UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-4219

Harbinger Group Inc.

(Exact name of registrant as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)		74-1339132 (I.R.S. Employer Identification No.)
450 Park Avenue, 27th Floor New York, NY (Address of principal executive offices)		10022 (Zip Code)

(212) 906-8555
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ or No o.

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o or No o.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer o		Accelerated Filer þ		Non-accelerated Filer o (Do not check if a smaller reporting company)		Smaller reporting company o

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o or No þ

     There were 139,284,286 shares of the registrant’s common stock outstanding as of August 10, 2011.

 

 

HARBINGER GROUP INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of July 3, 2011 and September 30, 2010			3
Condensed Consolidated Statements of Operations for the Three and Nine Month Periods Ended July 3, 2011 and July 4, 2010			4
Condensed Consolidated Statements of Cash Flows for the Nine Month Periods Ended July 3, 2011 and July 4, 2010			5
Notes to Condensed Consolidated Financial Statements			6
(1) Description of Business and Basis of Presentation			6
(2) Comprehensive Income (Loss)			7
(3) Investments			9
(4) Derivative Financial Instruments			13
(5) Fair Value of Financial Instruments			18
(6) Goodwill and Intangibles of Consumer Products Segment			22
(7) Intangibles of Insurance Segment			23
(8) Debt			24
(9) Temporary Equity			27
(10) Defined Benefit Plans			27
(11) Reinsurance			29
(12) Stock Compensation			31
(13) Income Taxes			32
(14) Earnings Per Share			33
(15) Commitments and Contingencies			35
(16) Insurance Subsidiary Financial Information			36
(17) Acquisitions			37
(18) Restructuring and Related Charges			40
(19) Other Required Disclosures			42
(20) Related Party Transactions			44
(21) Segment Data			46
(22) Subsequent Events			46
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
Item 3. Quantitative and Qualitative Disclosures about Market Risk			67
Item 4. Controls and Procedures			71
PART II. OTHER INFORMATION
Item 1. Legal Proceedings			76
Item 1A. Risk Factors			76
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			113
Item 3. Defaults Upon Senior Securities			113
Item 4. (Removed and Reserved)			113
Item 5. Other Information			113
Item 6. Exhibits			137
EX-3.4
EX-3.5
EX-10.2
EX-10.3
EX-10.5
EX-31.1
EX-31.2
EX-32.1
EX-32.2

PART I: FINANCIAL INFORMATION

Item 1.		Financial Statements

HARBINGER GROUP INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)

		July 3,				September 30,
		2011				2010 (A)
		(Unaudited)
ASSETS
Consumer Products and Other:
Cash and cash equivalents		$	449,190			$	256,831
Short-term investments			140,045				53,965
Receivables, net			411,248				406,447
Inventories, net			548,376				530,342
Prepaid expenses and other current assets			95,757				94,078
Total current assets			1,644,616				1,341,663
Properties, net			216,690				201,309
Goodwill			621,907				600,055
Intangibles, net			1,751,812				1,769,360
Deferred charges and other assets			110,747				103,808
			4,345,772				4,016,195
Insurance:
Investments:
Fixed maturities, available-for-sale, at fair value			15,714,228				—
Equity securities, available-for-sale, at fair value			310,345				—
Derivative investments			205,185				—
Other invested assets			40,853				—
Total investments			16,270,611				—
Cash and cash equivalents			740,623				—
Accrued investment income			202,295				—
Reinsurance recoverable			1,626,233				—
Intangibles, net			501,820				—
Deferred tax assets			182,125				—
Other assets			50,346				—
			19,574,053				—
Total assets		$	23,919,825			$	4,016,195
LIABILITIES AND EQUITY
Consumer Products and Other:
Current portion of long-term debt		$	26,677			$	20,710
Accounts payable			310,109				333,683
Accrued and other current liabilities			272,383				313,617
Total current liabilities			609,169				668,010
Long-term debt			2,218,958				1,723,057
Equity conversion option of preferred stock			79,740				—
Employee benefit obligations			96,644				97,946
Deferred tax liabilities			312,789				277,843
Other liabilities			61,794				71,512
			3,379,094				2,838,368
Insurance:
Contractholder funds			14,684,482				—
Future policy benefits			3,626,275				—
Liability for policy and contract claims			77,303				—
Note payable			95,000				—
Other liabilities			466,029				—
			18,949,089				—
Total liabilities			22,328,183				2,838,368
Commitments and contingencies
Temporary equity:
Redeemable preferred stock			186,219				—
Harbinger Group Inc. stockholders’ equity:
Common stock			1,392				1,392
Additional paid-in capital			867,061				855,767
Accumulated deficit			(44,661	)			(150,309	)
Accumulated other comprehensive income (loss)			102,828				(5,195	)
Total Harbinger Group Inc. stockholders’ equity			926,620				701,655
Noncontrolling interest			478,803				476,172
Total permanent equity			1,405,423				1,177,827
Total liabilities and equity		$	23,919,825			$	4,016,195

See accompanying notes to condensed consolidated financial statements.

