NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in millions, except per share and unit measures or as otherwise specified)
(1) Description of Business
HRG Group, Inc. (“
HRG
” and collectively with its respective subsidiaries, the “
Company
”) is a holding company that conducts its operations through its operating subsidiaries.
HRG
’s shares of common stock trade on the New York Stock Exchange (“
NYSE
”) under the symbol “
HRG
.”
The
Company
’s reportable business segments are organized in a manner that reflects how
HRG
’s management views those business activities. Accordingly, the
Company
currently operates its business in
two
reportable segments: (i)
Consumer Products
and (ii)
Insurance
.
The Company also owns Salus Capital Partners, LLC, (“Salus”), an asset-based lender, and
99.5%
of NZCH Corporation (“NZCH”), a public shell company. From time to time, the Company may manage a portion of its available cash and engage in other activities through its wholly-owned subsidiaries, HGI Funding, LLC (“HGI Funding”) and HGI Energy Holdings, LLC (“HGI Energy”). The Company’s corporate operations, as well as the operations of Salus, HGI Funding, NZCH and HGI Energy are presented in the Corporate and Other segment.
For the results of operations by segment, and other segment data, see
Note 15
,
Segment Data
and
Note 16
,
Consolidating Financial Information
.
Consumer Products Segment
The
Consumer Products
segment represents the
Company
’s
58.3%
controlling interest in Spectrum Brands Holdings, Inc. (“
Spectrum Brands
”). Through its operating subsidiaries,
Spectrum Brands
is a diversified global branded consumer products company with positions in multiple product lines and categories: consumer batteries, small appliances, global pet supplies, home and garden control products, personal care products, hardware and home improvement products and global auto care.
Insurance Segment
As of
December 31, 2016
, the Company’s insurance operations were conducted through Front Street Re (Delaware) Ltd., (“
Front Street
”) and its Bermuda and Cayman-based subsidiaries, Front Street Re Ltd. (“Front Street Bermuda”) and Front Street Re (Cayman) Ltd. (“Front Street Cayman”), respectively. Through Front Street and its Bermuda and Cayman-based subsidiaries, the Company engages in the business of life, annuity and long-term care reinsurance.
The Company also owns
80.5%
of Fidelity & Guaranty Life (“
FGL
”). Through its wholly-owned subsidiaries, Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) and Fidelity & Guaranty Life Insurance Company of New York,
FGL
is a provider of various types of fixed annuities and life insurance products in the U.S.
On November 8, 2015, Anbang Insurance Group Co., Ltd., a joint-stock insurance company established in the People’s Republic of China (“
Anbang
”), AB Infinity Holding, Inc., a wholly-owned subsidiary of Anbang (“
AB Infinity
”), and AB Merger Sub, Inc., a wholly-owned subsidiary of AB Infinity (“
Merger Sub
”), entered into a definitive merger agreement (as amended, the “
FGL Merger Agreement
” and such merger, the “
FGL Merger
”) to acquire
FGL
for
$26.80
per share. On November 3, 2016, FGL, Anbang, AB Infinity, and Merger Sub amended the FGL Merger Agreement to extend the outside termination date for the completion of the FGL Merger from November 7, 2016 to February 8, 2017. Accordingly, either party may terminate the FGL Merger Agreement if the closing of the FGL Merger does not occur on or prior to February 8, 2017. As of the date hereof, the parties to the FGL Merger Agreement were in discussions regarding an extension of the outside termination date beyond February 8, 2017. It is expected that FGL will make an announcement on or about February 9, 2017 regarding the outcome of those discussions.
The completion of the
FGL Merger
is subject to the satisfaction of a number of closing conditions, including the receipt of regulatory approvals from the Iowa Insurance Division, New York Department of Financial Services, Vermont Department of Financial Regulation, China Insurance Regulatory Commission, and the Committee on Foreign Investment in the United States.
Anbang continues to work on securing the remaining required regulatory approvals and the parties are committed to securing such approvals, however, the closing of the
FGL Merger
, and the timing thereof, is subject to the regulatory review and approval process, none of which can be assured. In the event that the
FGL Merger Agreement
is terminated, under specified circumstances,
FGL
may be required to pay a termination fee to Anbang and its subsidiaries of
$51.5
.
As a result of the
FGL Merger Agreement
, the Company’s ownership interest in
FGL
has been classified as held for sale in the accompanying
Condensed Consolidated Balance Sheets
and
FGL
’s operations were classified as discontinued operations in the accompanying
Condensed Consolidated Statements of Operations
and the
Condensed Consolidated Statements of Cash Flows
and reported separately for all periods presented. Prior to the transaction,
FGL
was included in the Company’s
Insurance
segment. See
Note 4
,
Divestitures
.
Corporate and Other
As previously announced in November 2016, Mr. Omar Asali, President, Chief Executive Officer and a director of the Company is expected to leave the Company during the fiscal year ending September 30, 2017. In addition, as previously announced in November 2016, the Company’s board of directors initiated a process to explore and evaluate strategic alternatives, which may include, but are not limited to, a merger, sale or other business combination involving the Company and/or its assets. The Company has not set a definitive schedule to complete its review of strategic alternatives and there can be no assurance that this process will result in a transaction, or if a transaction is undertaken, as to its terms or timing. Also, on November 28, 2016, the Company and David Maura, Managing Director and Executive Vice President of Investments of the Company, entered into a Separation and Release Agreement pursuant to which Mr. Maura resigned his employment with the Company, but will continue to serve as the Executive Chairman of Spectrum Brands and its subsidiaries and as a member of the Company’s board of directors.
(2) Basis of Presentation, Significant Accounting Policies and Recent Accounting Pronouncements
Basis of Presentation
The accompanying unaudited
Condensed Consolidated Financial Statements
of the
Company
included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“
SEC
”). The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of such information. All such adjustments are of a normal recurring nature. Although the
Company
believes that the disclosures are adequate to make the information presented not misleading, certain information and note disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“
U.S. GAAP
”), have been condensed or omitted pursuant to such rules and regulations. Certain prior amounts have been reclassified or combined to conform to the current year presentation. These reclassifications and combinations had no effect on previously reported net loss attributable to controlling interest or accumulated deficit. These interim financial statements should be read in conjunction with the
Company
’s annual consolidated financial statements and notes thereto included in the
Company
’s Annual Report on Form 10-K for the fiscal year ended
September 30, 2016
, filed with the
SEC
on November 23, 2016 (the “Form 10-K”). The results of operations for the
three months ended December 31, 2016
are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending
September 30, 2017
.
The
Company
’s fiscal year ends on September 30 and the quarters end on the last calendar day of the months of December, March and June. The
Company
’s significant subsidiary,
Spectrum Brands
’ fiscal year ends September 30 and its interim fiscal quarters end every thirteenth Sunday, except for its first fiscal quarter which may end on the fourteenth Sunday following September 30. The
Company
does not adjust for the difference in fiscal periods between
Spectrum Brands
and itself, as such difference would be less than 93 days, pursuant to Regulation S-X Rule 3A-02.
At
December 31, 2016
, the noncontrolling interest component of total equity primarily represents the
41.7%
share of
Spectrum Brands
and the
19.5%
of
FGL
not owned by
HRG
.
Insurance Subsidiary Financial Information and Regulatory Matters
FGL Insurance
’s statutory carrying value of Raven Reinsurance Company (“
Raven Re
”), its wholly-owned subsidiary, reflects the effect of permitted practices
Raven Re
received to treat the available amount of a letter of credit as an admitted asset which increased
Raven Re
’s statutory capital and surplus by
$195.0
and
$201.3
at
December 31, 2016
and
September 30, 2016
, respectively.
Raven Re
is also permitted to follow Iowa prescribed statutory accounting practice for its reserves on reinsurance assumed from
FGL Insurance
which increased
Raven Re
’s statutory capital and surplus by
$4.0
and
$4.2
at
December 31, 2016
and
September 30, 2016
, respectively. Without such permitted statutory accounting practices,
Raven Re
’s statutory capital and surplus would be
$8.3
and
$4.6
as of
December 31, 2016
and
September 30, 2016
, respectively, and its risk-based capital would fall below the minimum regulatory requirements. The letter of credit facility is collateralized by debt securities rated by the National Association of Insurance Commissioners (“NAIC”) as “NAIC-1.” If the permitted practice was revoked, the letter of credit could be replaced by the collateral assets with Nomura Bank International plc’s consent.
FGL Insurance
’s statutory carrying value of
Raven Re
at
December 31, 2016
and
September 30, 2016
was
$207.3
and
$210.0
, respectively.
On November 1, 2013,
FGL Insurance
re-domesticated from Maryland to Iowa. After re-domestication,
FGL Insurance
elected to apply Iowa-prescribed accounting practices that permit Iowa-domiciled insurers to report equity call options used to economically hedge fixed indexed annuity (“
FIA
”) index credits at amortized cost for statutory accounting purposes and to calculate
FIA
statutory reserves such that index credit returns will be included in the reserve only after crediting to the annuity contract. This resulted in no increase to statutory capital and surplus at
December 31, 2016
.
Recent Accounting Pronouncements
The Company has implemented all new accounting pronouncements that are in effect and that may impact its
Condensed Consolidated Financial Statements
and does not believe that there are any other new accounting pronouncements that have been
issued that might have a material impact on its financial condition, results of operations or liquidity.
Subsequent Events
ASC Topic 855, “Subsequent Events” (“ASC 855”), establishes general standards of accounting and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 requires the Company to evaluate events that occur after the balance sheet date through the date the Company’s financial statements are issued and to determine whether adjustments to or additional disclosures in the financial statements are necessary. The Company has evaluated subsequent events through the date these financial statements were issued. See
Note 9
,
Debt
, for additional discussion regarding the 2017 Loan Agreement entered into by the Company’s subsidiary on January 13, 2017, pursuant to which it may borrow up to an aggregate amount of
$150.0
(the “2017 Loan”). No other significant events occurred subsequent to
December 31, 2016
.
(3) Significant Risks and Uncertainties
Use of Estimates and Assumptions
The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.
Concentration of Securities Included in Funds Withheld Receivables
As of
December 31, 2016
and
September 30, 2016
, Front Street’s most significant exposure related to the securities underlying the funds withheld receivables was to the financial sector and the energy, mining and metals industries.
As of
December 31, 2016
and
September 30, 2016
, the carrying value of the fixed maturity securities in the financial sector was
$247.0
, or
15.4%
, and
$232.8
, or
14.1%
, respectively, of Front Street’s funds withheld receivables. At
December 31, 2016
and
September 30, 2016
, the holdings in this sector included investments in
87
and
81
different issuers, respectively, with the top ten investments accounting for
46.4%
and
48.0%
, respectively, of the total holdings in this sector.
As of
December 31, 2016
and
September 30, 2016
, the carrying value of the fixed maturity securities in the energy, mining and metals industries was
$189.7
, or
11.8%
, and
$188.6
, or
11.4%
, respectively, of Front Street’s funds withheld receivables. At
December 31, 2016
and
September 30, 2016
, the holdings in these industries included investments in
73
and
74
different issuers, respectively, with the top
ten
investments accounting for
42.8%
and
43.4%
, respectively, of the total holdings in these industries.
There were no holdings in a single issuer included in the funds withheld receivables that exceeded 10% of the Company’s stockholders’ equity as of
December 31, 2016
and
September 30, 2016
.
Concentrations of Financial and Capital Markets Risk
Through Front Street, the Company is exposed to financial and capital markets risk, including changes in interest rates and credit spreads which can have an adverse effect on the Company’s results of operations, financial condition and liquidity. The Company expects to continue to face challenges and uncertainties that could adversely affect its results of operations and financial condition.
The Company’s exposure to such financial and capital markets risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates, in the absence of other countervailing changes, will increase the net unrealized loss position of Front Street’s fund withheld receivables and, if long-term interest rates rise dramatically within a six to twelve month time period, certain of the Front Street’s reinsured products may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring Front Street to liquidate assets in an unrealized loss position. This risk is mitigated to some extent by surrender charge protection provided by the products reinsured by Front Street.
Insurance Counterparty Risk
Through Front Street, the Company is exposed to insurance counterparty risk, which is the potential for Front Street to incur losses due to a reinsurance counterparty becoming distressed or insolvent. This includes run-on-the-bank risk and collection risk. The run-on-the-bank risk is that a client’s in force block incurs substantial surrenders and/or lapses due to credit impairment, reputation damage or other market changes affecting the counterparty. Substantially higher than expected surrenders and/or lapses could result in inadequate in force business to recover cash paid out for acquisition costs. The collection risk for reinsurance counterparties includes their inability to satisfy a reinsurance agreement because the right of offset is disallowed by the receivership court; the reinsurance contract is rejected by the receiver, resulting in a premature termination of the contract; and/or the security supporting the transaction becomes unavailable to Front Street. To date, Front Street has not experienced a material default in connection with reinsurance arrangements, nor has it experienced any material difficulty in collecting claims recoverable from reinsurance
counterparties; however, no assurance can be given as to the future performance of such reinsurance counterparty or as to the recoverability of any such claims.
Receivables
The allowance for uncollectible receivables as of
December 31, 2016
and
September 30, 2016
was
$48.0
and
$46.8
, respectively. Through Spectrum Brands, the Company has a broad range of customers including many large retail outlet chains, one of which accounts for a significant percentage of its sales volume. This customer represents approximately
11.6%
and
13.1%
of the Company’s “
Receivables, net
” in the accompanying
Condensed Consolidated Balance Sheets
at
December 31, 2016
and
September 30, 2016
, respectively.
(4) Divestitures
The following table summarizes the components of “
Income (loss) from discontinued operations, net of tax
” in the accompanying
Condensed Consolidated Statements of Operations
for the
three months ended December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Income (loss) from discontinued operations, net of tax attributable to FGL
|
$
|
258.8
|
|
|
$
|
(35.6
|
)
|
Income from discontinued operations, net of tax attributable to Compass Production Partners, LP (“Compass”)
|
—
|
|
|
33.1
|
|
Income (loss) from discontinued operations, net of tax
|
$
|
258.8
|
|
|
$
|
(2.5
|
)
|
FGL Merger Agreement
As previously discussed in
Note 1
,
Description of Business
, as a result of the
FGL Merger Agreement
, the Company’s ownership interest in
FGL
has been classified as held for sale in the accompanying
Condensed Consolidated Balance Sheets
and
FGL
’s operations were classified as discontinued operations in the accompanying
Condensed Consolidated Statements of Operations
.
