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:



	March 31, 2013
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Estimated Fair Value		Carrying Value

Fixed-maturity securities, available-for sale
Asset-backed securities	$	1,388.5	$	30.6	$	(0.7	)	$	1,418.4	$	1,418.4
Commercial mortgage-backed securities	506.8		39.9		(0.5		)	546.2		546.2
Corporates	10,118.0		686.3		(13.0		)	10,791.3		10,791.3
Hybrids	438.8		28.1		—			466.9		466.9
Municipals	969.1		109.4		(0.8		)	1,077.7		1,077.7
Agency residential mortgage-backed securities	122.2		4.1		(0.3		)	126.0		126.0
Non-agency residential mortgage-backed securities	1,209.5		91.6		(2.6		)	1,298.5		1,298.5
U.S. Government	447.1		11.5		(0.1		)	458.5		458.5
Total fixed maturities	15,200.0		1,001.5		(18.0		)	16,183.5		16,183.5
Equity securities
Available-for-sale	247.4		10.2		(1.9		)	255.7		255.7
Held for trading	102.1		—		(44.4		)	57.7		57.7
Total equity securities	349.5		10.2		(46.3		)	313.4		313.4
Derivatives	141.8		124.6		(3.8		)	262.6		262.6
Asset-backed loans	241.6		—		—			241.6		241.6
Other invested assets
Policy loans and other invested assets	32.4		—		—			32.4		32.4
Total investments	$	15,965.3	$	1,136.3	$	(68.1	)	$	17,033.5	$	17,033.5



	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
Derivatives	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 March 31, 2013 and September 30, 2012.

Securities held on deposit with various state regulatory authorities had a fair value of $20.4 and $20.7 at March 31, 2013 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.



	March 31, 2013
	Amortized Cost		Fair Value
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities:
Due in one year or less	$	615.2	$	619.4
Due after one year through five years	2,888.8		2,985.3
Due after five years through ten years	3,702.2		3,958.0
Due after ten years	4,683.2		5,144.6
Subtotal	11,889.4		12,707.3
Other securities which provide for periodic payments:
Asset-backed securities	1,388.5		1,418.4
Commercial-mortgage-backed securities	506.8		546.2
Structured hybrids	83.6		87.1
Agency residential mortgage-backed securities	122.2		126.0
Non-agency residential mortgage-backed securities	1,209.5		1,298.5
Total fixed maturity available-for-sale securities	$	15,200.0	$	16,183.5

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 March 31, 2013. 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:



	March 31, 2013
	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	$	116.3	$	(0.5	)	$	21.8	$	(0.2	)	$	138.1	$	(0.7	)
Commercial-mortgage-backed securities	—		—			0.2		(0.5		)	0.2		(0.5		)
Corporates	1,044.4		(11.2		)	125.3		(1.8		)	1,169.7		(13.0		)
Equities	17.7		(0.7		)	32.2		(1.2		)	49.9		(1.9		)
Municipals	79.1		(0.8		)	—		—			79.1		(0.8		)
Agency residential mortgage-backed securities	4.9		(0.2		)	4.1		(0.1		)	9.0		(0.3		)
Non-agency residential mortgage-backed securities	143.4		(1.6		)	68.3		(1.0		)	211.7		(2.6		)
U.S. Government	20.0		(0.1		)	—		—			20.0		(0.1		)
Total available-for-sale securities	$	1,425.8	$	(15.1	)	$	251.9	$	(4.8	)	$	1,677.7	$	(19.9	)
Total number of available-for-sale securities in an unrealized loss position			213					51					264



	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		)
Equities	—		—			44.5		(1.3		)	44.5		(1.3		)
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		)
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 March 31, 2013 and September 30, 2012, securities in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments, residential mortgage-backed securities and equities. Total unrealized losses were $19.9 and $30.6 at March 31, 2013 and September 30, 2012, respectively. Although the absolute level of unrealized losses has declined, the largest component of the unrealized loss position remains in the corporates finance sector, as spreads in this industry sector remain above historical levels. Spreads remain elevated in the commercial mortgage-backed and non-agency residential mortgage backed sectors of the structured market, but with conviction growing in the strength of the recovery in the U.S. housing market, FGL is adding to non-agency residential mortgage backed securities at these higher, attractive spreads. In general, FGL targets non-agency residential mortgage holdings in the National Association of Insurance Commissioners ("NAIC") 1 rating category. Hybrids continue to strengthen due to regulatory changes that encourage issuers to retire outstanding securities, and as a result, the unrealized loss position in hybrids has improved from September 30, 2012 to March 31, 2013.