HARBINGER GROUP INC. AND SUBSIDIARIES

		Three Month Period Ended								Nine Month Period Ended
		July 3, 2011				July 4, 2010				July 3, 2011				July 4, 2010
		(Unaudited)								(Unaudited)
Revenues:
Consumer Products and Other:
Net sales		$	804,635			$	653,486			$	2,359,586			$	1,778,012
Insurance:
Premiums			25,118				—				25,118				—
Net investment income			176,885				—				176,885				—
Net investment gains			1,228				—				1,228				—
Insurance and investment product fees and other			26,424				—				26,424				—
			229,655				—				229,655				—
Total revenues			1,034,290				653,486				2,589,241				1,778,012
Operating costs and expenses:
Consumer Products and Other:
Cost of goods sold			510,941				400,617				1,511,215				1,131,101
Selling, general and administrative expenses			222,939				193,781				690,493				523,293
			733,880				594,398				2,201,708				1,654,394
Insurance:
Benefits and other changes in policy reserves			129,959				—				129,959				—
Acquisition and operating expenses, net of deferrals			28,595				—				28,595				—
Amortization of intangibles			21,340				—				21,340				—
			179,894				—				179,894				—
Total operating costs and expenses			913,774				594,398				2,381,602				1,654,394
Operating income			120,516				59,088				207,639				123,618
Interest expense			(51,904	)			(132,238	)			(192,650	)			(230,130	)
Bargain purchase gain from business acquisition			134,668				—				134,668				—
Other income (expense), net			7,086				(1,312	)			7,049				(8,296	)
Income (loss) from continuing operations before reorganization items and income taxes			210,366				(74,462	)			156,706				(114,808	)
Reorganization items expense, net			—				—				—				3,646
Income (loss) from continuing operations before income taxes			210,366				(74,462	)			156,706				(118,454	)
Income tax expense			3,720				12,460				63,906				45,016
Income (loss) from continuing operations			206,646				(86,922	)			92,800				(163,470	)
Loss from discontinued operations, net of tax			—				—				—				(2,735	)
Net income (loss)			206,646				(86,922	)			92,800				(166,205	)
Less: Net income (loss) attributable to noncontrolling interest			13,015				(35,304	)			(18,811	)			(35,304	)
Net income (loss) attributable to controlling interest			193,631				(51,618	)			111,611				(130,901	)
Less: Preferred stock dividends and accretion			5,963				—				5,963				—
Net income (loss) attributable to common and participating preferred stockholders		$	187,668			$	(51,618	)		$	105,648			$	(130,901	)
Basic and diluted income (loss) per common share attributable to controlling interest:
Continuing operations		$	1.03			$	(0.39	)		$	0.58			$	(0.98	)
Discontinued operations			—				—				—				(0.02	)
Net income (loss)		$	1.03			$	(0.39	)		$	0.58			$	(1.00	)

See accompanying notes to condensed consolidated financial statements.

HARBINGER GROUP INC. AND SUBSIDIARIES

		Nine Month Period Ended
		July 3, 2011				July 4, 2010
		(Unaudited)
Cash flows from operating activities:
Net income (loss)		$	92,800			$	(166,205	)
Loss from discontinued operations			—				(2,735	)
Income (loss) from continuing operations			92,800				(163,470	)
Adjustments to reconcile income (loss) from continuing operations to net cash used in continuing operating activities:
Bargain purchase gain from business acquisition			(134,668	)			—
Depreciation of properties			34,785				39,488
Amortization of intangibles			64,413				31,744
Stock-based compensation			22,902				12,280
Amortization of debt issuance costs			9,876				6,657
Amortization of debt discount			4,105				17,358
Write off of debt issuance costs on retired debt			15,420				6,551
Write off of unamortized discount on retired debt			8,950				59,162
Deferred income taxes			68,951				12,000
Interest credited/index credits to contractholder account balances			80,563				—
Amortization of fixed maturity discounts and premiums			35,221				—
Net recognized gains on investments and derivatives			(8,985	)			—
Charges assessed to contractholders for mortality and administration			(14,259	)			—
Deferred policy acquisition costs			(17,293	)			—
Cash transferred to reinsurer			(25,907	)			—
Administrative related reorganization items			—				3,646
Payments for administrative related reorganization items			—				(47,173	)
Non-cash increase to cost of goods sold due to fresh-start reporting inventory valuation			—				34,865
Non-cash interest expense on 12% Notes			—				20,317
Non-cash restructuring and related charges			8,312				10,355
Changes in operating assets and liabilities:
Receivables			(3,996	)			(2,736	)
Inventories			(17,340	)			(50,200	)
Prepaid expenses and other current assets			(11,695	)			(855	)
Accrued investment income			12,227				—
Reinsurance recoverable			(71,766	)			—
Accounts payable and accrued and other current liabilities			(114,782	)			(53,251	)
Future policy benefits			(5,736	)			—
Liability for policy and contract claims			16,903				—
Other operating			(92,425	)			18,479
Net cash used in continuing operating activities			(43,424	)			(44,783	)
Net cash used in discontinued operating activities			(291	)			(9,812	)
Net cash used in operating activities			(43,715	)			(54,595	)
Cash flows from investing activities:
Proceeds from investments sold, matured or repaid			1,114,541				—
Cost of investments acquired			(1,254,487	)			—
Acquisitions, net of cash acquired			684,417				(2,577	)
Capital expenditures			(27,649	)			(17,392	)
Cash acquired in common control transaction			—				65,780
Proceeds from sales of assets			7,185				260
Other investing activities, net			(2,369	)			—
Net cash provided by investing activities			521,638				46,071
Cash flows from financing activities:
Proceeds from senior secured notes			498,459				—
Proceeds from preferred stock issuance, net of issuance costs			269,000				—
Proceeds from new senior credit facilities, excluding new revolving credit facility, net of discount			—				1,474,755
Payment of extinguished senior credit facilities, excluding old revolving credit facility			(93,400	)			(1,278,760	)
Reduction of other debt			(905	)			(8,366	)
Proceeds from other debt financing			15,349				51,849
Debt issuance costs, net of refund			(26,976	)			(54,931	)
Revolving credit facility activity			55,000				(33,225	)
Payment of supplemental loan			—				(45,000	)
Prepayment penalty			(7,500	)			—
Contractholder account deposits			241,075				—
Contractholder account withdrawals			(491,182	)			—
Other financing activities, net			(1,447	)			(2,207	)
Net cash provided by financing activities			457,473				104,115
Effect of exchange rate changes on cash and cash equivalents			(2,414	)			(7,086	)
Effect of exchange rate changes on cash and cash equivalents due to Venezuela hyperinflation			—				(5,640	)
Net increase in cash and cash equivalents			932,982				82,865
Cash and cash equivalents at beginning of period			256,831				97,800
Cash and cash equivalents at end of period		$	1,189,813			$	180,665
Cash and cash equivalents — Consumer Products and Other		$	449,190			$	180,665
Cash and cash equivalents — Insurance			740,623				—
Total cash and cash equivalents at end of period		$	1,189,813			$	180,665