The following table summarizes the major categories of assets and liabilities of FGL classified as held for sale in the accompanying
Condensed Consolidated Balance Sheets
at
December 31, 2016
and
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
September 30,
2016
|
Assets
|
|
|
|
Investments, including loans and receivables from affiliates
|
$
|
21,192.8
|
|
|
$
|
21,140.9
|
|
Cash and cash equivalents
|
631.9
|
|
|
863.9
|
|
Accrued investment income
|
200.7
|
|
|
213.7
|
|
Reinsurance recoverable
|
3,443.7
|
|
|
3,463.9
|
|
Deferred tax assets
|
47.2
|
|
|
—
|
|
Properties, plant and equipment, net
|
19.7
|
|
|
18.5
|
|
Deferred acquisition costs and value of business acquired, net
|
1,270.9
|
|
|
1,065.5
|
|
Other assets
|
213.0
|
|
|
335.1
|
|
Write-down of assets of business held for sale to fair value less cost to sell
|
(218.3
|
)
|
|
(362.8
|
)
|
Total assets of business held for sale
|
$
|
26,801.6
|
|
|
$
|
26,738.7
|
|
Liabilities
|
|
|
|
Insurance reserves
|
$
|
24,134.3
|
|
|
$
|
23,944.6
|
|
Debt
|
400.0
|
|
|
398.8
|
|
Accounts payable and other current liabilities
|
39.6
|
|
|
57.0
|
|
Deferred tax liabilities
|
—
|
|
|
9.9
|
|
Other liabilities
|
626.6
|
|
|
689.9
|
|
Total liabilities of business held for sale
|
$
|
25,200.5
|
|
|
$
|
25,100.2
|
|
At
December 31, 2016
, the carrying value of the
Company
’s interest in
FGL
was
$218.3
higher than the fair value less cost to sell based on the sales price and as a result, during the
three months ended December 31, 2016
, the Company partially reversed the previously recorded
$362.8
write-down of assets of business held for sale by
$144.5
.
The balances included in the accompanying
Condensed Consolidated Balance Sheets
and in the table above reflect transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the closing of the FGL Merger. Such transactions are not eliminated to reflect the continuing operations and balances held for sale. As a result, adjustments to the carrying value of certain intercompany assets recorded by FGL were reversed upon consolidation in the Company’s
Condensed Consolidated Financial Statements
.
Below is a summary of the impact of such intercompany balances in the accompanying
Condensed Consolidated Balance Sheets
:
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
September 30,
2016
|
Assets
|
|
|
|
Funds withheld receivable
|
$
|
939.5
|
|
|
$
|
978.8
|
|
Other assets
|
15.0
|
|
|
15.1
|
|
Assets of business held for sale
|
1,349.0
|
|
|
1,375.5
|
|
Total assets
|
$
|
2,303.5
|
|
|
$
|
2,369.4
|
|
Liabilities
|
|
|
|
Insurance reserves
|
$
|
1,087.5
|
|
|
$
|
1,119.5
|
|
Debt
|
58.8
|
|
|
63.0
|
|
Liabilities of business held for sale
|
1,157.2
|
|
|
1,186.9
|
|
Total liabilities
|
$
|
2,303.5
|
|
|
$
|
2,369.4
|
|
The following table summarizes the components of “
Net income (loss) from discontinued operations
” in the accompanying
Condensed Consolidated Statements of Operations
for the
three months ended December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
Insurance premiums
|
$
|
11.1
|
|
|
$
|
15.4
|
|
Net investment income
|
239.8
|
|
|
222.2
|
|
Net investment gains
|
56.3
|
|
|
66.2
|
|
Insurance and investment product fees and other
|
38.3
|
|
|
28.8
|
|
Total revenues
|
345.5
|
|
|
332.6
|
|
Operating costs and expenses:
|
|
|
|
Benefits and other changes in policy reserves
|
19.9
|
|
|
180.9
|
|
Selling, acquisition, operating and general expenses
|
28.3
|
|
|
28.2
|
|
Amortization of intangibles
|
120.0
|
|
|
33.5
|
|
Total operating costs and expenses
|
168.2
|
|
|
242.6
|
|
Operating income
|
177.3
|
|
|
90.0
|
|
Interest expense
|
(6.1
|
)
|
|
(5.9
|
)
|
Write-up of assets of business held for sale to fair value less cost to sell
|
144.5
|
|
|
—
|
|
Net income before income taxes
|
315.7
|
|
|
84.1
|
|
Income tax expense (a)
|
56.9
|
|
|
119.7
|
|
Net income (loss)
|
258.8
|
|
|
(35.6
|
)
|
Less: net income attributable to noncontrolling interest
|
21.1
|
|
|
9.4
|
|
Net income (loss) - attributable to controlling interest
|
$
|
237.7
|
|
|
$
|
(45.0
|
)
|
(a) Included in the income tax expense for the
three months ended December 31, 2015
was a
$90.9
net income tax expense related to the establishment of a deferred tax liability of
$338.6
at
December 31, 2015
, which was a result of classifying the Company’s ownership interest in FGL as held for sale, partially offset by a
$247.7
reduction of valuation allowance on HRG’s net operating and capital loss carryforwards expected to offset the FGL taxable gain.
Compass Sale
On July 1, 2016, HGI Energy entered into an agreement to sell its equity interests in Compass to a third party (such agreement, the “Compass Sale Agreement”). During the fourth quarter of the fiscal year 2016, the transactions contemplated by the Compass Sale Agreement were consummated. This sale represented the disposal of all of the Company’s oil and gas properties, which were prior to their disposal accounted for using the full-cost method. The Company has determined that the completion of HGI Energy’s sale of its equity interests in Compass to a third party (the “Compass Sale”) represented a strategic shift for the Company and, accordingly, has presented the results of operations for Compass as discontinued operations in the accompanying
Condensed Consolidated Statements of Operations
.
The following table summarizes the components of “
Net income (loss) from discontinued operations
” attributable to Compass in the accompanying
Condensed Consolidated Statements of Operations
for the
three months ended December 31, 2015
.
|
|
|
|
|
|
Three months ended December 31, 2015
|
Revenues:
|
|
Oil and natural gas revenues
|
$
|
16.8
|
|
|
|
Operating costs and expenses:
|
|
Oil and natural gas direct operating costs
|
17.1
|
|
Selling, acquisition, operating and general expenses
|
9.8
|
|
Impairments
|
54.4
|
|
Total operating costs and expenses
|
81.3
|
|
Operating loss
|
(64.5
|
)
|
Interest expense
|
(2.3
|
)
|
Gain on sale of oil and gas properties
|
105.6
|
|
Other income, net
|
1.8
|
|
Net income before income taxes
|
40.6
|
|
Income tax expense
|
7.5
|
|
Net income
|
$
|
33.1
|
|
(5) Derivative Financial Instruments
The fair value of outstanding derivatives recorded in the accompanying
Condensed Consolidated Balance Sheets
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Asset Derivatives
|
|
Classification
|
|
December 31,
2016
|
|
September 30,
2016
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Foreign exchange contracts
|
|
Receivables, net
|
|
$
|
10.1
|
|
|
$
|
5.5
|
|
Commodity swaps
|
|
Receivables, net
|
|
3.3
|
|
|
2.9
|
|
Foreign exchange contracts
|
|
Other assets
|
|
0.1
|
|
|
0.1
|
|
Total asset derivatives designated as hedging instruments
|
|
|
|
13.5
|
|
|
8.5
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Call option receivable from FGL
|
|
Funds withheld receivables
|
|
12.2
|
|
|
11.3
|
|
Call options
|
|
Other assets
|
|
8.3
|
|
|
5.9
|
|
Foreign exchange contracts
|
|
Receivables, net
|
|
0.1
|
|
|
0.2
|
|
Total asset derivatives
|
|
|
|
$
|
34.1
|
|
|
$
|
25.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Derivatives
|
|
Classification
|
|
December 31,
2016
|
|
September 30,
2016
|
Derivatives designated as hedging instruments:
|
|
|
|
|
|
|
Interest rate swaps
|
|
Accounts payable and other current liabilities
|
|
$
|
0.3
|
|
|
$
|
0.7
|
|
Interest rate swaps
|
|
Other liabilities
|
|
0.4
|
|
|
0.4
|
|
Commodity swaps
|
|
Accounts payable and other current liabilities
|
|
0.2
|
|
|
0.1
|
|
Foreign exchange contracts
|
|
Accounts payable and other current liabilities
|
|
0.1
|
|
|
1.7
|
|
Foreign exchange contracts
|
|
Other liabilities
|
|
0.1
|
|
|
0.1
|
|
Total liability derivatives designated as hedging instruments
|
|
|
|
1.1
|
|
|
3.0
|
|
Derivatives not designated as hedging instruments:
|
|
|
|
|
|
|
Embedded derivatives in Front Street's assumed FIA business
|
|
Insurance reserves
|
|
121.2
|
|
|
131.2
|
|
Foreign exchange contracts
|
|
Accounts payable and other current liabilities
|
|
0.3
|
|
|
0.2
|
|
Total liability derivatives
|
|
|
|
$
|
122.6
|
|
|
$
|
134.4
|
|
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, the gain (loss) associated with the derivative contract
is recognized in earnings in the period of change. The
Company
recognizes all derivative instruments as assets or liabilities in the accompanying
Condensed Consolidated Balance Sheets
at fair value.
The following tables summarize the impact of the effective portion of designated hedges and the gain recognized in the accompanying
Condensed Consolidated Statements of Operations
for the
three months ended December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2016
|
|
Classification
|
|
Effective portion
|
|
|
|
|
Gain in AOCI
|
|
Gain (Loss) reclassified to Earnings
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
0.1
|
|
|
$
|
(0.3
|
)
|
Commodity swaps
|
|
Cost of consumer products and other goods sold
|
|
0.1
|
|
|
0.8
|
|
Net investment hedge
|
|
Other income (expense), net
|
|
32.5
|
|
|
—
|
|
Foreign exchange contracts
|
|
Net consumer and other product sales
|
|
0.2
|
|
|
—
|
|
Foreign exchange contracts
|
|
Cost of consumer products and other goods sold
|
|
10.3
|
|
|
4.3
|
|
|
|
|
|
$
|
43.2
|
|
|
$
|
4.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2015
|
|
Classification
|
|
Effective portion
|
|
|
|
|
Gain (Loss) in AOCI
|
|
Gain (Loss) reclassified to Earnings
|
Interest rate swaps
|
|
Interest expense
|
|
$
|
0.3
|
|
|
$
|
(0.5
|
)
|
Commodity swaps
|
|
Cost of consumer products and other goods sold
|
|
(1.0
|
)
|
|
(1.4
|
)
|
Foreign exchange contracts
|
|
Net consumer and other product sales
|
|
(0.1
|
)
|
|
—
|
|
Foreign exchange contracts
|
|
Cost of consumer products and other goods sold
|
|
5.4
|
|
|
2.1
|
|
|
|
|
|
$
|
4.6
|
|
|
$
|
0.2
|
|
During the
three months ended December 31, 2016
and
2015
, the Company recognized the following gains and losses on its derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
Classification
|
|
Derivatives Not Designated as Hedging Instruments
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
|
|
|
Net investment losses
|
|
Call options
|
|
$
|
3.1
|
|
|
$
|
1.9
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
Cost of consumer products and other goods sold
|
|
Commodity swaps
|
|
$
|
0.1
|
|
|
$
|
—
|
|
Benefits and other changes in policy reserves
|
|
Embedded derivatives in Front Street's assumed FIA business
|
|
(10.0
|
)
|
|
(2.4
|
)
|
Other income (expense), net
|
|
Foreign exchange contracts
|
|
0.7
|
|
|
(2.1
|
)
|
Additional Disclosures
Call options.
Derivative financial instruments included within the funds withheld receivables at fair value in the accompanying
Condensed Consolidated Balance Sheets
are in the form of call options receivable by Front Street. Front Street hedges exposure to product related equity market risk by entering into derivative transactions. These options hedge Front Street’s share of the FIA index credit. The change in fair value is recognized within “
Net investment losses
” in the accompanying
Condensed Consolidated Statements of Operations
.
Call option receivable from FGL
. Under the terms of the modified coinsurance arrangement between Front Street and FGL, FGL is required to pay Front Street a portion of the net cost of equity option purchases and the proceeds from expirations related to the equity options which hedge the index credit feature of the reinsured FIA contracts. Accordingly, the receivable from FGL is reflected in “Funds withheld receivables” as of the balance sheet date with changes in fair value recognized within “
Net investment losses
” in the accompanying
Condensed Consolidated Statements of Operations
.
Embedded derivatives in Front Street’s assumed FIA business from FGL
. Front Street has assumed FIA contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the Standard & Poor’s Ratings Services (“S&P”) 500 Index. This feature represents an embedded derivative under U.S. GAAP. The FIA embedded derivative is valued at fair value and included in the “
Insurance reserves
” in the accompanying
Condensed Consolidated Balance Sheets
with changes in fair value included as a component of “
Benefits and other changes in policy reserves
” in the accompanying
Condensed Consolidated Statements of Operations
.
Interest Rate Swaps.
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
Accumulated other comprehensive (loss) income
(“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 counterparties 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. As of
December 31, 2016
and
September 30, 2016
, Spectrum Brands had a series of U.S. dollar denominated interest rate swaps outstanding which effectively fix the interest on floating rate debt, exclusive of lender spreads, at
1.36%
for a notional principal amount of
$300.0
through April 2017. The derivative net gain estimated to be reclassified from AOCI into earnings over the next 12 months is
$0.2
, net of tax. Spectrum Brands’ interest rate swap derivative financial instruments at
December 31, 2016
and
September 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
|
Notional
|
|
Remaining Years
|
|
Notional
|
|
Remaining Years
|
Interest rate swaps - fixed
|
|
$
|
300.0
|
|
|
0.3
|
|
$
|
300.0
|
|
|
0.5
|
Foreign exchange contracts - cash flow hedges
. Spectrum Brands periodically enters into forward foreign exchange contracts to hedge a portion of 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, Canadian Dollars (“CAD”) 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 and other product sales
” or “
Cost of consumer products and other goods sold
”, respectively, in the accompanying
Condensed Consolidated Statements of Operations
. At
December 31, 2016
, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through December 2017. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is
$4.4
, net of tax. At
December 31, 2016
and
September 30, 2016
,
Spectrum Brands
had foreign exchange derivative contracts designated as cash flow hedges with a notional value of
$259.9
and
$224.8
, respectively.
