Derivative Financial Instruments

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



Asset Derivatives	Classification	March 31, 2014		September 30, 2013
Derivatives designated as hedging instruments:
Commodity swap and option agreements	Receivables, net	$	0.3	$	0.4
Commodity swap and option agreements	Other assets	0.1		—
Foreign exchange forward agreements	Receivables, net	2.0		1.7
Total asset derivatives designated as hedging instruments		2.4		2.1
Derivatives not designated as hedging instruments:
Commodity contracts	Receivables, net	—		3.7
Call options	Derivatives	271.5		221.8
Futures contracts	Derivatives	1.5		—
Foreign exchange contracts	Receivables, net	0.1		0.1
Foreign exchange embedded derivative included in asset-based loans	Receivables, net	1.2		—
Total asset derivatives		$	276.7	$	227.7



Liability Derivatives	Classification	March 31, 2014		September 30, 2013
Derivatives designated as hedging instruments:
Commodity contracts	Accounts payable and other current liabilities	$	0.2	$	0.5
Foreign exchange forward agreements	Accounts payable and other current liabilities	4.8		4.6
Foreign exchange contracts	Other liabilities	0.2		0.1
Total liability derivatives designated as hedging instruments		5.2		5.2
Derivatives not designated as hedging instruments:
Commodity contracts	Other liabilities	4.9		1.9
FIA embedded derivative	Contractholder funds	1,718.7		1,544.4
Futures contracts	Other liabilities	—		1.0
Foreign exchange forward contracts	Accounts payable and other current liabilities	2.2		5.3
Equity conversion feature of preferred stock	Equity conversion feature of preferred stock	364.8		330.8
Total liability derivatives		$	2,095.8	$	1,888.6

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 and six months ended March 31, 2014 and March 31, 2013:



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)						Amount of Gain ( Loss) Recognized in Income on Derivatives (Ineffective Portion and Amount Excluded from Effectiveness Testing)						Classification
Three months ended	March 31, 2014			March 31, 2013			March 31, 2014			March 31, 2013			March 31, 2014			March 31, 2013

Commodity contracts	$	(1.0	)	$	(2.2	)	$	0.3		$	0.2		$	(0.2	)	$	(0.1	)	Consumer products cost of goods sold
Foreign exchange contracts	(0.1		)	0.1			—			0.2			—			—			Net consumer products sales
Foreign exchange contracts	(0.7		)	3.6			(0.3		)	(0.4		)	—			—			Consumer products cost of goods sold
Total	$	(1.8	)	$	1.5		$	—		$	—		$	(0.2	)	$	(0.1	)
Six months ended
Commodity contracts	$	0.1		$	(2.4	)	$	—		$	0.1		$	—		$	(0.1	)	Consumer products cost of goods sold
Foreign exchange contracts	0.1			0.6			0.1			0.3			—			—			Net consumer products sales
Foreign exchange contracts	(1.1		)	3.2			(1.0		)	(0.9		)	—			—			Consumer products cost of goods sold
Total	$	(0.9	)	$	1.4		$	(0.9	)	$	(0.5	)	$	—		$	(0.1	)

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 redeemable 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. Salus recognizes the change in the fair value of foreign exchange derivative embedded in certain of its foreign currency-denominated asset-based loans in the Condensed Consolidated Statements of Operations. During the three and six months ended March 31, 2014 and March 31, 2013, the Company recognized the following gains (losses) on these derivatives:



Derivatives Not Designated as Hedging Instruments	Gain (Loss) Recognized in Income on Derivatives												Classification
	Three months ended						Six months ended
	March 31, 2014			March 31, 2013			March 31, 2014			March 31, 2013
Equity conversion feature of preferred stock	$	(3.5	)	$	(39.6	)	$	(50.7	)	$	29.3		(Loss) gain from the change in the fair value of the equity conversion feature of preferred stock
Oil and natural gas commodity contracts	(6.8		)	(8.8		)	(10.2		)	(8.8		)	Other expense, net
Commodity contracts	—			—			(0.1		)	—			Consumer products cost of goods sold
Foreign exchange contracts	(0.2		)	1.8			0.6			(2.3		)	Other expense, net
Foreign exchange embedded derivative included in asset-based loans	1.2			—			1.2			—			Other expense, net
Call options	21.2			118.5			135.5			97.6			Net investment gains
Futures contracts	1.3			13.7			14.4			9.0			Net investment gains
FIA embedded derivatives	74.0			(122.6		)	174.3			(88.8		)	Benefits and other changes in policy reserves
Total	$	87.2		$	(37.0	)	$	265.0		$	36.0

Additional Disclosures

Cash Flow Hedges

When it determines appropriate, Spectrum Brands uses 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 March 31, 2014 and September 30, 2013, 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 March 31, 2014, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2014 with a contract value of $223.1. The derivative net loss on these contracts recorded in AOCI at March 31, 2014 was $1.4, net of tax benefit of $0.7 and noncontrolling interest of $1.0. At March 31, 2014, the portion of derivative net loss estimated to be reclassified from AOCI into earnings over the next twelve months is $1.3, net of tax and noncontrolling interest.

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. At March 31, 2014, Spectrum Brands had a series of zinc swap contracts outstanding through September 2014 for 7 tons with a contract value of $13.7. At March 31, 2014, Spectrum Brands had a series of brass swap contracts outstanding through September 2014 for one ton with a contract value of $5.7. The derivative net gain on these contracts recorded in AOCI at March 31, 2014 was insignificant. At March 31, 2014, the portion of derivative net gain estimated to be reclassified from AOCI into earnings over the next twelve months is insignificant.