See accompanying notes to condensed consolidated financial statements.

HARBINGER GROUP INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Amounts in thousands, except per share figures)

(1) Description of Business and Basis of Presentation

Harbinger Group Inc. (“HGI” and, prior to June 16, 2010, its accounting predecessor as described below, collectively with their respective subsidiaries, the “Company”) is a diversified holding company that is 93.3% owned by Harbinger Capital Partners Master Fund I, Ltd. (the “Master Fund”), Global Opportunities Breakaway Ltd. and Harbinger Capital Partners Special Situations Fund, L.P. (together, the “Principal Stockholders”), not giving effect to the conversion of the Series A Participating Convertible Preferred Stock (the “Preferred Stock”) or the Series A-2 Participating Convertible Preferred Stock (the “Series A-2 Preferred Stock”) discussed in Note 9 and Note 22. HGI’s shares of common stock trade on the New York Stock Exchange (“NYSE”) under the symbol “HRG.”

HGI is focused on obtaining controlling equity stakes in companies that operate across a diversified set of industries. The Company has identified the following six sectors in which it intends to pursue investment opportunities: consumer products, insurance and financial products, telecommunications, agriculture, power generation and water and natural resources. In addition, the Company owns 98% of Zap.Com Corporation (“Zap.Com”), a public shell company that may seek assets or businesses to acquire.

On January 7, 2011, HGI completed the acquisition (the “Spectrum Brands Acquisition”) of a controlling financial interest in Spectrum Brands Holdings, Inc. (“Spectrum Brands”) under the terms of a contribution and exchange agreement (the “Exchange Agreement”) with the Principal Stockholders. The Principal Stockholders contributed approximately 54.5% of the then outstanding Spectrum Brands common stock to the Company and, in exchange for such contribution, the Company issued to the Principal Stockholders 119,910 shares of its common stock. As of July 3, 2011, the Principal Stockholders directly owned approximately 12.8% of the outstanding Spectrum Brands common stock. On July 20, 2011 and July 29, 2011, the Principal Stockholders sold approximately 5,495 and 824 shares, respectively, of the Spectrum Brands common stock they held and Spectrum Brands sold approximately 1,000 and 150 newly-issued shares, respectively, of its common stock in a public offering. As a result, the Company’s and the Principal Stockholders’ ownership of the outstanding common stock of Spectrum Brands was reduced to 53% and 0.3%, respectively.

Spectrum Brands was formed in connection with the combination (the “SB/RH Merger”) of Spectrum Brands, Inc. (“SBI”), a global branded consumer products company, and Russell Hobbs, Inc. (“Russell Hobbs”), a global branded small appliance company. The SB/RH Merger was consummated on June 16, 2010. As a result of the SB/RH Merger, both SBI and Russell Hobbs are wholly-owned subsidiaries of Spectrum Brands and Russell Hobbs is a wholly-owned subsidiary of SBI. Prior to the SB/RH Merger, the Principal Stockholders owned approximately 40% and 100% of the outstanding common stock of SBI and Russell Hobbs, respectively. Spectrum Brands issued an approximately 65% controlling financial interest to the Principal Stockholders and an approximately 35% noncontrolling financial interest to other stockholders (other than the Principal Stockholders) in the SB/RH Merger. Spectrum Brands trades on the NYSE under the symbol “SPB.”

