Derivative Financial Instruments

The fair value of outstanding “Derivatives” recorded in the accompanying Consolidated Balance Sheets were as follows:



		September 30,
Asset Derivatives	Classification	2015		2014
Derivatives designated as hedging instruments:
Interest rate swaps	Other assets	$	—	$	0.6
Commodity swaps	Receivables, net	—		1.3
Foreign exchange contracts	Other assets	0.4		0.3
Foreign exchange contracts	Receivables, net	5.2		12.0
Total asset derivatives designated as hedging instruments		5.6		14.2
Derivatives not designated as hedging instruments:
Commodity contracts	Receivables, net	7.9		1.9
Call options	Derivatives	80.7		296.3
Futures contracts	Derivatives	1.2		—
Other embedded derivatives	Other invested assets	10.2		11.2
Foreign exchange contracts	Receivables, net	0.4		0.5
Total asset derivatives		$	106.0	$	324.1



		September 30,
Liability Derivatives	Classification	2015		2014
Derivatives designated as hedging instruments:
Interest rate swaps	Accounts payable and other current liabilities	$	1.4	$	1.8
Interest rate swaps	Other liabilities	1.2		—
Commodity swaps	Accounts payable and other current liabilities	4.7		0.1
Commodity swaps	Other liabilities	0.8		—
Foreign exchange contracts	Accounts payable and other current liabilities	1.5		—
Total liability derivatives designated as hedging instruments		9.6		1.9
Derivatives not designated as hedging instruments:
Commodity contracts	Accounts payable and other current liabilities	0.1		—
Commodity contracts	Other liabilities	—		0.3
FIA embedded derivative	Contractholder funds	2,149.4		1,908.1
Futures contracts	Other liabilities	—		0.5
Foreign exchange	Accounts payable and other current liabilities	0.1		0.1
Total liability derivatives		$	2,159.2	$	1,910.9

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, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. The Company recognizes all derivative instruments as assets or liabilities in the Consolidated Balance Sheets at fair value, including derivative instruments embedded in FIA contracts, and any changes in the fair value of the derivatives are recognized in “Net investment (losses) gains” in the accompanying Consolidated Statements of Operations.

The following table summarizes the impact of the effective portions of cash flow hedges and the gain (loss) recognized in the Consolidated Statement of Operations for Fiscal 2015, 2014 and 2013:



Fiscal 2015	Classification	Effective Portion
		Gain (Loss) in AOCI			Gain (Loss) reclassified to Earnings
Interest rate swaps	Interest expense	$	(3.4	)	$	(1.9	)
Commodity swaps	Cost of consumer products and other goods sold	(7.1		)	(0.7		)
Foreign exchange contracts	Net consumer and other product sales	0.1			0.1
Foreign exchange contracts	Cost of consumer products and other goods sold	21.8			30.0
		$	11.4		$	27.5



Fiscal 2014	Classification	Effective Portion
		Gain (Loss) in AOCI			Gain (Loss) reclassified to Earnings
Interest rate swaps	Interest expense	$	(1.6	)	$	(0.9	)
Commodity swaps	Cost of consumer products and other goods sold	1.9			0.7
Foreign exchange contracts	Net consumer and other product sales	0.1			0.2
Foreign exchange contracts	Cost of consumer products and other goods sold	12.7			(2.6		)
		$	13.1		$	(2.6	)



Fiscal 2013	Classification	Effective Portion
		Gain (Loss) in AOCI			Gain (Loss) reclassified to Earnings
Commodity swaps	Cost of consumer products and other goods sold	$	(2.6	)	$	(0.6	)
Foreign exchange contracts	Net consumer and other product sales	0.9			0.9
Foreign exchange contracts	Cost of consumer products and other goods sold	(0.3		)	0.6
		$	(2.0	)	$	0.9

The unrealized loss on derivatives in Comprehensive (loss) income expected to be recognized during Fiscal 2016 is $2.8.

During Fiscal 2015, 2014 and 2013, the Company recognized the following gains and losses on derivatives:



Classification	Derivatives Not Designated as Hedging Instruments	Amounts Recognized on Derivatives Increase / (Decrease)
		Fiscal
		2015			2014			2013
Revenues:
Net investment (losses) gains	Call options	$	(106.3	)	$	246.0		$	151.6
	Futures contracts	(7.0		)	25.5			17.5
	Change in fair value of other embedded derivatives	(1.0		)	(0.1		)	—
Operating costs and expenses:
Benefits and other changes in policy reserves	FIA embedded derivatives	$	241.3		$	363.7		$	(6.4	)
Cost of consumer products and other goods sold	Commodity swaps	(0.1		)	(0.1		)	(0.1		)
Other income and expense:
Other income (expense), net	Oil and natural gas commodity contracts	$	25.3		$	(6.6	)	$	(1.3	)
	Foreign exchange contracts	(2.5		)	3.1			(3.6		)
Loss from the change in the fair value of the equity conversion feature of preferred stock	Equity conversion feature of preferred stock	—			(12.7		)	(101.6		)

Additional Disclosures

Interest Rate Swaps. When it deems 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 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. As of September 30, 2015 and 2014, Spectrum Brands had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on variable rate debt, exclusive of lender spreads, at 1.4% for a notional principal amount of $300.0 through April 2017.