Base interest rates remain low due to ongoing efforts by central banks to maintain an accommodative monetary. As a result, risk assets continue to perform well, including during the March 31, 2013 three and six month periods.

At March 31, 2013 and September 30, 2012, securities with a fair value of $0.1 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 and structured securities. 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 for the three and six months ended March 31, 2013 and April 1, 2012, for which a portion of the other-than-temporary impairment was recognized in AOCI:



	Three months ended				Six months ended
	March 31, 2013		April 1, 2012		March 31, 2013		April 1, 2012
Balance at the beginning of the period	$	2.7	$	2.1	$	2.7	$	0.7
Increases attributable to credit losses on securities:
Other-than-temporary impairment was not previously recognized	—		0.5		—		1.9
Balance at the end of the period	$	2.7	$	2.6	$	2.7	$	2.6

For the three and six months ended March 31, 2013, FGL recognized impairment losses in operations totaling $0.4 and $0.9, respectively, including credit impairments of $0.1 and $0.3 and change-of-intent impairments of $0.3 and $0.7 and had an amortized cost of $2.7 and a fair value of $1.8 at the time of impairment. For the three and six months ended April 1, 2012, FGL recognized impairment losses in operations totaling $4.1 and 17.3, respectively, including credit impairments of $2.6 for both periods, and change-of-intent impairments of $1.6 and $14.7 and had an amortized cost of $86.9 and a fair value of $68.0 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				Six months ended
	March 31, 2013		April 1, 2012		March 31, 2013		April 1, 2012
Other-than-temporary impairments recognized in net income:
Corporates	$	—	$	—	$	—	$	0.7
Non-agency residential mortgage-backed securities	0.4		3.3		0.9		6.1
Hybrids	—		—		—		9.7
Other invested assets	—		0.8		—		0.8
Total other-than-temporary impairments	$	0.4	$	4.1	$	0.9	$	17.3

Asset-backed Loans

Salus’ portfolio of asset-backed loans receivable, included in "Asset-backed loans" in the Condensed Consolidated Balance Sheets as of March 31, 2013 and September 30, 2012, consisted of the following:



	March 31, 2013		September 30, 2012
Asset-backed loans, by major industry:
Wholesale	$	66.0	$	77.2
Apparel	96.7		70.1
Jewelry	39.2		27.9
Other	42.5		6.3
Total asset-backed loans	244.4		181.5
Less: Allowance for credit losses	2.8		1.4
Total asset-backed loans, net	$	241.6	$	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 and six months ended March 31, 2013 and April 1, 2012:



	Three months ended				Six months ended
	March 31, 2013		April 1, 2012		March 31, 2013		April 1, 2012
Allowance for credit losses:
Balance at beginning of period	$	2.6	$	—	$	1.4	$	—
Provision for credit losses	0.2		0.2		1.4		0.2
Charge-offs	—		—		—		—
Recoveries	—		—		—		—
Balance at end of period	$	2.8	$	0.2	$	2.8	$	0.2

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 March 31, 2013 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 March 31, 2013 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 March 31, 2013 and September 30, 2012:



NAIC Designation	Credit Equivalent Rating	March 31, 2013		Percent of Total		September 30, 2012		Percent of Total
1	AAA/AA/A	$	18.0	7.4	%	$	75.8	41.7	%
2	BBB	200.2		81.9	%	94.9		52.3	%
3	BB	—		—	%	10.8		6.0	%
4	B	—		—	%	—		—	%
5	CCC	26.2		10.7	%	—		—	%
Not rated		—		—	%	—		—	%
Total		$	244.4	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						Six months ended
	March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
Fixed maturity available-for-sale securities	$	165.9		$	170.5		$	333.5		$	357.7
Equity available-for-sale securities	2.9			3.4			7.6			6.0
Policy loans	0.2			0.1			0.5			0.4
Invested cash and short-term investments	0.4			1.3			1.2			1.4
Other investments	5.4			0.9			14.2			0.6
Gross investment income	174.8			176.2			357.0			366.1
External investment expense	(2.8		)	(3.2		)	(6.9		)	(6.3		)
Net investment income	$	172.0		$	173.0		$	350.1		$	359.8