Immediately prior to the Spectrum Brands Acquisition, the Principal Stockholders held controlling financial interests in both HGI and Spectrum Brands. As a result, the Spectrum Brands Acquisition is considered a transaction between entities under common control under Accounting Standards Codification (“ASC”) Topic 805 — “Business Combinations,” and is accounted for similar to the pooling of interest method. In accordance with the guidance in ASC Topic 805, the assets and liabilities transferred between entities under common control are recorded by the receiving entity based on their carrying amounts (or at the historical cost basis of the parent, if these amounts differ). Although HGI was the issuer of shares in the Spectrum Brands Acquisition, during the historical periods presented Spectrum Brands was an operating business and HGI was not. Therefore, Spectrum Brands has been reflected as the predecessor and receiving entity in the Company’s financial statements to provide a more meaningful presentation of the transaction to the Company’s stockholders. Accordingly, the Company’s financial statements have been retrospectively adjusted to reflect as the Company’s historical financial statements, those of SBI prior to June 16, 2010 and the combination of Spectrum Brands, HGI and HGI’s other subsidiaries thereafter. HGI’s assets and liabilities have been recorded at the Principal Stockholders’ basis as of June 16, 2010, the date that common control was first established. As SBI was the accounting acquirer in the SB/RH Merger, the financial statements of SBI are included as the Company’s predecessor entity for periods preceding the June 16, 2010 date of the SB/RH Merger.

In connection with the Spectrum Brands Acquisition, the Company changed its fiscal year end from December 31 to September 30 to

conform to the fiscal year end of Spectrum Brands. As a result of this change in fiscal year end, the Company’s quarterly reporting periods for fiscal year 2011, subsequent to the Spectrum Brands Acquisition, ended on April 3, 2011 and July 3, 2011.

As discussed further in Note 17, on April 6, 2011 (the “FGL Acquisition Date”), the Company acquired Fidelity & Guaranty Life Holdings, Inc. (formerly, Old Mutual U.S. Life Holdings, Inc.), a Delaware corporation (“FGL”), from OM Group (UK) Limited (“OMGUK”). Such acquisition (the “FGL Acquisition”) has been accounted for using the acquisition method of accounting. Accordingly, the results of FGL’s operations have been included in the Company’s Condensed Consolidated Financial Statements commencing April 6, 2011.

FGL’s primary business is the sale of individual life insurance products and annuities through independent agents, managing general agents, and specialty brokerage firms and in selected institutional markets. FGL’s principal products are deferred annuities (including fixed indexed annuities), immediate annuities and life insurance products. FGL markets products through its wholly-owned insurance subsidiaries, Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) and Fidelity & Guaranty Life Insurance Company of New York (“FGL Insurance NY”), which together are licensed in all fifty states and the District of Columbia.

As a result of the Spectrum Brands Acquisition and the FGL Acquisition, the Company currently operates in two business segments, consumer products and insurance (see Note 21 for segment data).

The accompanying unaudited Condensed Consolidated Financial Statements of the Company (which present SBI as the accounting predecessor prior to June 16, 2010) 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, except for the FGL purchase accounting adjustments discussed in Note 17. Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote 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 (“US GAAP”), have been condensed or omitted pursuant to such rules and regulations. These interim financial statements should be read in conjunction with the Company’s retrospectively adjusted annual consolidated financial statements and notes thereto which are included in the Company’s Current Report on Form 8-K filed with the SEC on June 10, 2011. The results of operations for the nine months ended July 3, 2011 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending September 30, 2011.

(2) Comprehensive Income (Loss)

Comprehensive income (loss) and the components of other comprehensive income (loss), net of tax, for the three and nine month periods ended July 3, 2011 and July 4, 2010 are as follows:

		Three Months								Nine Months
		2011				2010				2011				2010
Net income (loss)		$	206,646			$	(86,922	)		$	92,800			$	(166,205	)
Other comprehensive income (loss):
Consumer Products and Other:
Foreign currency translation			13,139				(2,870	)			33,009				(9,306	)
Valuation allowance adjustments			(216	)			668				860				(2,453	)
Pension liability adjustments			—				—				—				(52	)
Net unrealized (loss) on derivative instruments			(653	)			1,548				(3,718	)			(1,850	)
			12,270				(654	)			30,151				(13,661	)
Insurance:
Unrealized investment gains (losses):
Changes in unrealized investment gains before reclassification adjustment			227,381				—				227,381				—
Net reclassification adjustment for gains included in net income			(15,032	)			—				(15,032	)			—
Changes in unrealized investment gains after reclassification adjustment			212,349				—				212,349				—
Adjustments to intangible assets			(71,344	)			—				(71,344	)			—
Changes in deferred income tax asset/liability			(49,352	)			—				(49,352	)			—
Net unrealized gain on investments			91,653				—				91,653				—
Non-credit related other-than-temporary impairment:
Changes in non-credit related other-than-temporary impairment			(144	)			—				(144	)			—
Adjustments to intangible assets			48				—				48				—
Changes in deferred income tax asset/liability			34				—				34				—
Net non-credit related other-than-temporary impairment			(62	)			—				(62	)			—
Net change to derive comprehensive loss for the period			103,861				(654	)			121,742				(13,661	)
Comprehensive income (loss)			310,507				(87,576	)			214,542				(179,866	)
Less: Comprehensive income (loss) attributable to the noncontrolling interest:
Net income (loss)			13,015				(35,304	)			(18,811	)			(35,304	)
Other comprehensive income (loss)			5,583				3,506				13,719				3,506
			18,598				(31,798	)			(5,092	)			(31,798	)
Comprehensive income (loss) attributable to the controlling interest		$	291,909			$	(55,778	)		$	219,634			$	(148,068	)

Net exchange gains or losses resulting from the translation of assets and liabilities of foreign subsidiaries are accumulated, net of taxes and noncontrolling interest, in the “Accumulated other comprehensive income (loss)” (“AOCI”) section of HGI’s stockholders’ equity. Also included are the effects of exchange rate changes on intercompany balances of a long-term nature and transactions designated as hedges of net foreign investments.