Foreign exchange contracts. 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 rates related to sales of product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related cash flow 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 cash flow hedge is reclassified as an adjustment to “Net consumer and other product sales” or “Cost of consumer products and other goods sold,” respectively. At September 30, 2015 and 2014, Spectrum Brands had foreign exchange derivative contracts designated as cash flow hedges with a notional value of $300.6 and $226.7, respectively.

Commodity Swaps. Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc and brass used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with the purchase of 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. Spectrum Brands had the following outstanding commodity swap contracts outstanding as of September 30, 2015 and 2014:



	September 30, 2015			September 30, 2014
	Notional	Contract Value		Notional	Contract Value
Zinc swap contracts (tons)	10.8	$	22.2	8.0	$	17.4
Brass swap contracts (tons)	1.8	8.5		0.6	2.8

Foreign exchange 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 economic hedges of a related liability or asset recorded in the accompanying Consolidated Balance Sheets. The gain or loss on the foreign exchange contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At September 30, 2015 and 2014, Spectrum Brands had $126.8 and $108.9, respectively, of notional value for such foreign exchange contracts outstanding.

Commodity Swaps. Spectrum Brands periodically enters into commodity swap contracts to economically hedge the risk from fluctuating prices for raw materials, specifically the pass-through of market prices for silver used in manufacturing purchased watch batteries. Spectrum Brands hedges a portion of the risk associated with these materials through the use of commodity swaps. The commodity swap contracts are designated as economic hedges with the unrealized gain or loss recorded in earnings and as an asset or liability at each period end. The unrecognized changes in fair value of the commodity swap contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the commodity swap contracts. The commodity swap contracts effectively fix the floating price on a specified quantity of silver through a specified date. Spectrum Brands had the following commodity swap contracts outstanding as of September 30, 2015 and 2014:



	September 30, 2015			September 30, 2014
	Notional	Contract Value		Notional	Contract Value
Silver (troy oz.)	25	$	0.4	25	$	0.4

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 & Poor’s 500 Index (the “S&P 500 Index”). This feature represents an embedded derivative under U.S. GAAP. The FIA embedded derivative is valued at fair value and included in the “Liability for contractholder funds” in the accompanying Consolidated Balance Sheets with changes in fair value included as a component of “Benefits and other changes in policy reserves” in the accompanying 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, three and five 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, three or five 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, spreads 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 (losses) gains” in the accompanying Consolidated Statement of Operations. 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.

Oil and natural gas commodity contracts. Compass’ natural gas and oil commodity contracts are comprised of swap contracts, collars and three-way collars (“Derivative Financial Instruments”). Swap contracts allow Compass to receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. A three-way collar is a combination of options including a sold call, a purchased put and a sold put. A three-way collar allows Compass to participate in the upside of commodity prices to the ceiling of the call option and provides Compass with partial downside protection through the combination of the put options.

Compass’ primary objective in entering into Derivative Financial Instruments is to manage its exposure to commodity price fluctuations, protect its returns on investments and achieve a more predictable cash flow in connection with its operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits Compass would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of its Derivative Financial Instruments management activities consists of non-cash income or expense due to changes in the fair value of its Derivative Financial Instruments. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if Compass terminates a contract prior to its expiration. Compass does not designate its Derivative Financial Instruments as hedging instruments for financial reporting purposes and, as a result, Compass recognizes the change in the respective Derivative Financial Instruments’ fair value in earnings.

Settlements in the normal course of maturities of Derivative Financial Instruments result in cash receipts from, or cash disbursements to, Compass’ derivative contract counterparties. Changes in the fair value of Compass’ Derivative Financial Instruments, which includes both cash and non-cash changes in fair value, are included in “Net investment (losses) gains” in the accompanying Consolidated Statements of Operations with a corresponding increase or decrease in the accompanying Consolidated Balance Sheets fair value amounts.