Net investment gains

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



	Three months ended						Six months ended
	March 31, 2013			April 1, 2012			March 31, 2013			April 1, 2012
Net realized gains before other-than-temporary impairments	$	73.0		$	69.7		$	245.5		$	151.6
Gross other-than-temporary impairments	(0.4		)	(4.8		)	(0.9		)	(18.9		)
Non-credit portion of other-than-temporary impairments included in other comprehensive income	—			0.7			—			1.6
Net realized gains on fixed maturity available-for-sale securities	72.6			65.6			244.6			134.3
Realized gains on equity securities	1.9			0.1			1.9			0.4
Net realized gains on securities	74.5			65.7			246.5			134.7
Realized gains (losses) on certain derivative instruments	29.7			9.8			45.3			(5.7		)
Unrealized gains on certain derivative instruments	102.5			89.2			61.3			139.5
Change in fair value of derivatives	132.2			99.0			106.6			133.8
Realized gains on other invested assets	—			(1.1		)	0.1			(1.0		)
Net investment gains	$	206.7		$	163.6		$	353.2		$	267.5

For the three and six months ended March 31, 2013, principal repayments, calls, tenders, and proceeds from the sale of fixed maturity available-for-sale securities totaled $2,490.4 and $4,905.5, gross gains on such sales totaled $71.0 and $249.0 and gross losses totaled $0.1 and $0.6, respectively. The proceeds from the sale of fixed maturity available-for sale securities exclude maturities and repayments for the three and six months ended March 31, 2013.

For the three and six months ended April 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 10 totaled $1,417.0 and $3,150.1, gross gains on such sales totaled $70.1 and $162.4 and gross losses totaled $1.2 and $11.7, respectively. The proceeds from the sale of fixed maturity available-for sale securities exclude maturities and repayments for the three and six months ended April 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 securities above were $0.4 and $0.9 for the three and six months ended March 31, 2013, respectively and were $4.1 and $17.3 for the three and six months ended April 1, 2012, respectively.

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



	Six months ended
	March 31, 2013			April 1, 2012
Proceeds from investments sold, matured or repaid:
Available-for-sale	$	5,769.7		$	3,059.7
Held-to-maturity	—			74.9
Trading (acquired for holding)	91.8			9.2
Derivatives and other	154.8			79.4
	$	6,016.3		$	3,223.2
Cost of investments acquired:
Available-for-sale	$	(5,839.0	)	$	(2,022.0	)
Held-to-maturity	—			(34.0		)
Trading (acquired for holding)	(0.9		)	(70.4		)
Derivatives and other	(76.3		)	(67.9		)
	$	(5,916.2	)	$	(2,194.3	)

Concentrations of Financial Instruments

As of March 31, 2013, 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 $2,036.4, or 12.2%, of the invested assets portfolio. FGL’s holdings in this industry includes investments in 87 different issuers with the top ten investments accounting for 39.6% of the total holdings in this industry. As of March 31, 2013, FGL’s exposure to sub-prime and Alternative-A residential mortgage-backed securities was $332.3 and $328.6 or collectively 2.0% of FGL's invested assets. As of March 31, 2013 and September 30, 2012 FGL had investments in 10 and 13 issuers that exceeded 10% of the Company's stockholders’ equity with a fair value of $1,408.0 and $1,625.9, or 8.4% and 9.8% of the invested assets portfolio, respectively. Additionally, FGL’s largest concentration in any single issuer as of March 31, 2013 and September 30, 2012 had a fair value of $167.7 and $152.9, or 1.0% and 0.7% of FGL's invested assets portfolio, respectively.