The changes in accumulated foreign currency translation for the three and nine month periods ended July 3, 2011 and July 4, 2010 were primarily attributable to the impact of translation of the net assets of the Company’s European and Latin American operations, primarily denominated in Euros, Pounds Sterling and Brazilian Real.

Net unrealized gains and losses on investment securities classified as available-for-sale are reduced by deferred income taxes and adjustments to intangible assets, including value of business acquired (“VOBA”) and deferred policy acquisition costs (“DAC”), that would have resulted had such gains and losses been realized. Changes in net unrealized gains and losses on investment securities classified as available-for-sale are recognized in other comprehensive income and loss. See Note 7 for additional disclosures regarding VOBA and DAC.

(3) Investments

Consumer Products and Other

HGI’s short-term investments consist of (1) marketable equity and debt securities classified as trading and carried at fair value with unrealized gains and losses recognized in earnings, including certain securities for which the Company has elected the fair value option under ASC 825, Financial Instruments, which would otherwise have been classified as available-for-sale, and (2) U.S. Treasury securities and a certificate of deposit classified as held to maturity and carried at amortized cost, which approximates fair value. The Company’s short-term investments are summarized as follows:

		July 3,				September 30,
		2011				2010
Trading:
Marketable equity securities		$	103,408			$	—
Marketable debt securities			778				—
			104,186				—
Held to maturity:
U.S. Treasury securities			35,609				53,965
Certificate of deposit			250				—
			35,859				53,965
Total		$	140,045			$	53,965

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

Insurance

FGL’s debt and equity securities have been designated as available-for-sale and are carried at fair value with unrealized gains and losses included in AOCI, net of associated VOBA, DAC and deferred income taxes. The amortized cost, gross unrealized gains (losses), and fair value of available-for-sale securities of FGL at July 3, 2011 were as follows:

						Gross Unrealized				Gross Unrealized
		Amortized Cost				Gains				Losses				Fair Value
Available-for-sale securities
Asset-backed securities		$	514,291			$	5,849			$	(261	)		$	519,879
Commercial mortgage-backed securities			614,912				8,304				(6,341	)			616,875
Corporates			11,642,202				188,997				(21,909	)			11,809,290
Equities			308,939				3,612				(2,206	)			310,345
Hybrids			707,553				10,645				(4,411	)			713,787
Municipals			801,505				32,970				(503	)			833,972
Agency residential mortgage-backed securities			225,751				2,563				(203	)			228,111
Non-agency residential mortgage-backed securities			531,932				6,202				(13,298	)			524,836
U.S. Government			465,284				2,512				(318	)			467,478
Total available-for-sale securities		$	15,812,369			$	261,654			$	(49,450	)		$	16,024,573

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

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

Corporate, Municipal and U.S. Government securities:			Amortized Cost				Fair Value
Due in one year or less		$	365,252			$	366,031
Due after one year through five years			2,853,640				2,886,449
Due after five years through ten years			4,606,324				4,685,515
Due after ten years			5,083,775				5,172,745
Subtotal			12,908,991				13,110,740
Other securities which provide for periodic payments:
Asset-backed securities			514,291				519,879
Commercial mortgage-backed securities			614,912				616,875
Hybrids			707,553				713,787
Agency residential mortgage-backed securities			225,751				228,111
Non-agency residential mortgage-backed securities			531,932				524,836
Total fixed maturity available-for-sale securities		$	15,503,430			$	15,714,228

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

As part of FGL’s ongoing securities monitoring process, FGL evaluates whether securities in an unrealized loss position could potentially be other-than-temporarily impaired. FGL has concluded that the declines in fair values of the securities in the sectors presented in the tables below were not other-than-temporary impairments as of July 3, 2011, except for the non-credit portion of other-than-temporary impairments of non-agency residential mortgage-backed securities of $144. This conclusion is derived from the issuers’ continued satisfaction of the securities’ obligations in accordance with their contractual terms along with the expectation that they will continue to do so, including an assessment of the issuers’ financial condition, and other objective evidence. Also contributing to this conclusion is its determination that it is more likely than not that FGL will not be required to sell these securities prior to recovery. As it specifically relates to asset-backed securities and commercial mortgage-backed securities, the present value of cash flows expected to be collected is at least the amount of the amortized cost basis of the security and FGL management has a lack of intent to sell these securities for a period of time sufficient to allow for any anticipated recovery in fair value.

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

		July 3, 2011
						Gross Unrealized
		Fair Value				Losses
Available-for-sale securities
Asset-backed securities		$	48,060			$	(261	)
Commercial mortgage-backed securities			271,584				(6,341	)
Corporates			1,766,048				(21,909	)
Equities			72,111				(2,206	)
Hybrids			277,085				(4,411	)
Municipals			46,997				(503	)
Agency residential mortgage-backed securities			14,016				(203	)
Non-agency residential mortgage-backed securities			350,286				(13,298	)
U.S. Government			229,270				(318	)
Total available-for-sale securities		$	3,075,457			$	(49,450	)
Total number of available-for-sale securities in an unrealized loss position							298

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

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

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

Net Investment Income

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

		For the period
		April 6, 2011 to
		July 3, 2011
Fixed maturity available-for-sale securities		$	174,181
Equity available-for-sale securities			5,641
Policy loans			800
Invested cash and short-term investments			72
Other investments			(291	)
Gross investment income			180,403
Investment expense			(3,518	)
Net investment income		$	176,885

