Risks and Uncertainties Risks and Uncertainties (Notes)

6 Months Ended

Mar. 31, 2017

Concentration Risk Disclosure [Text Block]

Use of Estimates and Assumptions

The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.

Concentration of Securities Included in Funds Withheld Receivables

As of March 31, 2017 and September 30, 2016, Front Street’s most significant exposure related to the securities underlying the funds withheld receivables was to the financial sector and the energy, mining and metals industries.

As of March 31, 2017 and September 30, 2016, the carrying value of the fixed maturity securities in the financial sector was $243.2, or 14.9%, and $232.8, or 14.1%, respectively, of Front Street’s funds withheld receivables. At March 31, 2017 and September 30, 2016, the holdings in this sector included investments in 92 and 81 different issuers, respectively, with the top ten investments accounting for 47.7% and 48.0%, respectively, of the total holdings in this sector.

As of March 31, 2017 and September 30, 2016, the carrying value of the fixed maturity securities in the energy, mining and metals industries was $168.5, or 10.3%, and $188.6, or 11.4%, respectively, of Front Street’s funds withheld receivables. At March 31, 2017 and September 30, 2016, the holdings in these industries included investments in 66 and 74 different issuers, respectively, with the top ten investments accounting for 42.0% and 43.4%, respectively, of the total holdings in these industries.

There were no holdings in a single issuer included in the funds withheld receivables that exceeded 10% of the Company’s stockholders’ equity as of March 31, 2017 and September 30, 2016.

Concentrations of Financial and Capital Markets Risk

Through Front Street, the Company is exposed to financial and capital markets risk, including changes in interest rates and credit spreads which can have an adverse effect on the Company’s results of operations, financial condition and liquidity. The Company expects to continue to face challenges and uncertainties that could adversely affect its results of operations and financial condition.

The Company’s exposure to such financial and capital markets risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates, in the absence of other countervailing changes, will increase the net unrealized loss position of Front Street’s fund withheld receivables and, if long-term interest rates rise dramatically within a six to twelve month time period, certain of Front Street’s reinsured products may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring Front Street to liquidate assets in an unrealized loss position. This risk is mitigated to some extent by surrender charge protection provided by the products reinsured by Front Street.

Insurance Counterparty Risk

Through Front Street, the Company is exposed to insurance counterparty risk, which is the potential for Front Street to incur losses due to a reinsurance counterparty becoming distressed or insolvent. This includes run-on-the-bank risk and collection risk. The run-on-the-bank risk is that a client’s in force block incurs substantial surrenders and/or lapses due to credit impairment, reputation damage or other market changes affecting the counterparty. Substantially higher than expected surrenders and/or lapses could result in inadequate in force business to recover cash paid out for acquisition costs. The collection risk for reinsurance counterparties includes their inability to satisfy a reinsurance agreement because the right of offset is disallowed by the receivership court; the reinsurance contract is rejected by the receiver, resulting in a premature termination of the contract; and/or the security supporting the transaction becomes unavailable to Front Street. To date, Front Street has not experienced a material default in connection with reinsurance arrangements, nor has it experienced any material difficulty in collecting claims recoverable from reinsurance counterparties; however, no assurance can be given as to the future performance of such reinsurance counterparty or as to the recoverability of any such claims.

Receivables

The allowance for uncollectible receivables as of March 31, 2017 and September 30, 2016 was $45.3 and $46.8, respectively. Through Spectrum Brands, the Company has a broad range of customers including many large retail outlet chains, one of which accounts for a significant percentage of its sales volume. This customer represents approximately 15.1% and 13.1% of the Company’s “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets at March 31, 2017 and September 30, 2016, respectively.

Concentration Risk Disclosure [Text Block]

The Company’s consolidated funds withheld receivables are summarized as follows:



	March 31, 2017
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value
Funds withheld receivables with FGL
Corporates	$	661.1	$	10.0	$	(25.8	)	$	645.3	$	645.3
Asset/Mortgage-backed securities	197.8		1.1		(4.9		)	194.0		194.0
Municipals	12.0		0.1		(0.3		)	11.8		11.8
Government bonds	1.1		—		(0.1		)	1.0		1.0
Preferred stock	8.5		0.1		(0.4		)	8.2		8.2
Total funds withheld receivables with FGL	880.5		11.3		(31.5		)	860.3		860.3
Funds withheld receivables with third parties
Corporates	404.4		5.9		(7.2		)	403.1		403.1
Asset/Mortgage-backed securities	135.4		2.4		(1.1		)	136.7		136.7
Municipals	56.2		0.7		(0.4		)	56.5		56.5
Government bonds	83.0		—		(3.5		)	79.5		79.5
Agency bonds	7.3		—		—			7.3		7.3
Total funds withheld receivables with third parties	686.3		9.0		(12.2		)	683.1		683.1
Total fixed maturity and equity securities included in funds withheld receivables	1,566.8		20.3		(43.7		)	1,543.4		1,543.4

Call option receivable from FGL included in funds withheld receivables	8.9		4.4		—			13.3		13.3
Accrued interest	17.0		—		—			17.0		17.0
Net receivables	52.2		—		—			52.2		52.2
Policy loans and other	8.3		—		—			8.3		8.3
Total funds withheld receivables	$	1,653.2	$	24.7	$	(43.7	)	$	1,634.2	$	1,634.2



	September 30, 2016
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value
Funds withheld receivables with FGL
Corporates	$	638.5	$	18.2	$	(29.5	)	$	627.2	$	627.2
Asset/Mortgage-backed securities	238.8		0.6		(7.9		)	231.5		231.5
Municipals	12.1		0.7		—			12.8		12.8
Government bonds	1.1		—		—			1.1		1.1
Preferred stock	8.8		0.3		(0.9		)	8.2		8.2
Total funds withheld receivables with FGL	899.3		19.8		(38.3		)	880.8		880.8
Funds withheld receivables with third parties
Corporates	390.0		18.8		(2.7		)	406.1		406.1
Asset/Mortgage-backed securities	118.7		1.9		(1.7		)	118.9		118.9
Municipals	49.5		4.1		—			53.6		53.6
Government bonds	67.7		1.3		(0.2		)	68.8		68.8
Agency bonds	6.6		0.3		—			6.9		6.9
Total funds withheld receivables with third parties	632.5		26.4		(4.6		)	654.3		654.3
Total fixed maturity and equity securities included in funds withheld receivables	1,531.8		46.2		(42.9		)	1,535.1		1,535.1

Call option receivable from FGL included in funds withheld receivables	9.8		1.5		—			11.3		11.3
Accrued interest	17.8		—		—			17.8		17.8
Net receivables	77.7		—		—			77.7		77.7
Policy loans and other	8.5		—		—			8.5		8.5
Total funds withheld receivables	$	1,645.6	$	47.7	$	(42.9	)	$	1,650.4	$	1,650.4

Maturities of Funds Withheld Receivables

The amortized cost and fair value of fixed maturity and equity securities included in funds withheld receivables 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.



	March 31, 2017
	Amortized Cost		Fair Value
Corporate, Non-structured Hybrids, Municipal and Preferred stock:
Due in one year or less	$	18.6	$	18.6
Due after one year through five years	201.6		198.0
Due after five years through ten years	498.0		496.2
Due after ten years	496.3		481.6
Subtotal	1,214.5		1,194.4
Other securities which provide for periodic payments:
Asset/Mortgage-backed securities	333.2		330.7
Structured hybrids	19.1		18.3
Total fixed maturity and equity securities included in funds withheld receivables	$	1,566.8	$	1,543.4

Securities in Funds Withheld Receivables with FGL in an Unrealized Loss Position

The Company has concluded that the fair value of the securities presented in the table below were not other-than-temporarily impaired as of March 31, 2017. The fair value and gross unrealized losses of securities in the funds withheld receivables with FGL, aggregated by investment category, were as follows:



	March 31, 2017
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Funds withheld receivables with FGL
Corporates	$	152.4	$	(5.3	)	$	159.6	$	(20.5	)	$	312.0	$	(25.8	)
Asset/Mortgage-backed securities	29.5		(0.1		)	100.6		(4.8		)	130.1		(4.9		)
Municipals	5.9		(0.3		)	0.9		—			6.8		(0.3		)
Government bonds	1.0		(0.1		)	—		—			1.0		(0.1		)
Preferred stock	—		—			5.2		(0.4		)	5.2		(0.4		)
Total funds withheld receivables with FGL	$	188.8	$	(5.8	)	$	266.3	$	(25.7	)	$	455.1	$	(31.5	)
Total number of securities in an unrealized loss position			135					112					247



