been subject to a troubled-debt restructuring. As of December 30, 2012 and September 30, 2012, Salus had no outstanding loans that had been individually considered impaired, as all loans were in current payment status.

Salus’ internal loan ratings provide information about the credit quality of its asset-based lending borrowers, and its risk of potential loss. The following tables present information about the credit quality of Salus’ asset-based loan portfolio, based on National Association of Insurance Commissioners (“NAIC”) risk rating, as of December 30, 2012 and September 30, 2012:


NAIC Designation	Credit Equivalent Rating	December 30, 2012	Percent of Total	September 30, 2012	Percent of Total
1	AAA/AA/A	$18.1	8.7%	$75.8	41.7%
2	BBB	165.9	80.0%	94.9	52.3%
3	B	—	—	10.8	6.0%
4	B	—	—	—	—
5	CCC	23.4	11.3%	—	—
Not rated		—	—	—	—

Total		$207.4	100.0%	$181.5	100.0%

Net Investment Income

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


	Three Months Ended
	December 30, 2012			January 1, 2012
Fixed maturity available-for-sale securities	$	167.6		$	187.2
Equity available-for-sale securities		4.7			2.6
Policy loans		0.3			0.3
Invested cash and short-term investments		0.8			0.1
Other investments		8.7			(0.3	)

Gross investment income		182.1			189.9
External investment expense		(4.1	)		(3.1	)

Net investment income	$	178.0		$	186.8

Net Investment Gains

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


	Three Months Ended
	December 30, 2012			January 1, 2012
Net realized gains before other-than-temporary impairments	$	172.5		$	81.9
Gross other-than-temporary impairments		(0.5	)		(14.1	)
Non-credit portion of other-than-temporary impairments included in other comprehensive income		—			0.9

Net realized gains on fixed maturity available-for-sale securities		172.0			68.7
Realized gains on equity securities		—			0.3

Net realized gains on securities		172.0			69.0

Realized gains (losses) on certain derivative instruments		15.6			(15.5	)
Unrealized (losses) gains on certain derivative instruments		(41.2	)		50.3

Change in fair value of derivatives		(25.6	)		34.8

Realized gains on other invested assets		0.1			0.1

Net investment gains	$	146.5		$	103.9

For the three months ended December 30, 2012 and January 1, 2012, proceeds from the sale of fixed maturity available-for-sale securities, including assets transferred to Wilton Re as discussed in Note 8 for the three month period January 1, 2012 only, totaled $2,415.1 and $1,733.1, gross gains on such sales totaled $178.0 and $92.3 and gross losses totaled $0.5 and $10.5, respectively. The proceeds from the sale of fixed maturity available-for sale securities exclude maturities and repayments for the three months ended December 30, 2012 and January 1, 2012.

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 $0.5 and $13.2 for the three months ended December 30, 2012 and January 1, 2012, respectively.

Concentrations of Financial Instruments

As of December 30, 2012, the Company's most significant investment in one industry, excluding treasuries, was FGL's investment securities in the banking industry with a fair value of $1,878.9, or 11.0%, of the invested assets portfolio. FGL's holdings in this industry includes investments in 114 different issuers with the top ten investments accounting for 34.8% of the total holdings in this industry. As of December 30, 2012, FGL's exposure to sub-prime and Alternative-A residential mortgage-backed securities was $237.5 and $249.1 or collectively 1.5% of FGL's invested assets. As of December 30, 2012 and September 30, 2012 FGL had investments in 8 issuers that exceeded 10% of the Company's stockholders' equity with a fair value of $1,131.5 and $1,082.0, or 6.6% and 6.5% of the invested assets portfolio, respectively. Additionally, FGL's largest concentration in any single issuer as of December 30, 2012 and September 30, 2012 had a fair value of $167.0 and $152.9, or 1.0% and 0.7% of FGL's invested assets portfolio, respectively.