Commodity swaps - cash flow hedges.
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
December 31, 2016
, Spectrum Brands had a series of zinc and brass swap contracts outstanding through December 2017. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is
$1.3
, net of tax. Spectrum Brands had the following commodity swap contracts outstanding as of
December 31, 2016
and
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
|
Notional
|
|
Contract Value
|
|
Notional
|
|
Contract Value
|
Zinc swap contracts (tons)
|
|
5.1
|
|
$
|
9.8
|
|
|
6.7
|
|
$
|
12.8
|
|
Brass swap contracts (tons)
|
|
1.0
|
|
|
3.8
|
|
|
1.0
|
|
|
4.0
|
|
Net Investment Hedge.
On September 20, 2016, Spectrum Brands, Inc., a subsidiary of Spectrum Brands, issued
€425.0
aggregate principal amount of
4.00%
Notes at par value, due October 1, 2026 (“
4.00%
Notes”). Spectrum Brands’
4.00%
Notes are denominated in Euros and have been designated as a net investment hedge of the translation of Spectrum Brands’ net investments in Euro denominated subsidiaries at the time of issuance. As a result, the translation of the Euro denominated debt is recognized in AOCI with any ineffective portion recognized as foreign currency translation gains or losses in the accompanying
Condensed Consolidated Statements of Operations
when the aggregate principal exceeds the net investment in its Euro denominated subsidiaries. Net gains or losses from the net investment hedge are reclassified from AOCI into earnings upon a liquidation event or deconsolidation of Euro denominated subsidiaries. As of
December 31, 2016
, the hedge was fully effective and no ineffective portion was recognized in earnings.
Commodity Swaps - not designated as hedges for accounting purposes.
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 commodity 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 unrecognized changes in the fair value of the commodity swap contracts are adjusted through earnings when the realized gains or losses affect earnings upon
settlement of the commodity swap contracts. The commodity swap contracts effectively fix the floating price on a specified quantity of silver through a specified date. At
December 31, 2016
, Spectrum Brands had a series of commodity swaps outstanding through September 2017. Spectrum Brands had the following commodity swaps outstanding as of
December 31, 2016
and
September 30, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
|
Notional
|
|
Contract Value
|
|
Notional
|
|
Contract Value
|
Silver (troy oz.)
|
|
20.0
|
|
$
|
0.4
|
|
|
31.0
|
|
$
|
0.6
|
|
Foreign exchange contracts - not designated as hedges for accounting purposes- Spectrum Brands.
Spectrum Brands periodically enters into forward and swap foreign exchange contracts to economically hedge a portion of 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, CAD, Euros, Pounds Sterling, Taiwanese Dollars, Hong Kong Dollars 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
December 31, 2016
, Spectrum Brands had a series of forward exchange contracts outstanding through December 2017. At
December 31, 2016
and
September 30, 2016
, Spectrum Brands had
$206.3
and
$131.4
, respectively, of notional value for such foreign exchange derivative contracts outstanding.
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 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 as of
December 31, 2016
and
September 30, 2016
.
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. As of
December 31, 2016
and
September 30, 2016
, there was
no
cash collateral outstanding. In addition, as of
December 31, 2016
and
September 30, 2016
,
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
.
Front Street is exposed to credit risk in the event of non-performance by its counterparties on call options. Front Street seeks to reduce the risk associated with such agreements by purchasing such options from large, well-established financial institutions, but there can be no assurance that Front Street will not suffer losses in the event of counterparty non-performance. No collateral was posted by its counterparties; accordingly, at
December 31, 2016
, the maximum amount of loss due to credit risk that Front Street would incur if parties to the call options failed completely to perform according to the terms of the contracts was
$8.3
.
Earnings from FIA reinsurance are primarily generated from the excess of net investment income earned over the sum of interest credited to policyholders and the cost of hedging the risk on FIA policies, known as the net investment spread. With respect to FIAs, the cost of hedging the risk includes the expenses incurred to fund the annual index credits. Proceeds received upon expiration or early termination of call options purchased to fund annual index credits are recorded as part of the fair value changes associated with reinsurance contracts in the accompanying
Condensed Consolidated Statements of Operations
, and are largely offset by an expense for index credits earned on annuity contractholder fund balances.
(6) Fair Value of Financial Instruments
The
Company
’s consolidated assets and liabilities measured at fair value are summarized according to the hierarchy previously described as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
Assets
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
Fixed maturity and equity securities included in funds withheld receivables
|
$
|
79.6
|
|
|
$
|
1,406.8
|
|
|
$
|
46.4
|
|
|
$
|
1,532.8
|
|
|
$
|
69.9
|
|
|
$
|
1,387.1
|
|
|
$
|
78.1
|
|
|
$
|
1,535.1
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Call option receivable from FGL included in funds withheld receivables
|
—
|
|
|
12.2
|
|
|
—
|
|
|
12.2
|
|
|
—
|
|
|
11.3
|
|
|
—
|
|
|
11.3
|
|
Call options
|
—
|
|
|
8.3
|
|
|
—
|
|
|
8.3
|
|
|
—
|
|
|
5.9
|
|
|
—
|
|
|
5.9
|
|
Foreign exchange contracts
|
—
|
|
|
10.3
|
|
|
—
|
|
|
10.3
|
|
|
—
|
|
|
5.8
|
|
|
—
|
|
|
5.8
|
|
Commodity contracts
|
—
|
|
|
3.3
|
|
|
—
|
|
|
3.3
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
|
2.9
|
|
Total financial assets
|
$
|
79.6
|
|
|
$
|
1,440.9
|
|
|
$
|
46.4
|
|
|
$
|
1,566.9
|
|
|
$
|
69.9
|
|
|
$
|
1,413.0
|
|
|
$
|
78.1
|
|
|
$
|
1,561.0
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
634.5
|
|
|
$
|
634.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
631.8
|
|
|
$
|
631.8
|
|
Derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives in Front Street's assumed FIA business
|
—
|
|
|
—
|
|
|
121.2
|
|
|
121.2
|
|
|
—
|
|
|
—
|
|
|
131.2
|
|
|
131.2
|
|
Commodity contracts
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
0.1
|
|
Interest rate contracts
|
—
|
|
|
0.7
|
|
|
—
|
|
|
0.7
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
1.1
|
|
Foreign exchange contracts
|
—
|
|
|
0.5
|
|
|
—
|
|
|
0.5
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
2.0
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
1.4
|
|
|
$
|
755.7
|
|
|
$
|
757.1
|
|
|
$
|
—
|
|
|
$
|
3.2
|
|
|
$
|
763.0
|
|
|
$
|
766.2
|
|
Valuation Methodologies
Reinsurance Agreements with FGL
Front Street Cayman has entered into certain reinsurance agreements with FGL on a funds withheld basis. The funds withheld receivables portfolio related to the reinsurance agreements with FGL consists of investments in debt and equity securities that are carried at fair value with unrealized gains and losses included in AOCI, net of associated intangibles “shadow adjustments” and deferred income taxes. The funds withheld receivables portfolio also includes cash, derivatives and accrued income.
The liabilities for contractholder funds for deferred annuities consist of contract account balances that accrue to the benefit of the contractholders, excluding surrender charges and other liabilities. The liabilities for FIA consist of the value of the host contract plus the value of the embedded derivative. The embedded derivative is carried at fair value in the accompanying
Condensed Consolidated Balance Sheets
with changes in fair value reported in “Benefits and other changes in policy reserves” in the accompanying
Condensed Consolidated Statements of Operations
. Liabilities for immediate annuities without life contingencies are recorded at the present value of future benefits.
Liabilities for investment-type contracts are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes.
The liabilities for future policy benefits and claim reserves life contingent pay-out annuity policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. The investment yield assumptions for life contingent pay-out annuities range from 0.8% to 6.0%.
Reinsurance agreements with third parties
Front Street elected to apply the fair value option to account for its funds withheld receivables, non-funds withheld assets and future policyholder benefits reserve related to its assumed reinsurance with third parties. Front Street measures fair value of the funds withheld receivables based on the fair values of the securities in the underlying funds withheld portfolio held by the cedant. The non-funds withheld assets held by Front Street, backing the future policyholder benefits reserve, are measured at fair value. Policy loans included in the funds withheld receivables with third parties are measured at amortized cost, which approximates fair value.
Front Street uses a discounted cash flows approach to measure the fair value of the future policyholder benefits reserve. The cash flows associated with future policy premiums and benefits are generated using best estimate assumptions (plus a risk margin, where applicable) and are consistent with market prices, where available. Risk margins are typically applied to non-observable,
non-hedgeable market inputs such as mortality, morbidity, lapse, discount rate for non-performance risk, discount rate for risk margin, surrenders, etc. Mortality relates to the occurrence of death. Mortality assumptions are based upon the experience of the cedant as well as past and emerging industry experience, when available. Morbidity relates to the occurrence of a claim status and is a key assumption for the long term care business. Morbidity assumptions are based upon the experience of the cedant as well as past and emerging industry experience, when available. Mortality and morbidity assumptions may be different by sex, underwriting class and policy type. Assumptions are also made for future mortality and morbidity improvements.
Front Street determines the discount rate based on the market yields on the underlying assets backing the liabilities plus a risk margin to reflect uncertainty and adjusts the discount rate to reflect the credit risk of Front Street. Policies are terminated through surrenders and maturities, where surrenders represent the voluntary terminations of policies by policyholders and maturities are determined by policy contract terms. Surrender assumptions are based upon cedant experience adjusted for expected future conditions. Front Street discounts the liability cash flows by using the market yields on the underlying assets backing the liabilities plus a risk margin to reflect uncertainty and adjusts the discount rate to reflect the credit risk of Front Street.
The significant unobservable inputs used in the fair value measurement of the Front Street future policyholder benefit liability are non-performance risk spread and risk spread to reflect uncertainty. Significant increases (decreases) in non-performance risk spread and risk margin to reflect uncertainty would result in a lower (higher) fair value measurement.
Funds Withheld Receivables
Through Front Street, the Company measures the fair value of its securities included in the funds withheld receivables portfolio based on assumptions used by market participants in pricing the security. The appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and the Company will then consistently apply the valuation methodology to measure the security’s fair value. The Company’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include a third-party pricing service, independent broker quotations or pricing matrices. The Company uses observable and unobservable inputs in its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators and industry and economic events are monitored and further market data will be acquired when certain thresholds are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. Management believes the broker quotes are prices at which trades could be executed based on historical trends executed at broker-quoted or slightly higher prices. The Company did not adjust prices received from third parties as of
December 31, 2016
. However, the Company does analyze the third-party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy.
Derivatives
The fair values of the embedded derivatives in Front Street’s assumed FIA business from FGL are derived using market indices, pricing assumptions and historical data. The significant unobservable inputs used in the fair value measurement of the embedded derivatives in Front Street’s assumed FIA business are market value of options, interest swap rates, mortality multiplier, surrender rates, and non-performance spread. The mortality multiplier at
December 31, 2016
and
September 30, 2016
was applied to the Annuity 2000 mortality tables. Significant increases or decreases in the market value of an option in isolation would result in a higher or lower, respectively, fair value measurement. Significant increases or decreases in interest swap rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower or higher, respectively, fair value measurement. Generally, a change in any one unobservable input would not result in a change in any other unobservable input.
Spectrum Brands’ derivative assets and liabilities are valued on a recurring basis using internal models, which are based on market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities, which are generally based on quoted or observed market prices and classified as Level 2. The fair value of certain derivatives is estimated using pricing models based on contracts with similar terms and risks. Modeling techniques assume market correlation and volatility, such as using prices of one delivery point to calculate the price of the contract’s different delivery point. The nominal value of interest rate transactions is discounted using applicable forward interest rate curves. In addition, by applying a credit reserve which is calculated based on credit default swaps or published default probabilities for the actual and potential asset value, the fair value of Spectrum Brands’ derivative assets reflects the risk that the counterparties to these contracts may default on the obligations. Likewise, by assessing the requirements of a reserve for non-performance which is calculated based on the probability of default by Spectrum Brands, it adjusts its derivative liabilities to reflect the price at which a potential market participant would be willing to assume Spectrum Brands’ liabilities.
The Company has not changed its valuation techniques in measuring the fair value of any derivative assets and liabilities during the quarter.
Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value as of
December 31, 2016
and
September 30, 2016
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value at
|
|
|
|
|
|
Range (Weighted average)
|
Assets
|
|
December 31,
2016
|
|
September 30,
2016
|
|
Valuation Technique
|
|
Unobservable Input(s)
|
|
December 31,
2016
|
|
September 30,
2016
|
Funds withheld receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity and equity securities
|
|
$
|
34.0
|
|
|
$
|
35.2
|
|
|
Matrix pricing
|
|
Quoted prices
|
|
99% - 117% (107%)
|
|
98% - 122% (109%)
|
Fixed maturity securities
|
|
5.3
|
|
|
5.4
|
|
|
Loan Recovery Value
|
|
Recovery rate
|
|
56% - 100% (82%)
|
|
56% - 100% (82%)
|
Fixed maturity securities
|
|
6.4
|
|
|
35.7
|
|
|
Broker-quoted
|
|
Offered quotes
|
|
96% - 100% (98%)
|
|
97% - 100% (100%)
|
Loan participations
|
|
0.7
|
|
|
1.8
|
|
|
Loan Recovery Value
|
|
Recovery rate
|
|
18% - 50% (38%)
|
|
52% - 100% (71%)
|
Total
|
|
$
|
46.4
|
|
|
$
|
78.1
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
|
$
|
634.5
|
|
|
$
|
631.8
|
|
|
Discounted cash flow
|
|
Non-performance risk spread
|
|
0.35%
|
|
0.32%
|
|
|
|
|
|
|
|
|
Risk margin to reflect uncertainty
|
|
0.50%
|
|
0.50%
|
Embedded derivatives in Front Street's assumed FIA business
|
|
121.2
|
|
|
131.2
|
|
|
Discounted cash flow
|
|
Market value of option
|
|
0% - 22%
(3%)
|
|
0% - 27%
(2%)
|
|
|
|
|
|
|
|
|
SWAP rates
|
|
2.0%
|
|
1.0%
|
|
|
|
|
|
|
|
|
Mortality multiplier
|
|
80%
|
|
80%
|
|
|
|
|
|
|
|
|
Surrender rates
|
|
0.50% - 75%
(12%)
|
|
0.50% - 75%
(10%)
|
|
|
|
|
|
|
|
|
Non-performance risk spread
|
|
0.25%
|
|
0.25%
|
Total
|
|
$
|
755.7
|
|
|
$
|
763.0
|
|
|
|
|
|
|
|
|
|
The following tables summarize changes to the
Company
’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for the
three months ended December 31, 2016
and
2015
. 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2016
|
|
Balance at Beginning
of Period
|
|
Total Gains (Losses)
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3 (a)
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funds withheld receivables
|
$
|
78.1
|
|
|
$
|
(1.3
|
)
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
(6.3
|
)
|
|
$
|
—
|
|
|
$
|
(27.1
|
)
|
|
$
|
46.4
|
|
Total assets at fair value
|
$
|
78.1
|
|
|
$
|
(1.3
|
)
|
|
$
|
—
|
|
|
$
|
3.0
|
|
|
$
|
(6.3
|
)
|
|
$
|
—
|
|
|
$
|
(27.1
|
)
|
|
$
|
46.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Period
|
|
Total (Gains) Losses
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
631.8
|
|
|
$
|
(12.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15.3
|
|
|
$
|
—
|
|
|
$
|
634.5
|
|
Embedded derivatives in Front Street's assumed FIA business
|
131.2
|
|
|
(10.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
121.2
|
|
Total liabilities at fair value
|
$
|
763.0
|
|
|
$
|
(22.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15.3
|
|
|
$
|
—
|
|
|
$
|
755.7
|
|
(a) During the
three months ended December 31, 2016
, the net transfer out of Level 3 was exclusively to Level 2.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2015
|
|
Balance at Beginning
of Period
|
|
Total Gains (Losses)
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate fixed maturity securities AFS
|
$
|
14.1
|
|
|
$
|
(0.5
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(13.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Other invested assets
|
2.8
|
|
|
2.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(5.5
|
)
|
|
—
|
|
|
—
|
|
Funds withheld receivables
|
74.7
|
|
|
(1.6
|
)
|
|
—
|
|
|
5.0
|
|
|
(13.0
|
)
|
|
—
|
|
|
—
|
|
|
65.1
|
|
Total assets at fair value
|
$
|
91.6
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
5.0
|
|
|
$
|
(26.6
|
)
|
|
$
|
(5.5
|
)
|
|
$
|
—
|
|
|
$
|
65.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at Beginning
of Period
|
|
Total (Gains) Losses
|
|
|
|
|
|
|
|
Net transfer In (Out) of
Level 3
|
|
Balance at End of
Period
|
|
|
Included in
Earnings
|
|
Included in
AOCI
|
|
Purchases
|
|
Sales
|
|
Settlements
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Front Street future policyholder benefit liability
|
$
|
629.2
|
|
|
$
|
(3.7
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.5
|
|
|
$
|
—
|
|
|
$
|
629.0
|
|
Embedded derivatives in Front Street's assumed FIA business
|
142.3
|
|
|
(2.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
139.9
|
|
Total liabilities at fair value
|
$
|
771.5
|
|
|
$
|
(6.1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3.5
|
|
|
$
|
—
|
|
|
$
|
768.9
|
|
The
Company
reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. There were no transfers between Level 1 and Level 2 for
three months ended December 31, 2016
and
2015
and there were no transfers in or out of Level 3 for the three months ended December 31, 2015. For the
three months ended December 31, 2016
, the transfers out of Level 3 were related to changes in the primary pricing source and changes in the observability of external information used in determining fair value.
Non-Recurring Fair Value Measurements
Goodwill, intangible assets and other long-lived assets are tested annually or if an event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).
Financial Assets and Liabilities Not Measured at Fair Value
The carrying amount, estimated fair value and the level of the fair value hierarchy of the
Company
’s financial instrument assets and liabilities which are not measured at fair value in the accompanying
Condensed Consolidated Balance Sheets
are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Carrying Amount
|
Assets (a)
|
|
|
|
|
|
|
|
|
|
Asset-based loans, included in other assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13.7
|
|
|
$
|
13.7
|
|
|
$
|
13.7
|
|
Policy loans, included in funds withheld receivables
|
—
|
|
|
—
|
|
|
8.3
|
|
|
8.3
|
|
|
8.3
|
|
Total financial assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22.0
|
|
|
$
|
22.0
|
|
|
$
|
22.0
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities (a)
|
|
|
|
|
|
|
|
|
|
Investment contracts, included in contractholder funds and other insurance reserves
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
897.7
|
|
|
$
|
897.7
|
|
|
$
|
966.2
|
|
Total debt (b)
|
—
|
|
|
5,677.7
|
|
|
23.3
|
|
|
5,701.0
|
|
|
5,459.0
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
5,677.7
|
|
|
$
|
921.0
|
|
|
$
|
6,598.7
|
|
|
$
|
6,425.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Fair Value
|
|
Carrying Amount
|
Assets (a)
|
|
|
|
|
|
|
|
|
|
Asset-based loans, included in other assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
35.0
|
|
|
$
|
35.0
|
|
|
$
|
35.0
|
|
Policy loans, included in funds withheld receivables
|
—
|
|
|
—
|
|
|
8.5
|
|
|
8.5
|
|
|
8.5
|
|
Total financial assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
43.5
|
|
|
$
|
43.5
|
|
|
$
|
43.5
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities (a)
|
|
|
|
|
|
|
|
|
|
Investment contracts, included in contractholder funds and other insurance reserves
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
922.9
|
|
|
$
|
922.9
|
|
|
$
|
988.3
|
|
Total debt (b)
|
—
|
|
|
5,700.1
|
|
|
29.1
|
|
|
5,729.2
|
|
|
5,430.9
|
|
Total financial liabilities
|
$
|
—
|
|
|
$
|
5,700.1
|
|
|
$
|
952.0
|
|
|
$
|
6,652.1
|
|
|
$
|
6,419.2
|
|
(a) The carrying value of cash and cash equivalents, trade receivables, accounts payable and accrued investment income approximate fair value due to their short duration and, accordingly, they are not presented in the tables above.
(b) The fair value of debt set forth above is generally based on quoted or observed market prices.
Valuation Methodology
Investment Contracts and Other Insurance Reserves
Investment contracts assumed from
FGL
by
Front Street
include deferred annuities,
FIA
s and immediate annuities. The fair value of deferred annuity and
FIA
s is based on their cash surrender value (which is the cost the
Company
would incur to extinguish the liability) as these contracts are generally issued without an annuitization date. See “
Reinsurance Agreements with FGL
”
section above for discussion of the calculation of the fair value of the insurance reserves.
Asset-based loans
The fair value of the asset-based loans originated by Salus approximate their net carrying value. Such loans carry a variable rate that are typically revolving in nature and can be settled at the demand of either party. Nonaccrual loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. As the loans are collateral dependent, Salus measures such impairment based on the estimated fair value of eligible proceeds. This is generally based on estimated market prices, which may be obtained from a variety of sources, including in certain instances from appraisals prepared by third parties. The impaired loan balance represents those nonaccrual loans for which impairment was recognized during the quarter.
(7) Funds Withheld Receivables
The Company’s consolidated funds withheld receivables are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Cost or Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Carrying Value
|
Funds withheld receivables with FGL
|
|
|
|
|
|
|
|
|
|
Corporates
|
$
|
676.5
|
|
|
$
|
9.7
|
|
|
$
|
(32.8
|
)
|
|
$
|
653.4
|
|
|
$
|
653.4
|
|
Asset/Mortgage-backed securities
|
197.9
|
|
|
0.5
|
|
|
(7.3
|
)
|
|
191.1
|
|
|
191.1
|
|
Municipals
|
12.1
|
|
|
—
|
|
|
(0.4
|
)
|
|
11.7
|
|
|
11.7
|
|
Government bonds
|
1.1
|
|
|
—
|
|
|
(0.1
|
)
|
|
1.0
|
|
|
1.0
|
|
Preferred stock
|
12.5
|
|
|
0.1
|
|
|
(0.5
|
)
|
|
12.1
|
|
|
12.1
|
|
Total funds withheld receivables with FGL
|
900.1
|
|
|
10.3
|
|
|
(41.1
|
)
|
|
869.3
|
|
|
869.3
|
|
Funds withheld receivables with third parties
|
|
|
|
|
|
|
|
|
|
Corporates
|
397.5
|
|
|
5.9
|
|
|
(8.8
|
)
|
|
394.6
|
|
|
394.6
|
|
Asset/Mortgage-backed securities
|
133.9
|
|
|
1.7
|
|
|
(1.8
|
)
|
|
133.8
|
|
|
133.8
|
|
Municipals
|
49.4
|
|
|
1.0
|
|
|
(0.6
|
)
|
|
49.8
|
|
|
49.8
|
|
Government bonds
|
82.5
|
|
|
—
|
|
|
(3.9
|
)
|
|
78.6
|
|
|
78.6
|
|
Agency bonds
|
6.7
|
|
|
—
|
|
|
—
|
|
|
6.7
|
|
|
6.7
|
|
Total funds withheld receivables with third parties
|
670.0
|
|
|
8.6
|
|
|
(15.1
|
)
|
|
663.5
|
|
|
663.5
|
|
Total fixed maturity and equity securities included in funds withheld receivables
|
1,570.1
|
|
|
18.9
|
|
|
(56.2
|
)
|
|
1,532.8
|
|
|
1,532.8
|
|
|
|
|
|
|
|
|
|
|
|
Call option receivable from FGL included in funds withheld receivables
|
9.3
|
|
|
2.9
|
|
|
—
|
|
|
12.2
|
|
|
12.2
|
|
Accrued interest
|
16.6
|
|
|
—
|
|
|
—
|
|
|
16.6
|
|
|
16.6
|
|
Net receivables
|
39.1
|
|
|
—
|
|
|
—
|
|
|
39.1
|
|
|
39.1
|
|
Policy loans and other
|
8.3
|
|
|
—
|
|
|
—
|
|
|
8.3
|
|
|
8.3
|
|
Total funds withheld receivables
|
$
|
1,643.4
|
|
|
$
|
21.8
|
|
|
$
|
(56.2
|
)
|
|
$
|
1,609.0
|
|
|
$
|
1,609.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Cost or Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Fair Value
|
|
Carrying Value
|
Funds withheld receivables with FGL
|
|
|
|
|
|
|
|
|
|
Corporates
|
$
|
638.5
|
|
|
$
|
18.2
|
|
|
$
|
(29.5
|
)
|
|
$
|
627.2
|
|
|
$
|
627.2
|
|
Asset/Mortgage-backed securities
|
238.8
|
|
|
0.6
|
|
|
(7.9
|
)
|
|
231.5
|
|
|
231.5
|
|
Municipals
|
12.1
|
|
|
0.7
|
|
|
—
|
|
|
12.8
|
|
|
12.8
|
|
Government bonds
|
1.1
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
|
1.1
|
|
Preferred stock
|
8.8
|
|
|
0.3
|
|
|
(0.9
|
)
|
|
8.2
|
|
|
8.2
|
|
Total funds withheld receivables with FGL
|
899.3
|
|
|
19.8
|
|
|
(38.3
|
)
|
|
880.8
|
|
|
880.8
|
|
Funds withheld receivables with third parties
|
|
|
|
|
|
|
|
|
|
Corporates
|
390.0
|
|
|
18.8
|
|
|
(2.7
|
)
|
|
406.1
|
|
|
406.1
|
|
Asset/Mortgage-backed securities
|
118.7
|
|
|
1.9
|
|
|
(1.7
|
)
|
|
118.9
|
|
|
118.9
|
|
Municipals
|
49.5
|
|
|
4.1
|
|
|
—
|
|
|
53.6
|
|
|
53.6
|
|
Government bonds
|
67.7
|
|
|
1.3
|
|
|
(0.2
|
)
|
|
68.8
|
|
|
68.8
|
|
Agency bonds
|
6.6
|
|
|
0.3
|
|
|
—
|
|
|
6.9
|
|
|
6.9
|
|
Total funds withheld receivables with third parties
|
632.5
|
|
|
26.4
|
|
|
(4.6
|
)
|
|
654.3
|
|
|
654.3
|
|
Total fixed maturity and equity securities included in funds withheld receivables
|
1,531.8
|
|
|
46.2
|
|
|
(42.9
|
)
|
|
1,535.1
|
|
|
1,535.1
|
|
|
|
|
|
|
|
|
|
|
|
Call option receivable from FGL included in funds withheld receivables
|
9.8
|
|
|
1.5
|
|
|
—
|
|
|
11.3
|
|
|
11.3
|
|
Accrued interest
|
17.8
|
|
|
—
|
|
|
—
|
|
|
17.8
|
|
|
17.8
|
|
Net receivables
|
77.7
|
|
|
—
|
|
|
—
|
|
|
77.7
|
|
|
77.7
|
|
Policy loans and other
|
8.5
|
|
|
—
|
|
|
—
|
|
|
8.5
|
|
|
8.5
|
|
Total funds withheld receivables
|
$
|
1,645.6
|
|
|
$
|
47.7
|
|
|
$
|
(42.9
|
)
|
|
$
|
1,650.4
|
|
|
$
|
1,650.4
|
|
Maturities of Funds Withheld Receivables
The amortized cost and fair value of fixed maturity and equity securities included in funds withheld receivables 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.