	September 30, 2016
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Funds withheld receivables with FGL
Corporates	$	137.8	$	(12.6	)	$	91.7	$	(16.9	)	$	229.5	$	(29.5	)
Asset/Mortgage-backed securities	73.3		(2.2		)	99.0		(5.7		)	172.3		(7.9		)
Municipals	1.0		—			—		—			1.0		—
Government bonds	0.2		—			—		—			0.2		—
Preferred stock	3.7		(0.9		)	—		—			3.7		(0.9		)
Total funds withheld receivables with FGL	$	216.0	$	(15.7	)	$	190.7	$	(22.6	)	$	406.7	$	(38.3	)
Total number of securities in an unrealized loss position			146					76					222

At March 31, 2017 and September 30, 2016, securities in the funds withheld receivables with FGL in an unrealized loss position were primarily concentrated in investment grade corporate debt and asset-backed instruments.

At March 31, 2017 and September 30, 2016, securities with a fair value of $21.7 and $39.6, respectively, had an unrealized loss greater than 20% of amortized cost, which represented less than 5% of the carrying value of all funds withheld receivables.

The Company recognized other-than-temporary impairment (“OTTI”) losses in operations totaling $4.5 for the three months ended March 31, 2016 and $1.0 and $5.9 for the six months ended March 31, 2017 and 2016, respectively, related to funds withheld receivables with FGL with an amortized cost of $12.5 and $8.7 and a fair value of $11.5 and $2.8 at March 31, 2017 and 2016, respectively.

Details underlying write-downs taken as a result of OTTI that were recognized in “Net (loss) income” and included in “Net investment gains (losses)” were as follows:



	Three months ended March 31,				Six months ended March 31,
	2017		2016		2017		2016
OTTI recognized in net (loss) income:
Corporates	$	—	$	4.5	$	1.0	$	5.9
Total	$	—	$	4.5	$	1.0	$	5.9

Net investment income

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



	Three months ended March 31,				Six months ended March 31,
	2017		2016		2017		2016
Fixed maturity securities included in funds withheld receivables with FGL	$	11.9	$	14.1	$	22.1	$	29.6
Equity securities included in funds withheld receivables with FGL	0.2		0.6		0.4		1.2
Asset-based loans	0.7		1.2		1.0		3.2
Other investments	0.1		0.3		0.1		2.5
Net investment income	$	12.9	$	16.2	$	23.6	$	36.5

Net investment gains (losses)

The major sources of “Net investment gains (losses)” reported in the accompanying Condensed Consolidated Statements of Operations were as follows:



	Three months ended March 31,					Six months ended March 31,
	2017		2016			2017			2016
Net realized gains (losses) on fixed maturity securities included in funds withheld receivables with FGL	$	2.4	$	(5.4	)	$	0.2		$	(2.1	)
Realized gains on equity securities included in funds withheld receivables with FGL	0.8		—			0.7			1.8
Realized gains (losses) on certain derivative instruments	5.8		(1.4		)	8.9			0.5
Change in fair value of embedded derivatives in funds withheld receivables with FGL	10.9		16.9			(1.3		)	(9.6		)
Realized gains (losses) on funds withheld receivables with third parties and other	12.1		29.6			(10.3		)	17.1
Net investment gains (losses)	$	32.0	$	39.7		$	(1.8	)	$	7.7

The modified coinsurance arrangement between FGL Insurance and Front Street created an obligation for the parties to settle a payable or receivable at a later date, which resulted in an embedded derivative. This embedded derivative is considered a total return swap with contractual returns that are attributable to the assets and liabilities associated with this reinsurance arrangement. The fair value of the total return swap is based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangement, including gains and losses from sales, are passed directly to the reinsurer pursuant to contractual terms of the reinsurance arrangement. The reinsurance related embedded derivative is expected to continue to exist after the disposal of FGL and is therefore not eliminated to appropriately reflect the continuing operations and balances held for sale. It is embedded in the funds withheld receivables with a corresponding asset in business held for sale on the accompanying Condensed Consolidated Balance Sheets and the related gains or losses are reported in “Net investment gains (losses)” with a corresponding “(Loss) income from discontinued operations” in the accompanying Condensed Consolidated Statements of Operations.