Fair Value of Financial Instruments

9 Months Ended

Jul. 03, 2011

Fair Value of Financial Instruments [Abstract]

Fair Value of Financial Instruments

(5) Fair Value of Financial Instruments

The Company’s measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which may include the Company’s own credit risk. The Company’s estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). The Company categorizes financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:

Level 1 — Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.

Level 2 — Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads and yield curves.

Level 3 — Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lower level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.

The carrying amounts and estimated fair values of the Company’s consolidated financial instruments for which the disclosure of fair values is required were as follows (asset/(liability)):

	July 3, 2011						September 30, 2010
	Carrying						Carrying
	Amount			Fair Value			Amount			Fair Value
Consumer Products and Other
Cash and cash equivalents	$	449,190		$	449,190		$	256,831		$	256,833
Short-term investments (including related interest receivable of $51 and $68)		140,096			140,087			54,033			54,005
Total debt		(2,245,635	)		(2,387,693	)		(1,743,767	)		(1,868,754	)
Derivatives:
Interest rate swap agreements		(3,474	)		(3,474	)		(6,627	)		(6,627	)
Commodity swap and option agreements		3,316			3,316			3,914			3,914
Foreign exchange forward agreements		(52,722	)		(52,722	)		(38,111	)		(38,111	)
Equity conversion option of preferred stock		(79,740	)		(79,740	)		—			—
Redeemable preferred stock, excluding equity conversion option		(186,219	)		(214,725	)		—			—
Insurance
Cash and cash equivalents		740,623			740,623			—			—
Investments:
Fixed maturities, available-for-sale		15,714,228			15,714,228			—			—
Equity securities, available-for-sale		310,345			310,345			—			—
Other invested assets		40,853			40,853			—			—
Derivatives:
Call options and future contracts		205,185			205,185			—			—
FIA embedded derivatives, included in contractholder funds		(1,444,506	)		(1,444,506	)		—			—
Available-for-sale embedded derivatives		(411	)		(411	)		—			—
Investment contracts, included in contractholder funds		(12,280,732	)		(12,327,608	)		—			—
Note payable		(95,000	)		(95,000	)		—			—

The carrying amounts of receivables, accounts payable, accrued investment income and portions of other insurance liabilities approximate fair value due to their short duration and, accordingly, they are not presented in the table above.

The fair values of cash equivalents, short-term investments, and the long-term debt set forth above are generally based on quoted or observed market prices. Contractholder funds include investment contracts which are comprised of deferred annuities, FIAs and immediate annuities. The fair value of these investment contracts is based on their approximate account values. The fair value of FGL’s note payable approximates its carrying value as it is short-term in nature and the interest rate set on it was recently negotiated.

Goodwill, intangible assets and other long-lived assets are also tested annually or if a triggering event occurs that indicates an impairment loss may have been incurred (See Note 6) using fair value measurements with unobservable inputs (Level 3).

See Note 10 with respect to fair value measurements of the Company’s pension plan assets.

Financial assets and liabilities measured and carried at fair value on a recurring basis in our financial statements are summarized, according to the hierarchy previously described, as follows (in thousands):

As of July 3, 2011	Level 1		Level 2			Level 3			Total
Assets
Fixed maturity securities, available-for-sale:
Asset-backed securities	$	—	$	131,861		$	388,018		$	519,879
Commercial mortgage-backed securities		—		616,875			—			616,875
Corporates		—		11,612,764			196,526			11,809,290
Hybrids		—		708,558			5,229			713,787
Municipals		—		833,972			—			833,972
Agency residential mortgage-backed securities		—		224,848			3,263			228,111
Non-agency residential mortgage-backed securities		—		505,085			19,751			524,836
U.S. Government		467,478		—			—			467,478
Fixed maturity securities — Trading		—		778			—			778
Equity securities — Available-for-sale		—		310,345			—			310,345
Equity securities — Trading		103,408		—			—			103,408
Derivatives:
Call options and future contracts		—		205,185			—			205,185
Commodity swap and option agreements		—		3,316			—			3,316
Total assets carried at fair value	$	570,886	$	15,153,587		$	612,787		$	16,337,260
Liabilities
Derivatives:
FIA embedded derivatives, included in contractholder funds	$	—	$	—		$	(1,444,506	)	$	(1,444,506	)
Available-for-sale embedded derivatives		—		—			(411	)		(411	)
Interest rate swap agreements		—		(3,474	)		—			(3,474	)
Foreign exchange forward agreements		—		(52,722	)		—			(52,722	)
Equity conversion option of preferred stock		—		—			(79,740	)		(79,740	)
Total liabilities carried at fair value	$	—	$	(56,196	)	$	(1,524,657	)	$	(1,580,853	)

The following tables summarize changes to financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy, all of which are held by FGL except for the equity conversion option of HGI’s Preferred Stock. This summary excludes any impact of amortization of VOBA and DAC. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.

									Net			Net
	Balance at			Total Gains (Losses)					purchases,			transfer in			Balance at
	FGL Acquisition			Included in		Included in			sales and			(out) of			end of
For the period April 6, 2011 to July 3, 2011	Date			earnings		AOCI			settlements			Level 3 (A)			period
Assets
Fixed maturity securities, available-for-sale:
Asset-backed securities	$	399,967		$	—	$	6,385		$	(8,128	)	$	(10,206	)	$	388,018
Corporates		188,439			—		10,722			(2,635	)		—			196,526
Hybrids		8,305			—		(38	)		—			(3,038	)		5,229
Agency residential mortgage-backed securities		3,271			—		(8	)		—			—			3,263
Non-agency residential mortgage-backed securities		18,519			—		2,351			(1,119	)		—			19,751
Total assets at fair value	$	618,501		$	—	$	19,412		$	(11,882	)	$	(13,244	)	$	612,787
Liabilities
FIA embedded derivatives, included in contractholders funds	$	(1,466,308	)	$	21,802	$	—		$	—		$	—		$	(1,444,506	)
Available-for-sale embedded derivatives		(419	)		8		—			—			—			(411	)
Equity conversion option of preferred stock		—			5,960		—			(85,700	)		—			(79,740	)
Total liabilities at fair value	$	(1,466,727	)	$	27,770	$	—		$	(85,700	)	$	—		$	(1,524,657	)

(A) The net transfers in and out of Level 3 during the period from April 6, 2011 to July 3, 2011 were exclusively to or from Level 2.

The following table presents the gross components of purchases, sales, and settlements, net, of Level 3 financial instruments from April 6, 2011 to July 3, 2011. There were no issuances during this period.

									Net purchases, sales
For the period April 6, 2011 to July 3, 2011	Purchases		Sales			Settlements			and settlements
Assets
Fixed maturity securities, available-for-sale:
Asset-backed securities	$	—	$	—		$	(8,128	)	$	(8,128	)
Corporates		—		—			(2,635	)		(2,635	)
Non-agency residential mortgage-backed securities		—		—			(1,119	)		(1,119	)
Total assets	$	—	$	—		$	(11,882	)	$	(11,882	)
Liabilities
Equity conversion option of preferred stock	$	—	$	(85,700	)	$	—		$	(85,700	)