The following table presents Compass’ volumes and fair value of the oil and natural gas Derivative Financial Instruments as of September 30, 2015 (presented on a calendar-year basis):



(in millions, except volumes and prices)	Volume Mmbtus/Mbbls	Weighted average strike price per Mmbtu/Bbl		Fair Value at September 30, 2015
Natural gas swaps (October - December 2015)	2,760	$	3.95	$	3.7
Natural gas three-way collars (October 2015)	620			0.2
Short call		3.27
Long put		2.85
Short put		2.10
Total natural gas	3,380			$	3.9

Oil swaps (October - December 2015)	62	$	94.98	$	3.1
Oil collars (October - December 2015)	28			0.1
Short call		67.50
Long put		50.00
Oil three-way collars (January - December 2016)	183			0.8
Short call		76.00
Long put		56.00
Short put		42.00
Total oil	273			$	4.0
Total oil and natural gas derivatives				$	7.9

At September 30, 2014, Compass had outstanding derivative financial instruments to mitigate price volatility covering 6,821 Billion British Thermal Units (“Mmbtus”) of natural gas and 254 Thousand Barrels (“Mbbls”) of oil. At September 30, 2015, the average forward NYMEX oil prices per Bbl for the remainder of 2015 was $45.77, and the average forward NYMEX natural gas prices per Mmbtu for the remainder of 2015 was $2.61. Compass’ Derivative Financial Instruments covered approximately 60.0% and 72.0% of production volumes for Fiscal 2015 and 2014, respectively.

Other Embedded Derivatives

On June 16, 2014, FGL Insurance invested in a $35.0 fund-linked note issued by Nomura International Funding Pte. Ltd. The note provides for an additional payment at maturity based on the value of a hypothetical investment in AnchorPath Dedicated Return Fund (the “AnchorPath Fund”) of $11.3 which was based on the actual return of the fund. At September 30, 2015 and 2014, the fair value of the embedded derivative was $10.2 and $11.2, respectively. At maturity of the fund-linked note, FGL Insurance will receive the $35.0 face value of the note plus the value of the hypothetical investment in the AnchorPath Fund. The additional payment at maturity is an embedded derivative reported in “Other invested assets,” while the host is an AFS security reported in “Fixed maturities” within the accompanying Consolidated Balance Sheets.

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 as of September 30, 2015 and 2014.

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. As of September 30, 2015 and 2014, there was $3.5 and less than $0.1, respectively, of posted cash collateral related to such liability positions. In addition, as of September 30, 2015 and 2014, 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 Consolidated Balance Sheets.

Compass places Derivative Financial Instruments with the financial institutions that are lenders under Compass Credit Agreement that it believes have high quality credit ratings. To mitigate risk of loss due to default, Compass has entered into master netting agreements with its counterparties on its Derivative Financial Instruments that allow it to offset its asset position with its liability position in the event of a default by the counterparty.

FGL is exposed to credit loss in the event of non-performance by its counterparties on the call options and reflects assumptions regarding this non-performance risk in the fair value of the call options. The non-performance 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:



		September 30, 2015								September 30, 2014
Counterparty	Credit Rating (Fitch/Moody’s/S&P) (a)	Notional Amount		Fair Value		Collateral		Net Credit Risk		Notional Amount		Fair Value		Collateral		Net Credit Risk
Merrill Lynch	A/*/A	$	2,233.3	$	16.5	$	—	$	16.5	$	2,239.9	$	92.7	$	52.5	$	40.2
Deutsche Bank	A/A3/BBB+	2,481.4		26.0		—		26.0		2,810.0		108.0		72.5		35.5
Morgan Stanley	*/A1/A	4,086.2		34.8		7.0		27.8		2,294.7		85.0		63.0		22.0
Barclay's Bank	A/A2/A-	391.9		3.4		—		3.4		258.0		10.6		—		10.6
Total		$	9,192.8	$	80.7	$	7.0	$	73.7	$	7,602.6	$	296.3	$	188.0	$	108.3

(a) An * represents credit ratings that were not available.

Collateral Agreements

FGL is required to maintain minimum ratings as a matter of routine practice under its over-the-counter derivative agreements on ISDA forms. 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 September 30, 2015 and 2014, counterparties posted $7.0 and $188.0 of collateral, of which $7.0 and $135.5, respectively, was included in “Cash and cash equivalents” in the accompanying Consolidated Balance Sheets with an associated payable for this collateral included in “Other liabilities” in the accompanying Consolidated Balance Sheets. The remaining collateral was non-cash, held by a third-party custodian and is not included in the accompanying Consolidated Balance Sheets at September 30, 2015 and 2014, respectively. 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 $73.7 and $108.3 at September 30, 2015 and 2014, respectively.

FGL held 738 and 2,348 futures contracts at September 30, 2015 and 2014, respectively. The fair value of the 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 Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $3.3 and $10.8 at September 30, 2015 and 2014, respectively.