Net Investment Gains (Losses)

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

		For the period
		April 6, 2011 to
		July 3, 2011
Net realized gain on fixed maturity available-for-sale securities		$	15,137
Realized (loss) on equity securities			(105	)
Net realized gains on securities			15,032
Realized (loss) on certain derivative instruments			(3,258	)
Unrealized (loss) on certain derivative instruments			(10,546	)
Change in fair value of derivatives			(13,804	)
Net investment gains		$	1,228

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

		For the period
		April 6, 2011 to
		July 3, 2011
Total other-than-temporarily impaired		$	(1,403	)
Portion of other-than-temporarily impaired included in other comprehensive income			144
			(1,259	)
Other investment gains			16,291
Net realized gains on securities		$	15,032

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

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

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

		Nine Months
		Ended
		July 3, 2011
Proceeds from investments sold, matured or repaid:
Available-for-sale		$	648,243
Held-to-maturity			70,792
Trading			331,417
Derivatives and other			64,089
		$	1,114,541
Cost of investments acquired:
Available-for-sale		$	(730,468	)
Held-to-maturity			(52,682	)
Trading			(433,810	)
Derivatives and other			(37,527	)
		$	(1,254,487	)

Concentrations of Financial Instruments

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

(4) Derivative Financial Instruments

HGI

As of July 3, 2011, the Company had outstanding Preferred Stock that contained a conversion option (see Note 9). If the Company were to issue certain equity securities at a price lower than the conversion price of the Preferred Stock, the conversion price would be adjusted to the share price of the newly issued equity securities (a “down round” provision). Therefore, in accordance with the guidance in ASC 815, Derivatives and Hedging, this conversion option is considered to be an embedded derivative that must be separately accounted for as a liability at fair value with any changes in fair value reported in current earnings. This embedded derivative has been bifurcated from its host contract, marked to fair value and included in “Equity conversion option of preferred stock” in the “Consumer Products and Other” sections of the accompanying Condensed Consolidated Balance Sheet with the change in fair value included as a component of “Other income (expense), net” in the Condensed Consolidated Statements of Operations. The Company valued the conversion feature using the Monte Carlo simulation approach, which utilizes various inputs including the Company’s stock price, volatility, risk free rate and discount yield.

The estimated fair value of the bifurcated conversion option at July 3, 2011 was $79,740. The Company recorded income of $5,960 in “Other income (expense), net” due to a change in fair value from the May 13, 2011 issue date.

Spectrum Brands

Derivative financial instruments are used by Spectrum Brands principally in the management of its interest rate, foreign currency and raw material price exposures. Spectrum Brands does not hold or issue derivative financial instruments for trading purposes. When hedge accounting is elected at inception, Spectrum Brands formally designates the financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. Spectrum Brands formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also immediately recognized in earnings.

The fair value of outstanding derivative contracts recorded in the “Consumer Products and Other” sections of the accompanying Condensed Consolidated Balance Sheet were as follows:

Asset Derivatives		Classification		July 3, 2011				September 30, 2010
Derivatives designated as hedging instruments:
Commodity contracts		Receivables		$	1,997			$	2,371
Commodity contracts		Deferred charges and other assets			1,424				1,543
Foreign exchange contracts		Receivables			588				20
Foreign exchange contracts		Deferred charges and other assets			2				55
Total asset derivatives designated as hedging instruments					4,011				3,989
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Receivables			38				—
Total asset derivatives				$	4,049			$	3,989

Liability Derivatives		Classification		July 3, 2011				September 30, 2010
Derivatives designated as hedging instruments:
Interest rate contracts		Accounts payable		$	2,620			$	3,734
Interest rate contracts		Accrued and other current liabilities			854				861
Interest rate contracts		Other liabilities			—				2,032
Commodity contracts		Accounts payable			105				—
Foreign exchange contracts		Accounts payable			13,644				6,544
Foreign exchange contracts		Other liabilities			1,517				1,057
Total liability derivatives designated as hedging instruments					18,740				14,228
Derivatives not designated as hedging instruments:
Foreign exchange contracts		Accounts payable			15,520				9,698
Foreign exchange contracts		Other liabilities			22,669				20,887
Total liability derivatives				$	56,929			$	44,813

Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.

The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations for the three and nine month periods ended July 3, 2011 and July 4, 2010:

																		Amount of Gain ( Loss)
																		Recognized in Income on
		Amount of Gain (Loss)								Amount of Gain (Loss)								Derivatives (Ineffective
Derivatives in Cash Flow Hedging		Recognized in AOCI on Derivatives								Reclassified from AOCI into Income								Portion and Amount Excluded from								Location of Gain (Loss) Recognized
Relationships		(Effective Portion)								(Effective Portion)								Effectivess Testing)								in Income on
Three Months		2011				2010				2011				2010				2011				2010			Derivatives
Commodity contracts		$	(109	)		$	(4,647	)		$	587			$	155			$	16			$	(73	)		Cost of goods sold
Interest rate contracts			(42	)			(998	)			(839	)			(587	)			(44	)			(5,845)	(A)		Interest expense
Foreign exchange contracts			(11	)			(864	)			105				(216	)			—				—			Net sales
Foreign exchange contracts			(5,011	)			5,820				(4,346	)			1,601				—				—			Cost of goods sold
Total		$	(5,173	)		$	(689	)		$	(4,493	)		$	953			$	(28	)		$	(5,918	)
Nine Months		2011				2010				2011				2010				2011				2010
Commodity contracts		$	1,764			$	(2,201	)		$	1,921			$	1,106			$	17			$	68			Cost of goods sold
Interest rate contracts			(102	)			(12,644	)			(2,527	)			(3,565	)			(294	)			(5,845)	(A)		Interest expense
Foreign exchange contracts			216				(1,214	)			(102	)			(402	)			—				—			Net sales
Foreign exchange contracts			(15,801	)			7,865				(8,438	)			1,382				—				—			Cost of goods sold
Total		$	(13,923	)		$	(8,194	)		$	(9,146	)		$	(1,479	)		$	(277	)		$	(5,777	)

