(3) Derivative Financial Instruments

The fair value of outstanding derivative contracts recorded in the accompanying Condensed Consolidated Balance Sheets were as follows:


Asset Derivatives	Classification	December 30, 2012		September 30, 2012
Derivatives designated as hedging instruments:
Commodity swap and option agreements	Receivables, net	$	1.1	$	1.0
Commodity swap and option agreements	Other assets		0.7		1.0
Foreign exchange forward agreements	Receivables, net		0.6		1.2

Total asset derivatives designated as hedging instruments			2.4		3.2
Derivatives not designated as hedging instruments:
Call options	Derivative investments		152.5		200.7
Futures contracts	Derivative investments		3.9		—

Total asset derivatives		$	158.8	$	203.9


Liability Derivatives	Classification	December 30, 2012		September 30, 2012
Derivatives designated as hedging instruments:
Foreign exchange forward agreements	Accounts payable and other current liabilities	$	2.1	$	3.1

Total liability derivatives designated as hedging instruments			2.1		3.1
Derivatives not designated as hedging instruments:
FIA embedded derivative	Contractholder funds		1,517.0		1,550.8
Futures contracts	Other liabilities		—		0.9
Foreign exchange forward agreements	Accounts payable and other current liabilities		5.7		4.0
Foreign exchange forward agreements	Other liabilities		2.8		2.9
Equity conversion feature of preferred stock	Equity conversion feature of preferred stock		163.1		232.0

Total liability derivatives		$	1,690.7	$	1,793.7

Changes in AOCI from Derivative Instruments

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations, and within AOCI, for the three months ended December 30, 2012 and January 1, 2012:


Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)						Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)						Classification
Three Months Ended	December 30, 2012			January 1, 2012			December 30, 2012			January 1, 2012
Commodity contracts	$	(0.2	)	$	(0.8	)	$	(0.1	)	$	(0.4	)	Consumer products cost of goods sold
													Consumer products cost of goods sold
Interest rate contracts		—			—			—			(0.7	)	Interest expense
Foreign exchange contracts		0.5			(0.1	)		0.1			(0.1	)	Net consumer products sales
Foreign exchange contracts		(0.4	)		1.3			(0.5	)		(1.2	)	Consumer products cost of goods sold

Total	$	(0.1	)	$	0.4		$	(0.5	)	$	(2.4	)

Fair Value Contracts and Other

For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign currency payments, commodity purchases and interest rate payments, and the equity conversion feature of the Company’s Preferred Stock, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. FGL recognizes all derivative instruments as assets or liabilities in the Condensed Consolidated Balance Sheets at fair value, including derivative instruments embedded in Fixed Indexed Annuity (“FIA”) contracts, and any changes in the fair value of the derivatives are recognized immediately in the Condensed Consolidated Statements of Operations. During the three months ended December 30, 2012 and January 1, 2012 the Company recognized the following gains on these derivatives:


Derivatives Not Designated as Hedging Instruments	Gain (Loss) Recognized in Income on Derivatives						Classification
Three Months Ended	December 30, 2012			January 1, 2012
Equity conversion feature of preferred stock	$	68.9		$	27.9		Gain from the change in the fair value of the equity conversion feature of preferred stock


Foreign exchange contracts		(4.1	)		7.3		Other (expense) income, net
Call options		(20.9	)		19.9		Net investment gains
Futures contracts		(4.7	)		14.9		Net investment gains
FIA embedded derivatives		33.8			(58.7	)	Benefits and other changes in policy reserves

Total	$	73.0		$	11.3

Additional Disclosures

Cash Flow Hedges

When appropriate, Spectrum Brands has used interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At December 30, 2012, Spectrum Brands did not have any interest rate swaps outstanding.

Spectrum Brands periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency denominated third party and intercompany sales or payments. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Mexican Pesos, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to “Net consumer product sales” or purchase price variance in “Consumer products cost of goods sold.” At December 30, 2012, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through March 2014 with a contract value of $173.0. The derivative net (loss) on these contracts recorded in AOCI at December 30, 2012 was $(0.6), net of tax benefit of $0.4 and noncontrolling interest of $0.4. At December 30, 2012, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next twelve months is $(0.6), net of tax and noncontrolling interest.

Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At December 30, 2012, Spectrum Brands had a series of such swap contracts outstanding through September 2014 for 12 tons of raw materials with a contract value of $24.3. The derivative net gain on these contracts recorded in AOCI at December 30, 2012 was $0.9, net of tax expense of $0.3 and noncontrolling interest of $0.6. At December 30, 2012, the portion of derivative net gains estimated to be reclassified from AOCI into earnings over the next twelve months is $0.5, net of tax and noncontrolling interest.

Fair Value Contracts

Spectrum Brands periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Canadian Dollars, Euros or Australian Dollars. These foreign exchange contracts are fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Balance Sheets. The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At December 30, 2012 and September 30, 2012, Spectrum Brands had $162.8 and $172.6, respectively, of notional value for such foreign exchange derivative contracts outstanding.