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Amortized Cost
|
|
Fair Value
|
Corporate, Non-structured Hybrids, Municipal and Preferred stock:
|
|
|
|
Due in one year or less
|
$
|
24.9
|
|
|
$
|
24.9
|
|
Due after one year through five years
|
265.2
|
|
|
261.1
|
|
Due after five years through ten years
|
428.9
|
|
|
423.8
|
|
Due after ten years
|
497.1
|
|
|
477.0
|
|
Subtotal
|
1,216.1
|
|
|
1,186.8
|
|
Other securities which provide for periodic payments:
|
|
|
|
Asset/Mortgage-backed securities
|
331.8
|
|
|
324.9
|
|
Structured hybrids
|
22.2
|
|
|
21.1
|
|
Total fixed maturity and equity securities included in funds withheld receivables
|
$
|
1,570.1
|
|
|
$
|
1,532.8
|
|
Securities in Funds Withheld Receivables with FGL in an Unrealized Loss Position
The Company has concluded that the fair value of the securities presented in the table below were not other-than-temporarily impaired as of
December 31, 2016
. The fair value and gross unrealized losses of securities in the funds withheld receivables with FGL, aggregated by investment category, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
Funds withheld receivables with FGL
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
$
|
202.7
|
|
|
$
|
(7.9
|
)
|
|
$
|
162.4
|
|
|
$
|
(24.9
|
)
|
|
$
|
365.1
|
|
|
$
|
(32.8
|
)
|
Asset/Mortgage-backed securities
|
44.3
|
|
|
(0.2
|
)
|
|
120.2
|
|
|
(7.1
|
)
|
|
164.5
|
|
|
(7.3
|
)
|
Municipals
|
6.8
|
|
|
(0.4
|
)
|
|
—
|
|
|
—
|
|
|
6.8
|
|
|
(0.4
|
)
|
Government bonds
|
1.0
|
|
|
(0.1
|
)
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
(0.1
|
)
|
Preferred stock
|
0.9
|
|
|
(0.1
|
)
|
|
5.2
|
|
|
(0.4
|
)
|
|
6.1
|
|
|
(0.5
|
)
|
Total funds withheld receivables with FGL
|
$
|
255.7
|
|
|
$
|
(8.7
|
)
|
|
$
|
287.8
|
|
|
$
|
(32.4
|
)
|
|
$
|
543.5
|
|
|
$
|
(41.1
|
)
|
Total number of securities in an unrealized loss position
|
|
|
198
|
|
|
|
|
137
|
|
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Less than 12 months
|
|
12 months or longer
|
|
Total
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
|
Fair Value
|
|
Gross Unrealized
Losses
|
Funds withheld receivables with FGL
|
|
|
|
|
|
|
|
|
|
|
|
Corporates
|
$
|
137.8
|
|
|
$
|
(12.6
|
)
|
|
$
|
91.7
|
|
|
$
|
(16.9
|
)
|
|
$
|
229.5
|
|
|
$
|
(29.5
|
)
|
Asset/Mortgage-backed securities
|
73.3
|
|
|
(2.2
|
)
|
|
99.0
|
|
|
(5.7
|
)
|
|
172.3
|
|
|
(7.9
|
)
|
Municipals
|
1.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
Government bonds
|
0.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.2
|
|
|
—
|
|
Preferred stock
|
3.7
|
|
|
(0.9
|
)
|
|
—
|
|
|
—
|
|
|
3.7
|
|
|
(0.9
|
)
|
Total funds withheld receivables with FGL
|
$
|
216.0
|
|
|
$
|
(15.7
|
)
|
|
$
|
190.7
|
|
|
$
|
(22.6
|
)
|
|
$
|
406.7
|
|
|
$
|
(38.3
|
)
|
Total number of securities in an unrealized loss position
|
|
|
146
|
|
|
|
|
76
|
|
|
|
|
222
|
|
At
December 31, 2016
and
September 30, 2016
, securities in the funds withheld receivables with FGL in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments.
At
December 31, 2016
and
September 30, 2016
, securities with a fair value of
$29.5
and
$39.6
, respectively, had an unrealized loss greater than 20% of amortized cost, which represented less than 5% of the carrying value of all funds withheld receivables.
For the
three months ended December 31, 2016
and
2015
, the Company recognized other-than-temporary impairment (“OTTI”) losses in operations totaling
$1.0
and
$1.4
, respectively, related to funds withheld receivables with FGL with an amortized cost of
$12.0
and
$2.5
and a fair value of
$11.0
and
$1.1
at
December 31, 2016
and
2015
, respectively.
Details underlying write-downs taken as a result of OTTI that were recognized in “
Net income
” and included in “
Net investment losses
” were as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
OTTI recognized in net income:
|
|
|
|
Corporates
|
$
|
1.0
|
|
|
$
|
1.4
|
|
Total
|
$
|
1.0
|
|
|
$
|
1.4
|
|
Net investment income
The major sources of “
Net investment income
” reported in the accompanying
Condensed Consolidated Statements of Operations
were as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Fixed maturity securities included in funds withheld receivables with FGL
|
$
|
10.2
|
|
|
$
|
15.5
|
|
Equity securities included in funds withheld receivables with FGL
|
0.2
|
|
|
0.6
|
|
Asset-based loans
|
0.3
|
|
|
2.0
|
|
Other investments
|
—
|
|
|
2.2
|
|
Net investment income
|
$
|
10.7
|
|
|
$
|
20.3
|
|
Net investment losses
The major sources of “
Net investment losses
” reported in the accompanying
Condensed Consolidated Statements of Operations
were as follows:
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Net realized (losses) gains on fixed maturity securities included in funds withheld receivables with FGL
|
$
|
(2.2
|
)
|
|
$
|
3.3
|
|
Realized (losses) gains on equity securities included in funds withheld receivables with FGL
|
(0.1
|
)
|
|
1.8
|
|
Realized gains on certain derivative instruments
|
3.1
|
|
|
1.9
|
|
Change in fair value of embedded derivatives in funds withheld receivables with FGL
|
(12.2
|
)
|
|
(26.5
|
)
|
Realized losses on funds withheld receivables with third parties and other
|
(22.4
|
)
|
|
(12.5
|
)
|
Net investment losses
|
$
|
(33.8
|
)
|
|
$
|
(32.0
|
)
|
The modified coinsurance arrangement between FGL Insurance and Front Street created an obligation for the parties to settle a payable or receivable at a later date, which resulted in an embedded derivative. This embedded derivative is considered a total return swap with contractual returns that are attributable to the assets and liabilities associated with this reinsurance arrangement. The fair value of the total return swap is based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangement, including gains and losses from sales, are passed directly to the reinsurer pursuant to contractual terms of the reinsurance arrangement. The reinsurance related embedded derivative is expected to continue to exist after the disposal of FGL and is therefore not eliminated to appropriately reflect the continuing operations and balances held for sale. It is embedded in the funds withheld receivables with a corresponding asset in business held for sale on the accompanying
Condensed Consolidated Balance Sheets
and the related gains or losses are reported in net investment gains (losses) with a corresponding income (loss) from discontinued operations on the accompanying
Condensed Consolidated Statements of Operations
.
(8) Goodwill and Intangibles, net
A summary of the changes in the carrying amounts of goodwill and intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Assets
|
|
Goodwill
|
|
Indefinite Lived
|
|
Definite Lived
|
|
Total
|
Balance at September 30, 2016
|
$
|
2,478.4
|
|
|
$
|
1,473.5
|
|
|
$
|
899.0
|
|
|
$
|
2,372.5
|
|
Additions
|
—
|
|
|
—
|
|
|
0.8
|
|
|
0.8
|
|
Periodic amortization
|
—
|
|
|
—
|
|
|
(23.6
|
)
|
|
(23.6
|
)
|
Effect of translation
|
(13.9
|
)
|
|
(13.9
|
)
|
|
(7.9
|
)
|
|
(21.8
|
)
|
Balance at December 31, 2016
|
$
|
2,464.5
|
|
|
$
|
1,459.6
|
|
|
$
|
868.3
|
|
|
$
|
2,327.9
|
|
Goodwill and indefinite lived trade name intangibles are not amortized and are tested for impairment at least annually at the
Company
’s August financial period end, or more frequently if an event or circumstance indicates that an impairment loss may have been incurred between annual impairment tests.
Definite Lived Intangible Assets
The range and weighted average useful lives for definite lived intangible assets are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
Customer relationships
|
$
|
973.3
|
|
|
$
|
(313.2
|
)
|
|
$
|
660.1
|
|
|
$
|
984.8
|
|
|
$
|
(302.9
|
)
|
|
$
|
681.9
|
|
Technology assets
|
237.8
|
|
|
(102.3
|
)
|
|
135.5
|
|
|
237.2
|
|
|
(96.7
|
)
|
|
140.5
|
|
Trade names
|
165.7
|
|
|
(93.0
|
)
|
|
72.7
|
|
|
165.7
|
|
|
(89.1
|
)
|
|
76.6
|
|
|
$
|
1,376.8
|
|
|
$
|
(508.5
|
)
|
|
$
|
868.3
|
|
|
$
|
1,387.7
|
|
|
$
|
(488.7
|
)
|
|
$
|
899.0
|
|
At
December 31, 2016
, the range and weighted average useful lives for definite-lived intangibles assets were as follows:
|
|
|
|
|
|
Asset Type
|
|
Range
|
|
Weighted Average
|
Customer relationships
|
|
2 to 20 years
|
|
18.5 years
|
Technology assets
|
|
5 to 18 years
|
|
11.2 years
|
Trade names
|
|
5 to 13 years
|
|
11.4 years
|
Amortization expense for definite lived intangible assets for the
three months ended December 31, 2016
and
2015
was
$23.6
and was included in “
Selling, acquisition, operating and general expenses
” within the accompanying
Condensed Consolidated Statements of Operations
. Excluding the impact of any future acquisitions or change in foreign currency, the
Company
estimates annual amortization expense of amortizable intangible assets for the next five fiscal years will be as follows:
|
|
|
|
|
|
Fiscal Year
|
|
Estimated Amortization Expense
|
2017
|
|
$
|
91.9
|
|
2018
|
|
85.7
|
|
2019
|
|
85.4
|
|
2020
|
|
85.2
|
|
2021
|
|
81.9
|
|
(9) Debt
The
Company
’s consolidated debt consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2016
|
|
|
|
|
Amount
|
|
Rate
|
|
Amount
|
|
Rate
|
|
Interest rate
|
HRG
|
|
|
|
|
|
|
|
|
|
|
7.875% Senior Secured Notes, due July 15, 2019
|
|
$
|
864.4
|
|
|
7.9
|
%
|
|
$
|
864.4
|
|
|
7.9
|
%
|
|
Fixed rate
|
7.75% Senior Unsecured Notes, due January 15, 2022
|
|
890.0
|
|
|
7.8
|
%
|
|
890.0
|
|
|
7.8
|
%
|
|
Fixed rate
|
Spectrum Brands
|
|
|
|
|
|
|
|
|
|
|
USD Term Loan, due June 23, 2022
|
|
1,003.0
|
|
|
3.4
|
%
|
|
1,005.5
|
|
|
3.6
|
%
|
|
Variable rate, see below
|
CAD Term Loan, due June 23, 2022
|
|
53.3
|
|
|
4.5
|
%
|
|
54.9
|
|
|
4.6
|
%
|
|
Variable rate, see below
|
Euro Term Loan, due June 23, 2022
|
|
58.8
|
|
|
3.5
|
%
|
|
63.0
|
|
|
3.5
|
%
|
|
Variable rate, see below
|
6.375% Notes, due November 15, 2020
|
|
—
|
|
|
—
|
%
|
|
129.7
|
|
|
6.4
|
%
|
|
Fixed rate
|
6.625% Notes, due November 15, 2022
|
|
570.0
|
|
|
6.6
|
%
|
|
570.0
|
|
|
6.6
|
%
|
|
Fixed rate
|
6.125% Notes, due December 15, 2024
|
|
248.0
|
|
|
6.1
|
%
|
|
250.0
|
|
|
6.1
|
%
|
|
Fixed rate
|
5.75% Notes, due July 15, 2025
|
|
1,000.0
|
|
|
5.8
|
%
|
|
1,000.0
|
|
|
5.8
|
%
|
|
Fixed rate
|
4.00% Notes, due October 1, 2026
|
|
445.8
|
|
|
4.0
|
%
|
|
477.0
|
|
|
4.0
|
%
|
|
Fixed rate
|
Revolver Facility, expiring June 23, 2020
|
|
165.5
|
|
|
5.6
|
%
|
|
—
|
|
|
—
|
%
|
|
Variable rate, see below
|
Other notes and obligations
|
|
26.9
|
|
|
7.7
|
%
|
|
16.8
|
|
|
9.8
|
%
|
|
Variable rate
|
Obligations under capitalized leases
|
|
140.9
|
|
|
5.3
|
%
|
|
114.7
|
|
|
5.5
|
%
|
|
Various
|
Salus
|
|
|
|
|
|
|
|
|
|
|
Unaffiliated long-term debt of consolidated variable-interest entity
|
|
37.0
|
|
|
—
|
%
|
|
39.7
|
|
|
—
|
%
|
|
Variable rate, see below
|
Long-term debt of consolidated variable-interest entity with FGL (a)
|
|
58.8
|
|
|
—
|
%
|
|
63.0
|
|
|
—
|
%
|
|
Variable rate, see below
|
Unaffiliated secured borrowings under non-qualifying loan participations
|
|
1.0
|
|
|
—
|
%
|
|
2.0
|
|
|
—
|
%
|
|
Fixed rate
|
Total
|
|
5,563.4
|
|
|
|
|
5,540.7
|
|
|
|
|
|
Original issuance discounts on debt, net of premiums
|
|
(22.2
|
)
|
|
|
|
(22.8
|
)
|
|
|
|
|
Unamortized debt issue costs
|
|
(82.2
|
)
|
|
|
|
(87.0
|
)
|
|
|
|
|
Total debt
|
|
5,459.0
|
|
|
|
|
5,430.9
|
|
|
|
|
|
Less current maturities and short-term debt
|
|
43.5
|
|
|
|
|
166.0
|
|
|
|
|
|
Non-current portion of debt
|
|
$
|
5,415.5
|
|
|
|
|
$
|
5,264.9
|
|
|
|
|
|
(a)
The debt balances included in the accompanying
Condensed Consolidated Balance Sheets
and in the table above reflect transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the close of the FGL Merger. Such transactions are not eliminated in the accompanying
Condensed Consolidated Financial Statements
in order to appropriately reflect the continuing operations and balances held for sale.