Fair Value Contracts

For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign exchange payments, commodity purchases and interest rate payments, the gain (loss) is recognized in earnings in the period of change associated with the derivative contract. During the three and nine month periods ended July 3, 2011 and July 4, 2010 Spectrum Brands recognized the following gains (losses) on these derivative contracts:

		Amount of Gain (Loss) Recognized in Income on Derivatives																Location of Gain (Loss)
Derivatives Not Designated		Three Months								Nine Months								Recognized in Income on
as Hedging Instruments		2011				2010				2011				2010				Derivatives
Commodity contracts		$	—			$	(53	)		$	—			$	99			Cost of goods sold
Foreign exchange contracts			(7,578	)			(9,538	)			(17,468	)			(11,827	)		Other income (expense), net
Total		$	(7,578	)		$	(9,591	)		$	(17,468	)		$	(11,728	)

Additional Disclosures

Cash Flow Hedges

Spectrum Brands uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At July 3, 2011, Spectrum Brands had a portfolio of U.S. dollar denominated interest rate swaps outstanding, which effectively fix the interest on floating rate debt (exclusive of lender spreads), as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012. At September 30, 2010, Spectrum Brands had a portfolio of U.S. dollar-denominated interest rate swaps outstanding, which effectively fixed the interest on floating rate debt (exclusive of lender spreads), as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012 (the “U.S. dollar swaps”). The derivative net loss on these contracts recorded in AOCI at July 3, 2011 was $(639), net of tax benefit of $718 and noncontrolling interest of $533. The derivative net loss on the U.S. dollar swaps contracts recorded in AOCI at September 30, 2010 was $(1,458), net of tax benefit of $1,640 and noncontrolling interest of $1,217. At July 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(639), net of tax and noncontrolling interest.

Spectrum Brands periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign denominated third party and intercompany sales or payments. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales or 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 sales” or purchase price variance in “Cost of goods sold”. At July 3, 2011, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2012 with a contract value of $270,955. At September 30, 2010, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through June 2012 with a contract value of $299,993. The derivative net loss on these contracts recorded in AOCI at July 3, 2011 was $(5,614), net of tax benefit of $4,270 and noncontrolling interest of $4,687. The derivative net loss on these contracts recorded in AOCI at September 30, 2010 was $(2,900), net of tax benefit of $2,204 and noncontrolling interest of $2,422. At July 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(5,042) net of tax and noncontrolling interest.

Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with 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 July 3, 2011, Spectrum Brands had

a series of such swap contracts outstanding through September 2012 for 10 tons of raw materials with a contract value of $20,872. At September 30, 2010, Spectrum Brands had a series of such swap contracts outstanding through September 2012 for 15 tons of raw materials with a contract value of $28,897. The derivative net gain on these contracts recorded in AOCI at July 3, 2011 was $1,173, net of tax expense of $1,147 and noncontrolling interest of $980. The derivative net gain on these contracts recorded in AOCI at September 30, 2010 was $1,230, net of tax expense of $1,201 and noncontrolling interest of $1,026. At July 3, 2011, the portion of derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $679, net of tax and noncontrolling interest.

Fair Value Contracts

Spectrum Brands periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros or Australian Dollars. These foreign exchange contracts are economic 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 July 3, 2011 and September 30, 2010, Spectrum Brands had $277,510 and $333,562, respectively, of notional value for such foreign exchange derivative contracts outstanding.

Credit Risk

Spectrum Brands is exposed to the default risk of the counterparties with which Spectrum Brands transacts. Spectrum Brands monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are primarily concentrated with a foreign financial institution counterparty. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which were $62 and $75 at July 3, 2011 and September 30, 2010, respectively. Additionally, Spectrum Brands does not require collateral or other security to support financial instruments subject to credit risk.

Spectrum Brands’ standard contracts do not contain credit risk related contingent features whereby Spectrum Brands would be required to post additional cash collateral as a result of a credit event. However, Spectrum Brands is typically required to post collateral in the normal course of business to offset its liability positions. At both July 3, 2011 and September 30, 2010, Spectrum Brands had posted cash collateral of $294 and $2,363, respectively, related to such liability positions. In addition, at both July 3, 2011 and September 30, 2010, Spectrum Brands had posted standby letters of credit of $2,000 and $4,000 related to such liability positions. The cash collateral is included in “Receivables, net” within the accompanying Condensed Consolidated Balance Sheets.

