Investments

9 Months Ended

Jul. 03, 2011

(3) Investments

Consumer Products and Other

HGI’s short-term investments consist of (1) marketable equity and debt 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 ASC 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. The Company’s short-term investments are summarized as follows:


	July 3,		September 30,
	2011		2010
Trading:
Marketable equity securities	$	103,408	$	—
Marketable debt securities		778		—

		104,186		—

Held to maturity:
U.S. Treasury securities		35,609		53,965
Certificate of deposit		250		—

		35,859		53,965

Total	$	140,045	$	53,965

There was $1,058 of net unrealized gains recognized in “Other income (expense), net” during the three and nine months ended July 3, 2011 that relate to trading securities held at July 3, 2011.

Insurance

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 VOBA, DAC and deferred income taxes. The amortized cost, gross unrealized gains (losses), and fair value of available-for-sale securities of FGL at July 3, 2011 were as follows:


			Gross Unrealized		Gross Unrealized
	Amortized Cost		Gains		Losses			Fair Value
Available-for-sale securities
Asset-backed securities	$	514,291	$	5,849	$	(261	)	$	519,879
Commercial mortgage-backed securities		614,912		8,304		(6,341	)		616,875
Corporates		11,642,202		188,997		(21,909	)		11,809,290
Equities		308,939		3,612		(2,206	)		310,345
Hybrids		707,553		10,645		(4,411	)		713,787
Municipals		801,505		32,970		(503	)		833,972
Agency residential mortgage-backed securities		225,751		2,563		(203	)		228,111
Non-agency residential mortgage-backed securities		531,932		6,202		(13,298	)		524,836
U.S. Government		465,284		2,512		(318	)		467,478

Total available-for-sale securities	$	15,812,369	$	261,654	$	(49,450	)	$	16,024,573

At July 3, 2011, Non-agency residential-mortgage-backed securities had an other-than-temporary impairment of $(144).

The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, at July 3, 2011 were as follows:


Corporate, Municipal and U.S. Government securities:		Amortized Cost		Fair Value
Due in one year or less	$	365,252	$	366,031
Due after one year through five years		2,853,640		2,886,449
Due after five years through ten years		4,606,324		4,685,515
Due after ten years		5,083,775		5,172,745

Subtotal		12,908,991		13,110,740


Other securities which provide for periodic payments:
Asset-backed securities		514,291		519,879
Commercial mortgage-backed securities		614,912		616,875
Hybrids		707,553		713,787
Agency residential mortgage-backed securities		225,751		228,111
Non-agency residential mortgage-backed securities		531,932		524,836

Total fixed maturity available-for-sale securities	$	15,503,430	$	15,714,228

Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.

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. FGL has concluded that the declines in fair values of the securities in the sectors presented in the tables below were not other-than-temporary impairments as of July 3, 2011, except for the non-credit portion of other-than-temporary impairments of non-agency residential mortgage-backed securities of $144. 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, including an assessment of the issuers’ financial condition, and other objective evidence. Also contributing to this conclusion is its determination that it is more likely than not that FGL will not be required to sell these securities prior to recovery. 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 management has a lack of intent to sell these securities for a period of time sufficient to allow for any anticipated recovery in fair value.

As the amortized cost of all investments was adjusted to fair value as of the FGL Acquisition Date, no individual securities have been in a continuous unrealized loss position greater than twelve months. The fair value and gross unrealized losses, of available-for-sale securities with gross unrealized losses, aggregated by investment category, were as follows:


	July 3, 2011
			Gross Unrealized
	Fair Value		Losses
Available-for-sale securities
Asset-backed securities	$	48,060	$	(261	)
Commercial mortgage-backed securities		271,584		(6,341	)
Corporates		1,766,048		(21,909	)
Equities		72,111		(2,206	)
Hybrids		277,085		(4,411	)
Municipals		46,997		(503	)
Agency residential mortgage-backed securities		14,016		(203	)
Non-agency residential mortgage-backed securities		350,286		(13,298	)
U.S. Government		229,270		(318	)

Total available-for-sale securities	$	3,075,457	$	(49,450	)


Total number of available-for-sale securities in an unrealized loss position				298

At July 3, 2011, securities in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments, residential mortgage-backed securities and commercial mortgage-backed securities. Total unrealized losses were $49,450 at July 3, 2011. The unrealized loss position is primarily the result of risk premiums in finance and related sectors remaining elevated.