HRG
On January 13, 2017, subsequent to the end of the fiscal quarter, the Company, through its wholly-owned subsidiaries, entered into the 2017 Loan, pursuant to which it may borrow up to an aggregate amount of
$150.0
. The 2017 Loan bears interest at an adjusted International Exchange London Interbank Offered Rate (“LIBOR”), plus
2.35%
per annum, payable quarterly. The 2017 Loan matures on July 13, 2018, with an option for early termination by the borrower. The 2017 Loan is secured by approximately
$508.0
worth of marketable securities owned by a subsidiary of HGI Funding. The Company incurred
$1.1
of financing costs in connection with the 2017 Loan which have been capitalized as debt issuance costs and are being amortized through the scheduled maturity date of the loan. As of January 31, 2017, the Company had drawn
$50.0
under the 2017 Loan. The 2017 Loan contains a customary
mandatory prepayment clause, which requires the borrower to pay back any amounts borrowed under the 2017 Loan if certain events occur, including, but not limited to, a breach of the terms of the agreement by the borrower, a change of control of the borrower or the issuer of the pledged securities or a delisting of the pledged securities.
Spectrum Brands
Interest terms
During
three months ended December 31, 2016
,
Spectrum Brands
amended the credit agreement under its term loans reducing the interest rate margins applicable to the U.S. dollar denominated term loan facility (the “USD Term Loan”). At
December 31, 2016
,
Spectrum Brands
’ variable interest rate terms were as follows: (i) the USD Term Loan is subject to either adjusted
LIBOR
, subject to a
0.75%
floor, plus margin of
2.50%
per annum, or base rate with a
1.75%
floor plus margin of
1.50%
per annum; (ii) the CAD denominated term loan facility (the “CAD Term Loan”) is subject to either Canadian Dollar Offered Rate, subject to a
0.75%
floor plus
3.50%
per annum, or base rate plus
2.50%
per annum; (iii) the Euro denominated term loan facility (the “Euro
Term Loan”) is subject to Euro Interbank Offered Rate, subject to a
0.75%
floor, plus margin of
2.75%
per annum, with no base rate option available; and (iv) the revolving credit facility (the “Revolver Facility”), is subject to either adjusted
LIBOR
plus
2.75%
per annum or base rate plus
1.75%
per annum. As a result of borrowings and payments under the Revolver Facility, at
December 31, 2016
, the Company had borrowing availability of
$300.6
, net outstanding letters of credit of
$24.7
and a
$9.2
amount allocated to a foreign subsidiary.
On October 20, 2016,
Spectrum Brands
redeemed the remaining outstanding aggregate principal on the
6.375%
Notes due 2020 (the “
6.375%
Notes”) of
$129.7
with a make whole premium of
$4.6
charge to interest expense for the
three months ended December 31, 2016
in connection with the issuance of the
€425.0
aggregate principal amount of
4.00%
Notes and repurchase of the
6.375%
Notes on September 20, 2016.
Salus
In February 2013, September 2013 and February 2015,
Salus
completed a collateralized loan obligation (“
CLO
”) securitization of up to
$578.5
notional aggregate principal amount. At
December 31, 2016
and
September 30, 2016
, the outstanding notional aggregate principal amount of
$37.0
and
$39.7
, respectively, was taken up by unaffiliated entities and consisted entirely of subordinated debt in both periods, and
$58.8
and
$63.0
, respectively, was taken up by FGL and included in “
Assets of business held for sale
” in the accompanying
Condensed Consolidated Balance Sheets
. The obligations of the securitization is secured by the assets of the Variable Interest Entity, primarily asset-based loan receivables and carry residual interest subject to maintenance of certain covenants. Due to losses incurred in the
CLO
, at
December 31, 2016
and
September 30, 2016
, the
CLO
was not accruing interest on the subordinated debt.
(10) Stock-Based Compensation
The
Company
recognized consolidated stock-based compensation expense of
$11.1
and
$15.0
during the
three months ended December 31, 2016
and
2015
, respectively. Stock-based compensation expense is principally included in “
Selling, acquisition, operating and general expenses
” in the accompanying
Condensed Consolidated Statements of Operations
.
A summary of stock option awards outstanding as of
December 31, 2016
and related activity during the
three months
then ended are as follows (option amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRG
|
Stock Option Awards
|
|
Options
|
|
Weighted Average Exercise Price
|
|
Weighted
Average Grant
Date Fair Value
|
Stock options outstanding at September 30, 2016
|
|
4,231
|
|
|
$
|
9.48
|
|
|
$
|
3.80
|
|
Granted
|
|
318
|
|
|
15.39
|
|
|
5.96
|
|
Exercised
|
|
(77
|
)
|
|
12.33
|
|
|
4.52
|
|
Stock options outstanding at December 31, 2016
|
|
4,472
|
|
|
9.85
|
|
|
3.94
|
|
Stock options vested and exercisable at December 31, 2016
|
|
3,902
|
|
|
9.20
|
|
|
3.71
|
|
Stock options outstanding and expected to vest
|
|
4,472
|
|
|
9.85
|
|
|
3.94
|
|
A summary of restricted stock awards, restricted stock units and performance restricted stock units outstanding as of
December 31, 2016
and related activity during the
three months
then ended, under
HRG
and
Spectrum Brands
are as follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
HRG
|
Restricted Stock Awards
|
|
Shares
|
|
Weighted
Average Grant
Date Fair Value
|
Nonvested restricted stock outstanding at September 30, 2016
|
|
1,975
|
|
|
$
|
12.74
|
|
Granted
|
|
25
|
|
|
15.71
|
|
Exercised/Released
|
|
(1,543
|
)
|
|
12.57
|
|
Nonvested restricted stock outstanding at December 31, 2016
|
|
457
|
|
|
13.49
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRG
|
|
Spectrum Brands
|
Restricted Stock Units
|
|
Units
|
|
Weighted
Average Grant
Date Fair Value
|
|
Units
|
|
Weighted
Average Grant
Date Fair Value
|
Restricted stock units outstanding at September 30, 2016
|
|
42
|
|
|
$
|
12.33
|
|
|
577
|
|
|
$
|
94.97
|
|
Granted
|
|
—
|
|
|
—
|
|
|
688
|
|
|
126.97
|
|
Vested/Exercised
|
|
(42
|
)
|
|
12.33
|
|
|
(477
|
)
|
|
109.31
|
|
Forfeited or Expired
|
|
—
|
|
|
—
|
|
|
2
|
|
|
110.02
|
|
Restricted stock units outstanding at December 31, 2016
|
|
—
|
|
|
—
|
|
|
790
|
|
|
114.21
|
|
A summary of warrants outstanding as of
December 31, 2016
and related activity during the
three months
then ended, under
HRG
‘s incentive plan are as follows (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
HRG
|
Warrants
|
|
Units
|
|
Weighted Average Exercise Price
|
|
Weighted
Average Grant
Date Fair Value
|
Warrants outstanding at September 30, 2016
|
|
1,200
|
|
|
$
|
13.13
|
|
|
$
|
3.22
|
|
Warrants outstanding at December 31, 2016
|
|
1,200
|
|
|
13.13
|
|
|
3.22
|
|
Warrants outstanding and expected to vest
|
|
1,200
|
|
|
13.13
|
|
|
3.22
|
|
HRG
During the
three months ended December 31, 2016
,
HRG
granted stock option awards and restricted stock awards representing approximately
318 thousand
and
25 thousand
, respectively. All of these grants are time based, and vest either immediately, or over a period of up to
3
years. The total fair value of the stock grants during the
three months ended December 31, 2016
on their respective grant dates was approximately
$2.3
. During the
three months ended December 31, 2016
, stock option awards and restricted stock awards with a total fair value of
$23.1
vested. The total intrinsic value of share options exercised during the
three months ended December 31, 2016
was
$0.2
, for which
HRG
received cash of
$1.0
in settlement.
During the
three months ended December 31, 2015
,
HRG
granted stock option awards, restricted stock awards and restricted stock unit awards representing approximately
28 thousand
,
99 thousand
and
6 thousand
shares, respectively. All of these grants are time based, and vest either immediately, or over a period of up to
3
years. The total fair value of the stock grants during the
three months ended December 31, 2015
on their respective grant dates was approximately
$1.6
. During the
three months ended December 31, 2015
, stock option awards and restricted stock awards with a total fair value of
$28.1
vested. The total intrinsic value of stock options exercised during the
three months ended December 31, 2015
was
$2.1
, for which
HRG
received cash of
$3.2
in settlement.
Under
HRG
’s executive bonus plan for the fiscal year ending
September 30, 2017
, executives will be paid in cash. In addition, executives may also be granted stock, stock options and restricted stock shares.
As of
December 31, 2016
, there was approximately
$3.9
of total unrecognized compensation cost related to unvested share-based compensation agreements previously granted, which is expected to be recognized over a weighted-average period of
1.27 years
.
The fair values of restricted stock and restricted stock unit awards are determined based on the market price of
HRG
’s common stock on the grant date. The fair value of stock option awards and warrants are determined using the Black-Scholes option pricing model.
The following assumptions were used in the determination of these grant date fair values for options awarded using the Black-Scholes option pricing model:
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Risk-free interest rate
|
1.80% to 2.25%
|
|
1.65% to 1.74%
|
Assumed dividend yield
|
—%
|
|
—%
|
Expected option term
|
5.0 to 6.5 years
|
|
5.0 to 5.5 years
|
Volatility
|
35.1% to 37.5%
|
|
37.4% to 37.9%
|
The weighted-average remaining contractual term of outstanding stock option awards and warrants at
December 31, 2016
was
5.07 years
.
On November 17, 2016, the Company and Mr. Asali entered into a Transition Agreement (the “Transition Agreement”), which provides that Mr. Asali’s options and restricted stock awards that (i) were scheduled to vest and settle on November 29, 2016 vested and settled on such date and (ii) were scheduled to vest and settle on November 29, 2017 will vest and settle on the earlier of March 31, 2017 or such earlier dates specified in the Transition Agreement. In addition, the Transition Agreement provides that, subject to the terms thereof, Mr. Asali will receive from the Company (i) for the fiscal year ended September 30, 2016, a bonus of
$8.0
in cash; and (ii) for the fiscal year ending September 30, 2017, (x) a bonus of
$3.0
in cash, on the earlier of March 31, 2017 and the date on which the Company announces that it has entered into definitive documentation which, if the transactions contemplated thereby were consummated, would result in a sale, merger, change in control or other strategic transaction of or involving the Company and substantially all of its assets (such transaction, a “Transaction”); and (y) an additional payment of
$3.0
(or such higher amount as determined by the Board of Directors), if the Company enters into definitive documentation with respect to a Transaction, Mr. Asali remains employed through the announcement date of such Transaction and shareholder approval for such Transaction is obtained or upon certain other events specified in the Transition Agreement. Under certain circumstances, Mr. Asali will also receive
$0.5
in severance and
12
months of COBRA reimbursements. As a result of the foregoing, for the
three months ended December 31, 2016
, the Company recorded
$3.5
of severance liability and corresponding expense with respect to the Transition Agreement.
Spectrum Brands
Spectrum Brands
granted restricted stock units representing approximately
688 thousand
shares during the
three months ended December 31, 2016
. Of these grants,
78 thousand
restricted stock units vested immediately and
212 thousand
restricted stock units are time-based and vest over a period of less than
1
year. The remaining
398 thousand
are both performance and time-based and vest over a period of
1
to
3
years. The total market value of the restricted stock units on the dates of the grants was approximately
$87.3
. The remaining unrecognized pre-tax compensation cost related to restricted stock units at December 31, 2016 was
$60.8
.
Spectrum Brands
granted restricted stock units representing approximately
442 thousand
shares during the
three months ended December 31, 2015
. The
442 thousand
restricted stock units granted during the
three months ended December 31, 2015
included
112 thousand
restricted stock units that vested immediately and
33 thousand
restricted stock units are time-based and vest within a period of
1
year. The remaining
297 thousand
shares are both performance and time-based and vest over a period ranging from
1
to
2
years. The total market value of the restricted stock units on the dates of the grants was approximately
$42.1
. The remaining unrecognized pre-tax compensation cost related to restricted stock units at
December 31, 2015
was
$44.5
.
The fair value of restricted stock units is determined based on the market price of
Spectrum Brands
’ common stock on the grant date.
(11) Income Taxes
For the
three months ended December 31, 2016
, the
Company
’s effective tax rate of
92.7%
differed from the expected U.S. statutory tax rate of
35.0%
and was primarily impacted by U.S. pretax losses in the Company’s Corporate and Other segment where the tax benefits are not more-likely-than-not to be realized resulting in the recording of valuation allowance.
For the
three months ended December 31, 2015
, the
Company
’s effective tax rate of
(143.6)%
differed from the expected U.S. statutory tax rate of
35.0%
and was impacted by the expected utilization of a portion of Spectrum Brand’s U.S. net operating losses that were previously recorded with valuation allowance against Spectrum Brand’s earnings during the fiscal year 2016 and recognition of tax benefits on losses from the Corporate and Other segment in the U.S. during the fiscal year 2016. The Company determined that a portion of the fiscal year 2016 losses related to the Corporate and Other segment were more-likely-than-not to be realized based on the expected taxable gain from the FGL Merger.
(12) Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (“EPS”) (share amounts in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Net loss from continuing operations attributable to controlling interest
|
$
|
(25.5
|
)
|
|
$
|
(21.8
|
)
|
Net income (loss) from discontinued operations attributable to controlling interest
|
237.7
|
|
|
(12.1
|
)
|
Net income (loss) attributable to controlling interest
|
$
|
212.2
|
|
|
$
|
(33.9
|
)
|
|
|
|
|
Weighted-average common shares outstanding - basic
|
199,185
|
|
|
197,507
|
|
Weighted-average shares outstanding - diluted
|
199,185
|
|
|
197,507
|
|
|
|
|
|
Net income (loss) per common share attributable to controlling interest:
|
|
|
|
Basic loss from continuing operations
|
$
|
(0.13
|
)
|
|
$
|
(0.11
|
)
|
Basic income (loss) from discontinued operations
|
1.19
|
|
|
(0.06
|
)
|
Basic
|
$
|
1.06
|
|
|
$
|
(0.17
|
)
|
|
|
|
|
Diluted loss from continuing operations
|
$
|
(0.13
|
)
|
|
$
|
(0.11
|
)
|
Diluted income (loss) from discontinued operations
|
1.19
|
|
|
(0.06
|
)
|
Diluted
|
$
|
1.06
|
|
|
$
|
(0.17
|
)
|
The number of shares of common stock outstanding used in calculating the weighted average thereof reflects the actual number of
HRG
common stock outstanding, excluding unvested restricted stock.