FGL

FGL recognizes all derivative instruments as assets or liabilities in the Condensed Consolidated Balance Sheet at fair value and any changes in the fair value of the derivatives are recognized immediately in the Condensed Consolidated Statements of Operations. The fair value of derivative instruments, including derivative instruments embedded in Fixed Index Annuity (“FIA”) contracts, is as follows:

		July 3, 2011
Assets:
Derivative investments:
Call options		$	203,671
Futures contracts			1,514
		$	205,185
Liabilities:
Contractholder funds:
FIA embedded derivatives		$	1,444,506
Other liabilities:
Available-for-sale embedded derivative			411
		$	1,444,917

The change in fair value of derivative instruments included in the Condensed Consolidated Statements of Operations is as follows:

		For the period
		April 6, 2011 to
		July 3, 2011
Revenues:
Net investment gains (losses):
Call options		$	(15,400	)
Futures contracts			1,596
			(13,804	)
Net investment income:
Available-for-sale embedded derivatives			8
		$	(13,796	)
Benefits and other changes in policy reserves:
FIA embedded derivatives		$	(21,802	)

FGL has 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 S&P 500 Index. This feature represents an embedded derivative. The FIA embedded derivative is valued at fair value and included in the liability for contractholder funds in the Condensed Consolidated Balance Sheet with changes in fair value included as a component of benefits and other changes in policy reserves in the Condensed Consolidated Statements of Operations.

When FIA deposits are received from policyholders, a portion of the deposit is used to purchase derivatives consisting of a combination of call options and futures contracts on the applicable market indices to fund the index credits due to FIA contractholders. The majority of all such call options are one year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the interest credit is reset and FGL purchases new one, two or three year call options to fund the next index credit. FGL manages the cost of these purchases through the terms of its FIA contracts, which permit FGL to change caps or participation rates, subject to guaranteed minimums on each contract’s anniversary date. The change in the fair value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA embedded derivative related to index performance. The call options and futures contracts are marked to fair value with the change in fair value included as a component of net investment gains (losses). The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instrument term or upon early termination and the changes in fair value of open positions.

Other market exposures are hedged periodically depending on market conditions and FGL’s risk tolerance. FGL’s FIA hedging

strategy economically hedges the equity returns and exposes FGL to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. FGL uses a variety of techniques including direct estimation of market sensitivities and value-at-risk to monitor this risk daily. FGL intends to continue to adjust the hedging strategy as market conditions and FGL’s risk tolerance change.

FGL is exposed to credit loss in the event of nonperformance by its counterparties on the call options and reflects assumptions regarding this nonperformance risk in the fair value of the call options. The nonperformance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. The credit risk associated with such agreements is minimized by purchasing such agreements from several financial institutions with ratings above “A3” from Moody’s Investor Services or “A-” from Standard and Poor’s Corporation. Additionally, FGL maintains a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.

Information regarding FGL’s exposure to credit loss on the call options it holds is presented in the following table:

						July 3, 2011
						Notional								Collateral				Net Credit
Counterparty		Credit Rating				Amount				Fair Value				Held				Risk
Barclay’s Bank		Aa3				$	410,820			$	20,158			$	—			$	20,158
Credit Suisse		Aa1					436,595				22,265				19,360				2,905
Bank of America			A2				1,543,319				55,171				—				55,171
Deutsche Bank		Aa3					1,570,408				51,411				18,013				33,398
Morgan Stanley			A2				1,655,489				54,666				28,085				26,581
						$	5,616,631			$	203,671			$	65,458			$	138,213

In addition to the collateral presented in the table above, FGL has fixed maturity securities of $20,190 pledged as collateral by Bank of America which are considered off balance sheet and therefore not recorded in the Condensed Consolidated Financial Statements as of July 3, 2011. FGL holds cash and cash equivalents received from counterparties for call option collateral, which is included in “Other liabilities” in the “Insurance” sections of the Condensed Consolidated Balance Sheet. Both the cash and cash equivalents and fixed maturity securities held as collateral limit the maximum amount of loss due to credit risk that FGL would incur if parties to the call options failed completely to perform according to the terms of the contracts to $118,023 at July 3, 2011.

FGL is required to maintain minimum ratings as a matter of routine practice in its ISDA agreements. Under some ISDA agreements, FGL has agreed to maintain certain financial strength ratings. A downgrade below these levels could result in termination of the open derivative contracts between the parties, at which time any amounts payable by FGL or the counterparty would be dependent on the market value of the underlying derivative contracts. Downgrades of FGL have given multiple counterparties the right to terminate ISDA agreements. No ISDA agreements have been terminated, although the counterparties have reserved the right to terminate the ISDA agreements at any time. In certain transactions, FGL and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. Downgrades of FGL’s ratings have increased the threshold amount in FGL’s collateral support agreements, reducing the amount of collateral held and increasing the credit risk to which FGL is exposed.

FGL held 2,679 futures contracts at July 3, 2011. The fair value of futures contracts represents the cumulative unsettled variation margin. FGL provides cash collateral to the counterparties for the initial and variation margin on the futures contracts which is included in “Cash and cash equivalents” in the “Insurance” sections of the Condensed Consolidated Balance Sheet. The amount of collateral held by the counterparties for such contracts at July 3, 2011 was $10,698.

(5) Fair Value of Financial Instruments

The Company’s measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset or non-performance risk, which may include the Company’s own credit risk. The Company’s estimate of an exchange price is the price in an orderly transaction between market participants to sell the

asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). The Company categorizes financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:

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

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

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

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

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

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

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