Credit Risk

Spectrum Brands is exposed to the risk of default by the counterparties with which Spectrum Brands transacts and generally does not require collateral or other security to support financial instruments subject to credit risk. Spectrum Brands monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are concentrated with certain domestic and foreign financial institution counterparties. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which was insignificant at December 30, 2012 and $0.1 at September 30, 2012, respectively.

Spectrum Brands’ standard contracts do not contain credit risk related contingent features whereby Spectrum Brands would be required to post additional cash collateral as a result of a credit event. However, Spectrum Brands is typically required to post collateral in the normal course of business to offset its liability positions. At December 30, 2012 and September 30, 2012, Spectrum Brands had posted cash collateral of $0.5 and $0.1, respectively, related to such liability positions. In addition, at December 30, 2012 and September 30, 2012, Spectrum Brands had no posted standby letters of credit related to such liability positions. The cash collateral is included in “Receivables, net” within the accompanying Condensed Consolidated Balance Sheet.

FGL is exposed to credit loss in the event of nonperformance by its counterparties on the call options and reflects assumptions regarding this nonperformance risk in the fair value of the call options. The nonperformance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. FGL maintains a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.

Information regarding FGL’s exposure to credit loss on the call options it holds is presented in the following table:


	Credit Rating (Moody’s/S&P)	December 30, 2012				September 30, 2012
Counterparty	Credit Rating (Moody’s/S&P)	Notional Amount		Fair Value		Notional Amount		Fair Value
Bank of America	Baa2/A-	$	1,760.5	$	45.1	$	1,884.0	$	64.1
Deutsche Bank	A2/A+		1,892.7		46.8		1,816.5		61.7
Morgan Stanley	Baa1/A-		1,869.8		43.4		1,634.7		51.6
Royal Bank of Scotland	Baa1/A-		352.4		15.2		353.9		19.6
Barclay’s Bank	A2/A+		119.9		2.0		131.3		3.1
Credit Suisse	A2/A		—		—		10.0		0.6

		$	5,995.3	$	152.5	$	5,830.4	$	200.7

FIA Contracts

FGL has FIA contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the Standard and Poor’s (“S&P”) 500 Index. This feature represents an embedded derivative under US GAAP. The FIA embedded derivative is valued at fair value and included in the liability for contractholder funds in the accompanying Condensed Consolidated Balance Sheets with changes in fair value included as a component of benefits and other changes in policy reserves in the Condensed Consolidated Statements of Operations.

FGL purchases derivatives consisting of a combination of call options and futures contracts on the applicable market indices to fund the index credits due to FIA contractholders. The call options are one, two and three year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the interest credit is reset and FGL purchases new one, two or three year call options to fund the next index credit. FGL manages the cost of these purchases through the terms of its FIA contracts, which permit FGL to change caps or participation rates, subject to guaranteed minimums, on each contract’s anniversary date. The change in the fair value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA embedded derivative related to index performance. The call options and futures contracts are marked to fair value with the change in fair value included as a component of “Net investment gains.” The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instrument term or upon early termination and the changes in fair value of open positions.

Other market exposures are hedged periodically depending on market conditions and FGL’s risk tolerance. FGL’s FIA hedging strategy economically hedges the equity returns and exposes FGL to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. FGL uses a variety of techniques, including direct estimation of market sensitivities and value-at-risk, to monitor this risk daily. FGL intends to continue to adjust the hedging strategy as market conditions and FGL’s risk tolerance change.

Collateral Agreements

FGL is required to maintain minimum ratings as a matter of routine practice under its ISDA agreements. Under some ISDA agreements, FGL has agreed to maintain certain financial strength ratings. A downgrade below these levels provides the counterparty under the agreement the right to terminate the open derivative contracts between the parties, at which time any amounts payable by FGL or the counterparty would be dependent on the market value of the underlying derivative contracts. FGL’s current rating allows multiple counterparties the right to terminate ISDA agreements. No ISDA agreements have been terminated, although the counterparties have reserved the right to terminate the ISDA agreements at any time. In certain transactions, FGL and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. As of December 30, 2012 and September 30, 2012, no collateral was posted by FGL’s counterparties as they did not meet the net exposure thresholds. Accordingly, the maximum amount of loss due to credit risk that FGL would incur if parties to the call options failed completely to perform according to the terms of the contracts was $152.5 and $200.7 at December 30, 2012 and September 30, 2012, respectively.

FGL held 2,001 and 2,835 futures contracts at December 30, 2012 and September 30, 2012, respectively. The fair value of futures contracts represents the cumulative unsettled variation margin (open trade equity net of cash settlements). FGL provides cash collateral to the counterparties for the initial and variation margin on the futures contracts which is included in “Cash and cash equivalents” in the Condensed Consolidated Balance Sheets. The amount of collateral held by the counterparties for such contracts was $6.9 and $9.8 at December 30, 2012 and September 30, 2012, respectively.