The following were excluded from the calculation of “Diluted net income (loss) per common share attributable to controlling interest” because the as-converted effect of the unvested restricted stock and stock units, stock options and warrants would have been anti-dilutive (share amounts in thousands):
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Unvested restricted stock and restricted stock units
|
1,326
|
|
|
2,822
|
|
Stock options
|
1,567
|
|
|
1,303
|
|
Anti-dilutive warrants
|
104
|
|
|
—
|
|
For the three months ended December 31,
2015
, there were
1.8 million
outstanding warrants to purchase HRG common stock at an exercise price of
$13.125
per share that were excluded from the calculation of “Diluted net income (loss) per common share attributable to controlling interest” because the exercise price per share was above the average stock price for the three months ended December 31,
2015
.
(13) Commitments and Contingencies
Legal and Environmental Matters
The
Company
had aggregate accruals for its legal, environmental and regulatory matters of approximately
$7.0
at
December 31, 2016
, of which
$2.6
related to liabilities of business held for sale. The
Company
and its subsidiaries are involved in litigation and claims arising out of their prior businesses and arising in the ordinary course out of their current businesses, which include, among other things, indemnification and other claims and litigations involving
HRG
’s and its subsidiaries’ business practices, transactions, workers compensation matters, environmental matters, and personal injury claims. However, based on currently available information, including legal defenses available to the
Company
, and given the aforementioned accruals and related insurance coverage, the
Company
does not believe that the outcome of these legal, environmental and regulatory matters will have a material effect on its financial position, results of operations or cash flows.
HRG
HRG is a defendant in various litigation matters generally arising out of its legacy businesses. HRG does not believe that any of the matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows. See discussion above under the heading “Legal and Environmental Matters”.
Spectrum Brands
Spectrum Brands is a defendant in various litigation matters generally arising out of the ordinary course of business. Spectrum Brands does not believe that any of the matters or proceedings presently pending will have a material adverse effect on its results of operations, financial condition, liquidity or cash flows. See discussion above under the heading “Legal and Environmental Matters”.
FGL (Business Held for Sale)
FGL is involved in various pending or threatened legal proceedings, including purported class actions, arising in the ordinary course of business. In some instances, these proceedings include claims for unspecified or substantial punitive damages and similar types of relief in addition to amounts for alleged contractual liability or requests for equitable relief. In the opinion of FGL’s management and in light of existing insurance and other potential indemnification, reinsurance and established accruals, such litigation is not expected to have a material adverse effect on FGL’s financial position, although it is possible that the results of operations and cash flows could be materially affected by an unfavorable outcome in any one period.
FGL is assessed amounts by the state guaranty funds to cover losses to policyholders of insolvent or rehabilitated insurance companies. Those mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. At
December 31, 2016
, FGL had accrued
$2.1
for guaranty fund assessments that is expected to be offset by estimated future premium tax deductions of
$2.2
.
FGL has received inquiries from a number of state regulatory authorities regarding its use of the U.S. Social Security Administration’s Death Master File (the “Death Master File”) and compliance with state claims practices regulation. Legislation requiring insurance companies to use the Death Master File to identify potential claims has been enacted in a number of states. As a result of these legislative and regulatory developments, in May 2012, FGL undertook an initiative to use the Death Master File and other publicly available databases to identify persons potentially entitled to benefits under life insurance policies, annuities and retained asset accounts. In addition, FGL has received audit and examination notices from several state agencies responsible for escheatment and unclaimed property regulation in those states and in some cases has challenged the audits including litigation against the Controller for the State of California which is subject to a stay. FGL believes its current accrual will cover the reasonably estimated liability arising out of these developments, however costs that cannot be reasonably estimated as of the date of this filing are possible as a result of ongoing regulatory developments and other future requirements related to these matters.
On July 5, 2013, Plaintiff Eddie L. Cressy filed a putative class complaint captioned Cressy v.
Fidelity Guaranty
[sic]
Life Insurance Company, et. al.
(“
Cressy
”) in the Superior Court of California, County of Los Angeles (the “LA Court”), Case No. BC-514340. The complaint was filed after the Plaintiff was unable to maintain an action in federal court. The complaint asserts, inter alia, that the Plaintiff and members of the putative class relied on defendants’ advice in purchasing allegedly unsuitable equity-indexed insurance policies.
On January 2, 2015, the Court entered Final Judgment in
Cressy
, certifying the class for settlement purposes, and approving the class settlement reached on April 4, 2014. On August 10, 2015, FGL tendered
$1.3
to the Settlement Administrator for a claim review fund. FGL implemented an interest enhancement feature for certain policies as part of the class settlement, which enhancement began on October 12, 2015. On October 24, 2016, the parties filed a joint motion to amend the January 2, 2015 final order and judgment, to extend the deadline for settlement completion from October 24, 2016 to December 5, 2016. On December 5, 2016, Plaintiff Cressy filed a Notice of Filing Declaration of Settlement Administrator and Status of Completion of Settlement; the Declaration of Settlement Administrator included a certification by the Settlement Administrator that FGL had complied in all respects with the class settlement and that all eligible claims had been paid and the interest enhancement had been implemented pursuant to the terms of the class settlement.
At
December 31, 2016
, FGL estimated the total cost for the settlement, legal fees and other costs related to Cressy would be
$9.2
, with a liability for the unpaid portion of the estimate of less than
$0.1
. FGL had incurred and paid
$5.9
related to legal fees and other costs and
$3.3
related to settlement costs as of
December 31, 2016
. Based on the information currently available, FGL does not expect the actual cost for settlement, legal fees and other related costs to differ materially from the amount accrued.
On January 7, 2015, a putative class action complaint was filed in the United States District Court, Western District of Missouri (the “District Court”), captioned Dale R. Ludwick, on behalf of Herself and All Others Similarly Situated v. HRG, FGL Insurance, Raven Re, and Front Street Cayman. The complaint alleges violations of the Racketeer Influenced and Corrupt Organizations Act (“RICO”), requests injunctive and declaratory relief and seeks unspecified compensatory damages for the putative class in an amount not presently determinable, treble damages, and other relief, and claims Plaintiff Ludwick overpaid for her annuity. On April 13, 2015, FGL joined in the filing of a joint motion to dismiss the complaint. On February 12, 2016, the District Court granted the defendants’ joint motion to dismiss. Judgment was entered on February 12, 2016. On March 3, 2016, Plaintiff Ludwick filed a Notice of Appeal to the United States Court of Appeals for the Eighth Circuit (the “Court of Appeals”) from the District Court’s order and judgment. As of
December 31, 2016
, FGL did not have sufficient information to determine whether it was exposed to any losses that would be either probable or reasonably estimable beyond an expense contingency estimate of
$1.7
, which was accrued during the year ended September 30, 2016.
Unfunded Lending Commitments
Salus and FGL had unfunded investment commitments as of
December 31, 2016
based upon the timing of when investments are executed compared to when the actual investments are funded, as some investments require that funding occur over a period of months or years.
Through
Salus
, the
Company
enters into commitments to extend credit to meet the financing needs of its asset based lending customers upon satisfaction of certain conditions. At
December 31, 2016
, the notional amount of unfunded, legally binding lending commitments was approximately
$2.3
, which all expires in
1
year or less.
FGL had unfunded investment commitments of
$143.8
as of
December 31, 2016
.
(14) Related Party Transactions
FGL
has invested in
CLO
securities issued by Fortress Credit Opportunities III CLO LP (“FCO III”) and also invested in securities issued by Fortress Credit BSL Limited (“Fortress BSL”). The parent of both FCO III and Fortress BSL is Fortress Investment Group LLC (“Fortress”), which has acquired interests greater than 10% ownership in
HRG
as of
December 31, 2016
. Such CLOs had an aggregate total carrying value of
$228.6
and
$203.2
as of
December 31, 2016
and
September 30, 2016
, respectively, of which
$18.1
and
$18.0
, respectively, was included in the funds withheld receivables portfolio of Front Street. The Company’s net investment income from such securities was
$3.0
and
$2.2
for the
three months ended December 31, 2016
and 2015, respectively, of which
$0.3
and
$0.3
, respectively, was included in investment income, and the remaining
$2.7
and
$2.0
, respectively, was included in income from discontinued operations.
(15) Segment Data
The
Company
follows the accounting guidance which establishes standards for reporting information about operating segments in interim and annual financial statements. The
Company
’s reportable business segments are organized in a manner that reflects how
HRG
’s management views those business activities. Accordingly, the
Company
currently operates its business in
two
reporting segments: (i) Consumer Products and (ii) Insurance.
The following schedules present the
Company
’s segment information for the
three months ended December 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
Three months ended December 31,
|
|
2016
|
|
2015
|
Revenues:
|
|
|
|
Consumer Products
|
$
|
1,211.8
|
|
|
$
|
1,218.8
|
|
Insurance
|
(28.7
|
)
|
|
(10.0
|
)
|
Intersegment adjustments and eliminations
|
6.2
|
|
|
(5.4
|
)
|
Consolidated segment revenues
|
1,189.3
|
|
|
1,203.4
|
|
Corporate and Other
|
0.3
|
|
|
6.0
|
|
Total revenues
|
$
|
1,189.6
|
|
|
$
|
1,209.4
|
|
|
|
|
|
Operating income:
|
|
|
|
Consumer Products
|
$
|
151.0
|
|
|
$
|
142.5
|
|
Insurance
|
(15.4
|
)
|
|
—
|
|
Intersegment adjustments and eliminations (a)
|
2.3
|
|
|
(19.0
|
)
|
Total segment operating income
|
137.9
|
|
|
123.5
|
|
Corporate and Other
|
(20.2
|
)
|
|
(23.7
|
)
|
Consolidated operating income
|
117.7
|
|
|
99.8
|
|
Interest expense
|
(91.7
|
)
|
|
(95.2
|
)
|
Other income (expense), net
|
1.4
|
|
|
(0.7
|
)
|
Income from continuing operations before income taxes
|
27.4
|
|
|
3.9
|
|
Income tax expense (benefit)
|
25.4
|
|
|
(5.6
|
)
|
Net income from continuing operations
|
2.0
|
|
|
9.5
|
|
Income (loss) from discontinued operations, net of tax
|
258.8
|
|
|
(2.5
|
)
|
Net income
|
260.8
|
|
|
7.0
|
|
Less: Net income attributable to noncontrolling interest
|
48.6
|
|
|
40.9
|
|
Net income (loss) attributable to controlling interest
|
$
|
212.2
|
|
|
$
|
(33.9
|
)
|
(a) For its stand-alone reporting purposes, Front Street elected, since inception, to apply the fair value option to account for its funds withheld receivables, non-funds withheld assets and future policyholder benefits reserves related to its assumed reinsurance. For the Company’s consolidated reporting, the results from Front Street’s assumed reinsurance business with FGL is reported on FGL’s historical basis. Accordingly, in order to align the Company’s consolidated reporting, we have recorded a net intersegment adjustment to operating loss of
$3.2
and
$17.1
for the
three months ended December 31, 2016
and
2015
, respectively. Upon completion of the FGL Merger, the Company’s consolidated results will reflect all reinsurance business on the fair value option.
(16) Consolidating Financial Information
The following schedules present the
Company
’s accompanying
Condensed Consolidated Balance Sheets
information at
December 31, 2016
and
September 30, 2016
, and accompanying
Condensed Consolidated Statements of Operations
information for the
three months ended December 31, 2016
and
2015
. These schedules present the individual segments of the
Company
and their contribution to the
Condensed Consolidated Financial Statements
. Amounts presented will not necessarily be the same as those in the individual financial statements of the
Company
’s subsidiaries due to adjustments for purchase accounting, income taxes and noncontrolling interests. In addition, some of the
Company
’s subsidiaries use a classified balance sheet which also leads to differences in amounts reported for certain line items.
The Corporate and Other column primarily reflects the parent company’s investment in its subsidiaries, invested cash portfolio and corporate long term debt, and the results of Salus and HGI Energy. The elimination adjustments are for intercompany assets and liabilities, adjustments to align segment accounting policies with the consolidated basis, interest and dividends, the parent company’s investment in capital stocks of subsidiaries, and various reclasses of debit or credit balances to the amounts in consolidation. Purchase accounting adjustments have been pushed down to the appropriate subsidiary.