At July 3, 2011, securities with a fair value of $3,947 were depressed greater than 20% of amortized cost, which represented less than 1% of the carrying values of all investments. Based upon FGL’s current evaluation of these securities in accordance with its impairment policy and FGL’s intent to retain these investments for a period of time sufficient to allow for recovery in value, FGL has determined that these securities are temporarily impaired.

For the period from April 6, 2011 to June 30, 2011, FGL recognized credit losses in operations totaling $1,259 related to non-agency residential mortgage-backed securities, which experience other-than-temporary impairments that had not previously been recognized, and had an amortized cost of $12,140 and a fair value of $10,737 at the time of impairment.

Net Investment Income

The major categories of net investment income on the Company’s Condensed Consolidated Statements of Operations were as follows:


	For the period
	April 6, 2011 to
	July 3, 2011
Fixed maturity available-for-sale securities	$	174,181
Equity available-for-sale securities		5,641
Policy loans		800
Invested cash and short-term investments		72
Other investments		(291	)

Gross investment income		180,403
Investment expense		(3,518	)

Net investment income	$	176,885

Net Investment Gains (Losses)

Details underlying net investment gains (losses) reported on the Company’s Condensed Consolidated Statements of Operations were as follows:


	For the period
	April 6, 2011 to
	July 3, 2011
Net realized gain on fixed maturity available-for-sale securities	$	15,137
Realized (loss) on equity securities		(105	)

Net realized gains on securities		15,032

Realized (loss) on certain derivative instruments		(3,258	)
Unrealized (loss) on certain derivative instruments		(10,546	)

Change in fair value of derivatives		(13,804	)

Net investment gains	$	1,228

Additional detail regarding the net realized gain on securities is as follows:


	For the period
	April 6, 2011 to
	July 3, 2011
Total other-than-temporarily impaired	$	(1,403	)
Portion of other-than-temporarily impaired included in other comprehensive income		144

		(1,259	)
Other investment gains		16,291

Net realized gains on securities	$	15,032

For the period from April 6, 2011 to July 3, 2011, proceeds from the sale of available-for-sale securities totaled $461,506, gross gains on the sale of available-for-sale securities totaled $12,866 and gross losses totaled $1,815.

Underlying write-downs taken to residential mortgage-backed securities investments as a result of other-than-temporary impairments that were recognized in net income and included in net realized gains on available-for-sale securities above were $1,259 for the period from April 6, 2011 to July 3, 2011. The portion of other-than-temporary impairments recognized in AOCI is disclosed in Note 2.

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


	Nine Months
	Ended
	July 3, 2011
Proceeds from investments sold, matured or repaid:
Available-for-sale	$	648,243
Held-to-maturity		70,792
Trading		331,417
Derivatives and other		64,089

	$	1,114,541

Cost of investments acquired:
Available-for-sale	$	(730,468	)
Held-to-maturity		(52,682	)
Trading		(433,810	)
Derivatives and other		(37,527	)

	$	(1,254,487	)

Concentrations of Financial Instruments

As of July 3, 2011, FGL’s most significant investment in one industry was FGL’s investment securities in the banking industry with a fair value of $2,049,367, or 12.6% of the invested assets portfolio. FGL utilized the industry classifications to obtain the concentration of financial instruments amount; as such, this amount will not agree to the available-for-sale securities table above. As of July 3, 2011, FGL’s exposure to sub-prime and Alternative-A residential mortgage-backed securities was $314,182 and $36,222 or 1.9% and 0.2% of FGL’s invested assets, respectively.