Fair Value Contracts

Spectrum Brands

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 March 31, 2014 and September 30, 2013, Spectrum Brands had $120.5 and $108.5, respectively, of notional value for such foreign exchange derivative contracts outstanding.

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 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 unrealized changes in fair value of the hedge contracts are adjusted through earnings when the realized gains or losses affect earnings upon settlement of the hedges. The swaps effectively fix the floating price on a specified quantity of silver through a specified date. At March 31, 2014, Spectrum Brands had a series of such swap contracts outstanding through April 2014 for 15 troy ounces with a contract value of $0.3. At September 30, 2013, Spectrum Brands had a series of such swap contracts outstanding through April 2014 for 45 troy ounces with a contract value of $1.0.

Oil and natural gas commodity contracts

The EXCO/HGI JV’s 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 the EXCO/HGI JV would realize if commodity prices increase. When prices for oil and natural gas are volatile, changes in the fair value of the derivative financial instrument contracts underlying the EXCO/HGI JV’s derivative financial instrument management activities may result in significant non-cash income or expense activity. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if the EXCO/HGI JV terminates a contract prior to its expiration. The EXCO/HGI JV does not designate its derivative financial instruments as hedging instruments for financial reporting purposes and, as a result, the EXCO/HGI JV recognizes the change in the respective instruments’ fair value in earnings.

Settlements in the normal course of maturities of derivative financial instrument contracts result in cash receipts from, or cash disbursements to, the EXCO/HGI JV's derivative contract counterparties. Changes in the fair value of the EXCO/HGI JV's derivative financial instrument contracts, which includes both cash settlements and non-cash changes in fair value, are included in income with a corresponding increase or decrease in the Condensed Consolidated Balance Sheets fair value amounts.

The EXCO/HGI JV's natural gas and oil commodity contract derivative instruments are comprised of swap contracts. Swap contracts allow the EXCO/HGI JV to receive a fixed price and pay a floating market price to the counterparty for the hedged commodity.

The following table presents our proportionate share of the EXCO/HGI JV’s volumes and fair value of the oil and natural gas derivative financial instruments as of March 31, 2014 (presented on a calendar-year basis) :



(in millions, except volumes and prices)	Volume Mmmbtus/Mbbls	Weighted average strike price per Mmbtu/Bbl		March 31, 2014
Natural gas:
Swaps:
Remainder of 2014	12,272.0	$	4.15	$	(3.8	)
Total natural gas	12,272.0			$	(3.8	)
Oil:
Swaps:
Remainder of 2014	205.0	$	91.87	$	(1.2	)
Total oil	205.0			$	(1.2	)
Total oil and natural gas derivatives				$	(5.0	)

At September 30, 2013, the EXCO/HGI JV had outstanding derivative contracts to mitigate price volatility covering 16,018 Billion British Thermal Units ("Mmmbtus") of natural gas and 375 Thousand Barrels ("Mbbls") of oil. At March 31, 2014, the average forward NYMEX oil prices per Bbl for the calendar year 2014 was $98.47, and the average forward NYMEX natural gas prices per Mmbtu for the remainder of 2014 was $4.45.

The EXCO/HGI JV's derivative financial instruments covered approximately 69.0% and 77.0% of production volumes for the three and six months ended March 31, 2014, respectively, and 54.0% or production volumes for the period from inception to March 31, 2013.

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 March 31, 2014 and September 30, 2013.

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 March 31, 2014, Spectrum Brands did not post any cash collateral related to such liability positions. At September 30, 2013, Spectrum Brands had posted cash collateral of $0.5 related to such liability positions. In addition, at March 31, 2014 and September 30, 2013, 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 Sheets.

The EXCO/HGI JV places derivative financial instruments with the financial institutions that are lenders under the EXCO/HGI JV Credit Agreement that it believes have high quality credit ratings. To mitigate risk of loss due to default, the EXCO/HGI JV 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 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:



		March 31, 2014								September 30, 2013
Counterparty	Credit Rating (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	$	2,018.2	$	83.0	$	41.1	$	41.9	$	2,037.8	$	70.7	$	—	$	70.7
Deutsche Bank	A2/A	2,265.3		81.9		45.7		36.2		1,620.4		51.7		23.0		28.7
Morgan Stanley	A3/A	2,143.3		89.9		63.2		26.7		2,264.1		75.7		49.0		26.7
Royal Bank of Scotland	BBB+/Baa2	114.7		8.1		—		8.1		364.3		20.3		—		20.3
Barclay's Bank	A2/A	260.4		8.6		—		8.6		120.8		3.4		—		3.4
		$	6,801.9	$	271.5	$	150.0	$	121.5	$	6,407.4	$	221.8	$	72.0	$	149.8

(a) Credit rating as of March 31, 2014.

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 March 31, 2014 and September 30, 2013, counterparties posted $150.0 and $72.0 of collateral, of which $108.9 and $72.0, respectively, is included in "Cash and cash equivalents," with an associated payable for this collateral included in "Other liabilities" in the Condensed Consolidated Balance Sheets. The remaining $41.1 of non-cash collateral was held by a third-party custodian at March 31, 2014. 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 $121.5 and $149.8 at March 31, 2014 and September 30, 2013, respectively.

FGL held 1,990 and 1,693 futures contracts at March 31, 2014 and September 30, 2013, 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 Condensed Consolidated Balance Sheets. The amount of collateral held by the counterparties for such contracts was $8.6 and $5.9 at March 31, 2014 and September 30, 2013, respectively.