HRG Group, Inc. - Condensed Consolidating Balance Sheets Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Consumer Products
|
|
Insurance
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in subsidiaries and affiliates
|
|
$
|
—
|
|
|
$
|
0.6
|
|
|
$
|
2,362.3
|
|
|
$
|
—
|
|
|
$
|
(2,362.9
|
)
|
|
$
|
—
|
|
Affiliated loans and receivables
|
|
—
|
|
|
20.2
|
|
|
0.2
|
|
|
—
|
|
|
(20.4
|
)
|
|
—
|
|
Cash and cash equivalents
|
|
143.3
|
|
|
35.4
|
|
|
170.1
|
|
|
—
|
|
|
—
|
|
|
348.8
|
|
Funds withheld receivables
|
|
—
|
|
|
1,682.8
|
|
|
—
|
|
|
—
|
|
|
(73.8
|
)
|
|
1,609.0
|
|
Receivables, net
|
|
546.2
|
|
|
9.7
|
|
|
0.4
|
|
|
—
|
|
|
0.2
|
|
|
556.5
|
|
Inventories, net
|
|
779.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
779.7
|
|
Deferred tax assets
|
|
18.2
|
|
|
12.4
|
|
|
—
|
|
|
—
|
|
|
17.8
|
|
|
48.4
|
|
Property, plant and equipment, net
|
|
568.2
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
569.1
|
|
Goodwill
|
|
2,464.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,464.5
|
|
Intangibles, net
|
|
2,327.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,327.9
|
|
Other assets
|
|
106.5
|
|
|
19.3
|
|
|
15.3
|
|
|
—
|
|
|
16.1
|
|
|
157.2
|
|
Assets of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,801.6
|
|
|
—
|
|
|
26,801.6
|
|
Total assets
|
|
$
|
6,954.5
|
|
|
$
|
1,780.4
|
|
|
$
|
2,549.2
|
|
|
$
|
26,801.6
|
|
|
$
|
(2,423.0
|
)
|
|
$
|
35,662.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
$
|
—
|
|
|
$
|
1,653.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68.6
|
|
|
$
|
1,721.9
|
|
Debt
|
|
3,656.2
|
|
|
—
|
|
|
1,746.0
|
|
|
—
|
|
|
56.8
|
|
|
5,459.0
|
|
Accounts payable and other current liabilities
|
|
825.4
|
|
|
6.6
|
|
|
67.9
|
|
|
—
|
|
|
0.5
|
|
|
900.4
|
|
Employee benefit obligations
|
|
106.5
|
|
|
—
|
|
|
5.2
|
|
|
—
|
|
|
—
|
|
|
111.7
|
|
Deferred tax liabilities
|
|
563.1
|
|
|
—
|
|
|
9.9
|
|
|
—
|
|
|
0.1
|
|
|
573.1
|
|
Other liabilities
|
|
17.9
|
|
|
2.8
|
|
|
6.0
|
|
|
—
|
|
|
—
|
|
|
26.7
|
|
Affiliated debt and payables
|
|
—
|
|
|
0.3
|
|
|
168.4
|
|
|
—
|
|
|
(168.7
|
)
|
|
—
|
|
Liabilities of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,200.5
|
|
|
—
|
|
|
25,200.5
|
|
Total liabilities
|
|
5,169.1
|
|
|
1,663.0
|
|
|
2,003.4
|
|
|
25,200.5
|
|
|
(42.7
|
)
|
|
33,993.3
|
|
Total stockholders’ equity
|
|
1,003.3
|
|
|
117.4
|
|
|
548.1
|
|
|
1,259.6
|
|
|
(2,380.3
|
)
|
|
548.1
|
|
Noncontrolling interests
|
|
782.1
|
|
|
—
|
|
|
(2.3
|
)
|
|
341.5
|
|
|
—
|
|
|
1,121.3
|
|
Total permanent equity
|
|
1,785.4
|
|
|
117.4
|
|
|
545.8
|
|
|
1,601.1
|
|
|
(2,380.3
|
)
|
|
1,669.4
|
|
Total liabilities and equity
|
|
$
|
6,954.5
|
|
|
$
|
1,780.4
|
|
|
$
|
2,549.2
|
|
|
$
|
26,801.6
|
|
|
$
|
(2,423.0
|
)
|
|
$
|
35,662.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
Consumer Products
|
|
Insurance
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment in subsidiaries and affiliates
|
|
$
|
—
|
|
|
$
|
3.4
|
|
|
$
|
2,405.3
|
|
|
$
|
—
|
|
|
$
|
(2,408.7
|
)
|
|
$
|
—
|
|
Affiliated loans and receivables
|
|
—
|
|
|
20.3
|
|
|
0.2
|
|
|
—
|
|
|
(20.5
|
)
|
|
—
|
|
Cash and cash equivalents
|
|
275.3
|
|
|
32.1
|
|
|
189.9
|
|
|
—
|
|
|
—
|
|
|
497.3
|
|
Funds withheld receivables
|
|
—
|
|
|
1,725.0
|
|
|
—
|
|
|
—
|
|
|
(74.6
|
)
|
|
1,650.4
|
|
Receivables, net
|
|
538.2
|
|
|
17.4
|
|
|
0.7
|
|
|
—
|
|
|
—
|
|
|
556.3
|
|
Inventories, net
|
|
740.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
740.6
|
|
Deferred tax assets
|
|
18.3
|
|
|
8.6
|
|
|
—
|
|
|
—
|
|
|
15.7
|
|
|
42.6
|
|
Property, plant and equipment, net
|
|
542.1
|
|
|
—
|
|
|
1.3
|
|
|
—
|
|
|
—
|
|
|
543.4
|
|
Goodwill
|
|
2,478.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,478.4
|
|
Intangibles, net
|
|
2,372.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2,372.5
|
|
Other assets
|
|
103.7
|
|
|
18.1
|
|
|
34.6
|
|
|
—
|
|
|
16.2
|
|
|
172.6
|
|
Assets of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,738.7
|
|
|
—
|
|
|
26,738.7
|
|
Total assets
|
|
$
|
7,069.1
|
|
|
$
|
1,824.9
|
|
|
$
|
2,632.0
|
|
|
$
|
26,738.7
|
|
|
$
|
(2,471.9
|
)
|
|
$
|
35,792.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance reserves
|
|
$
|
—
|
|
|
$
|
1,685.9
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
65.4
|
|
|
$
|
1,751.3
|
|
Debt
|
|
3,620.2
|
|
|
—
|
|
|
1,747.7
|
|
|
—
|
|
|
63.0
|
|
|
5,430.9
|
|
Accounts payable and other current liabilities
|
|
931.6
|
|
|
6.1
|
|
|
51.6
|
|
|
—
|
|
|
0.5
|
|
|
989.8
|
|
Employee benefit obligations
|
|
120.2
|
|
|
—
|
|
|
5.2
|
|
|
—
|
|
|
—
|
|
|
125.4
|
|
Deferred tax liabilities
|
|
532.7
|
|
|
—
|
|
|
13.3
|
|
|
—
|
|
|
—
|
|
|
546.0
|
|
Other liabilities
|
|
20.4
|
|
|
3.5
|
|
|
8.3
|
|
|
—
|
|
|
(0.2
|
)
|
|
32.0
|
|
Affiliated debt and payables
|
|
—
|
|
|
0.2
|
|
|
171.2
|
|
|
—
|
|
|
(171.4
|
)
|
|
—
|
|
Liabilities of business held for sale
|
|
—
|
|
|
—
|
|
|
—
|
|
|
25,100.2
|
|
|
—
|
|
|
25,100.2
|
|
Total liabilities
|
|
5,225.1
|
|
|
1,695.7
|
|
|
1,997.3
|
|
|
25,100.2
|
|
|
(42.7
|
)
|
|
33,975.6
|
|
Total stockholders’ equity
|
|
1,040.4
|
|
|
129.2
|
|
|
638.1
|
|
|
1,259.6
|
|
|
(2,429.2
|
)
|
|
638.1
|
|
Noncontrolling interests
|
|
803.6
|
|
|
—
|
|
|
(3.4
|
)
|
|
378.9
|
|
|
—
|
|
|
1,179.1
|
|
Total permanent equity
|
|
1,844.0
|
|
|
129.2
|
|
|
634.7
|
|
|
1,638.5
|
|
|
(2,429.2
|
)
|
|
1,817.2
|
|
Total liabilities and equity
|
|
$
|
7,069.1
|
|
|
$
|
1,824.9
|
|
|
$
|
2,632.0
|
|
|
$
|
26,738.7
|
|
|
$
|
(2,471.9
|
)
|
|
$
|
35,792.8
|
|
HRG Group, Inc. - Condensed Consolidating Statements of Operations Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2016
|
|
Consumer Products
|
|
Insurance
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consumer and other product sales
|
|
$
|
1,211.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,211.8
|
|
Net investment income
|
|
—
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
10.4
|
|
|
10.7
|
|
Net investment losses
|
|
—
|
|
|
(28.7
|
)
|
|
—
|
|
|
—
|
|
|
(5.1
|
)
|
|
(33.8
|
)
|
Insurance and investment product fees and other
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
|
0.9
|
|
Total revenues
|
|
1,211.8
|
|
|
(28.7
|
)
|
|
0.3
|
|
|
—
|
|
|
6.2
|
|
|
1,189.6
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of consumer products and other goods sold
|
|
761.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
761.8
|
|
Benefits and other changes in policy reserves
|
|
—
|
|
|
(15.7
|
)
|
|
—
|
|
|
—
|
|
|
4.1
|
|
|
(11.6
|
)
|
Selling, acquisition, operating and general expenses
|
|
299.0
|
|
|
2.4
|
|
|
20.5
|
|
|
—
|
|
|
(0.2
|
)
|
|
321.7
|
|
Total operating costs and expenses
|
|
1,060.8
|
|
|
(13.3
|
)
|
|
20.5
|
|
|
—
|
|
|
3.9
|
|
|
1,071.9
|
|
Operating income
|
|
151.0
|
|
|
(15.4
|
)
|
|
(20.2
|
)
|
|
—
|
|
|
2.3
|
|
|
117.7
|
|
Equity in net income of subsidiaries
|
|
—
|
|
|
—
|
|
|
263.7
|
|
|
—
|
|
|
(263.7
|
)
|
|
—
|
|
Interest expense
|
|
(55.8
|
)
|
|
—
|
|
|
(35.9
|
)
|
|
—
|
|
|
—
|
|
|
(91.7
|
)
|
Affiliated interest expense
|
|
—
|
|
|
—
|
|
|
(1.7
|
)
|
|
—
|
|
|
1.7
|
|
|
—
|
|
Other income (expense), net
|
|
1.1
|
|
|
—
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
1.4
|
|
Income from continuing operations before income taxes
|
|
96.3
|
|
|
(15.4
|
)
|
|
206.2
|
|
|
—
|
|
|
(259.7
|
)
|
|
27.4
|
|
Income tax expense (benefit)
|
|
31.1
|
|
|
(3.8
|
)
|
|
(6.0
|
)
|
|
—
|
|
|
4.1
|
|
|
25.4
|
|
Net income from continuing operations
|
|
65.2
|
|
|
(11.6
|
)
|
|
212.2
|
|
|
—
|
|
|
(263.8
|
)
|
|
2.0
|
|
Income (loss) from discontinued operations, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
258.8
|
|
|
—
|
|
|
258.8
|
|
Net income
|
|
65.2
|
|
|
(11.6
|
)
|
|
212.2
|
|
|
258.8
|
|
|
(263.8
|
)
|
|
260.8
|
|
Less: Net income attributable to noncontrolling interest
|
|
27.5
|
|
|
—
|
|
|
—
|
|
|
21.1
|
|
|
—
|
|
|
48.6
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
37.7
|
|
|
$
|
(11.6
|
)
|
|
$
|
212.2
|
|
|
$
|
237.7
|
|
|
$
|
(263.8
|
)
|
|
$
|
212.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended December 31, 2015
|
|
Consumer Products
|
|
Insurance
|
|
Corporate and Other
|
|
Discontinued Operations
|
|
Eliminations and adjustments
|
|
Total
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net consumer and other product sales
|
|
$
|
1,218.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,218.8
|
|
Net investment income
|
|
—
|
|
|
0.9
|
|
|
5.1
|
|
|
—
|
|
|
14.3
|
|
|
20.3
|
|
Net investment losses
|
|
—
|
|
|
(11.7
|
)
|
|
—
|
|
|
—
|
|
|
(20.3
|
)
|
|
(32.0
|
)
|
Insurance and investment product fees and other
|
|
—
|
|
|
0.8
|
|
|
0.9
|
|
|
—
|
|
|
0.6
|
|
|
2.3
|
|
Total revenues
|
|
1,218.8
|
|
|
(10.0
|
)
|
|
6.0
|
|
|
—
|
|
|
(5.4
|
)
|
|
1,209.4
|
|
Operating costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of consumer products and other goods sold
|
|
778.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
778.1
|
|
Benefits and other changes in policy reserves
|
|
—
|
|
|
(12.4
|
)
|
|
—
|
|
|
—
|
|
|
13.2
|
|
|
0.8
|
|
Selling, acquisition, operating and general expenses
|
|
298.2
|
|
|
2.4
|
|
|
29.7
|
|
|
—
|
|
|
0.4
|
|
|
330.7
|
|
Total operating costs and expenses
|
|
1,076.3
|
|
|
(10.0
|
)
|
|
29.7
|
|
|
—
|
|
|
13.6
|
|
|
1,109.6
|
|
Operating income
|
|
142.5
|
|
|
—
|
|
|
(23.7
|
)
|
|
—
|
|
|
(19.0
|
)
|
|
99.8
|
|
Equity in net income of subsidiaries
|
|
—
|
|
|
—
|
|
|
20.6
|
|
|
—
|
|
|
(20.6
|
)
|
|
—
|
|
Interest expense
|
|
(58.4
|
)
|
|
—
|
|
|
(35.7
|
)
|
|
—
|
|
|
(1.1
|
)
|
|
(95.2
|
)
|
Affiliated interest expense
|
|
—
|
|
|
—
|
|
|
(5.4
|
)
|
|
—
|
|
|
5.4
|
|
|
—
|
|
Other income (expense), net
|
|
(3.5
|
)
|
|
—
|
|
|
3.0
|
|
|
—
|
|
|
(0.2
|
)
|
|
(0.7
|
)
|
Income from continuing operations before income taxes
|
|
80.6
|
|
|
—
|
|
|
(41.2
|
)
|
|
—
|
|
|
(35.5
|
)
|
|
3.9
|
|
Income tax expense (benefit)
|
|
6.9
|
|
|
(1.3
|
)
|
|
(7.5
|
)
|
|
—
|
|
|
(3.7
|
)
|
|
(5.6
|
)
|
Net income from continuing operations
|
|
73.7
|
|
|
1.3
|
|
|
(33.7
|
)
|
|
—
|
|
|
(31.8
|
)
|
|
9.5
|
|
Income (loss) from discontinued operations, net of tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.5
|
)
|
|
—
|
|
|
(2.5
|
)
|
Net income
|
|
73.7
|
|
|
1.3
|
|
|
(33.7
|
)
|
|
(2.5
|
)
|
|
(31.8
|
)
|
|
7.0
|
|
Less: Net income attributable to noncontrolling interest
|
|
31.1
|
|
|
—
|
|
|
0.2
|
|
|
9.6
|
|
|
—
|
|
|
40.9
|
|
Net income (loss) attributable to controlling interest
|
|
$
|
42.6
|
|
|
$
|
1.3
|
|
|
$
|
(33.9
|
)
|
|
$
|
(12.1
|
)
|
|
$
|
(31.8
|
)
|
|
$
|
(33.9
|
)
|