Intangibles of Insurance Segment

9 Months Ended

Jul. 03, 2011

Goodwill and Intangibles of Consumer Products Segment [Abstract]

(7) Intangibles of Insurance Segment

Intangible assets of the Insurance Segment include VOBA and DAC.

VOBA represents the estimated fair value of the right to receive future net cash flows from in-force contracts in a life insurance company acquisition at the acquisition date. DAC represents costs that are related directly to new or renewal insurance contracts, which may be deferred to the extent recoverable. These costs include incremental direct costs of contract acquisition, primarily commissions, as well as certain costs related directly to underwriting, policy issuance and processing. Up front bonus credits to policyholder account values, which are considered to be deferred sales inducements (“DSI”), are accounted for similarly to DAC.

The methodology for determining the amortization of VOBA and DAC varies by product type. For all insurance contracts, amortization is based on assumptions consistent with those used in the development of the underlying contract adjusted for emerging experience and expected trends. US GAAP requires that assumptions for these types of products not be modified unless recoverability testing deems them to be inadequate. VOBA and DAC amortization are reported within “Amortization of intangible assets” in the Condensed Consolidated Statements of Operations.

Acquisition costs for universal life insurance (“UL”) and investment-type products, which include fixed indexed and deferred annuities, are generally amortized over the lives of the policies in relation to the incidence of estimated gross profits (“EGPs”) from investment income, surrender charges and other product fees, policy benefits, maintenance expenses, mortality net of reinsurance ceded and expense margins, and actual realized gains (losses) on investments.

Changes in assumptions can have a significant impact on VOBA and DAC balances and amortization rates. Due to the relative size and sensitivity to minor changes in underlying assumptions of VOBA and DAC balances, FGL performs quarterly and annual analyses of VOBA and DAC for the annuity and life businesses, respectively. The VOBA and DAC balances are also evaluated for recoverability. At each evaluation date, actual historical gross profits are reflected, and estimated future gross profits and related assumptions are evaluated for continued reasonableness. Any adjustment in estimated future gross profits requires that the amortization rate be revised (“unlocking”) retroactively to the date of the policy or contract issuance. The cumulative unlocking adjustment is recognized as a component of current period amortization. In general, sustained increases in investment, mortality, and expense margins, and thus estimated future profits, lower the rate of amortization. However, sustained decreases in investment, mortality, and expense margins, and thus estimated future gross profits, increase the rate of amortization.

The carrying amounts of VOBA and DAC are adjusted for the effects of realized and unrealized gains and losses on debt securities classified as available-for-sale and certain derivatives and embedded derivatives. Amortization expense of VOBA and DAC reflects an assumption for an expected level of credit-related investment losses. When actual credit-related investment losses are realized, FGL performs a retrospective unlocking of VOBA and DAC amortization as actual margins vary from expected margins. This unlocking is reflected in the Condensed Consolidated Statements of Operations.

For annuity, UL, and investment-type products, the DAC asset is adjusted for the impact of unrealized gains (losses) on investments as if these gains (losses) had been realized, with corresponding credits or charges included in accumulated other comprehensive income.

VOBA and DAC are reviewed periodically to ensure that the unamortized portion does not exceed the expected recoverable amounts.

Information regarding VOBA and DAC (including DSI) is as follows:


	VOBA			DAC			Total
Balance at September 30, 2010	$	—		$	—		$	—
Acquisition of FGL on April 6, 2011		577,163			—			577,163
Deferrals		—			17,293			17,293
Less: Amortization related to:
Unlocking		(2,150	)		—			(2,150	)
Interest		6,832			—			6,832
Other amortization		(21,690	)		(4,332	)		(26,022	)
Add: Adjustment for unrealized investment losses (gains)		(70,850	)		(446	)		(71,296	)

Balance at July 3, 2011	$	489,305		$	12,515		$	501,820

The above DAC balances include $2,966 of DSI, net of shadow adjustments as of July 3, 2011.

Amortization of VOBA and DAC is attributed to both investment gains and losses and to other expenses for the amount of gross margins or profits originating from transactions other than investment gains and losses. Unrealized investment gains and losses represent the amount of VOBA and DAC that would have been amortized if such gains and losses had been recognized.

The estimated future amortization expense for VOBA is $21,364 for the three months remaining to September 30, 2011. Estimated amortization expense for VOBA in future fiscal years is as follows:


	Estimated
For the year ending	VOBA
September 30,	Expense
2012	$	85,823
2013		77,514
2014		68,237
2015		59,002
2016		49,934
Thereafter		198,281