(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.
Concentrations of Investments
As of December 31, 2015 and September 30, 2015, the Company’s most significant investment in one industry, was the Company’s asset-based loan in the electronics industry with a carrying value of $45.5, or 29.2%, and $45.9, or 16.5%, of the Company’s invested assets portfolio, respectively, and the only investment in a single issuer that exceeded 10% of the Company’s stockholders’ equity as of December 31, 2015.
Concentration of Securities Included in Funds Withheld Receivables
As of December 31, 2015 and September 30, 2015, 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, 2015 and September 30, 2015, the carrying value of the fixed maturity securities in the financial sector was $267.7, or 16.1%, and $269.7, or 15.8%, respectively, of Front Street’s funds withheld receivables. At December 31, 2015 and September 30, 2015, the holdings in this sector included investments in 113 and 107 different issuers, respectively, with the top ten investments accounting for 41.8% and 41.0%, respectively, of the total holdings in this sector.
As of December 31, 2015 and September 30, 2015, the carrying value of the fixed maturity securities in the energy, mining and metals industries was $210.6, or 12.7%, and $236.6, or 13.8%, respectively, of Front Street’s funds withheld receivables. At December 31, 2015 and September 30, 2015, the holdings in these industries included investments in 101 and 98 different issuers, respectively, with the top ten investments accounting for 40.2% and 39.7%, 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, 2015.
Concentrations of Financial and Capital Markets Risk
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 interest rate 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 funds 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 the high level of surrender charge protection provided by the products reinsured by Front Street.
Receivables
The allowance for uncollectible receivables as of December 31, 2015 and September 30, 2015 was $43.6 and $44.0, respectively. 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 9.8% and 12.7% of the Company’s Receivables, net at December 31, 2015 and September 30, 2015, respectively.
(4) Divestitures
FGL Merger Agreement
On November 8, 2015, FGL, Anbang, AB Infinity, and Merger Sub entered into the FGL Merger Agreement. Pursuant to the FGL Merger Agreement and subject to the terms and conditions set forth therein, Merger Sub will merge with and into FGL, with FGL continuing as the surviving entity, which will become a direct, wholly-owned subsidiary of AB Infinity and an indirect, wholly-owned subsidiary of Anbang. Pursuant to the FGL Merger Agreement, at the effective time of the FGL Merger, each issued and outstanding share of FGL common stock will be canceled and converted automatically into the right to receive $26.80 per share in cash, without interest, other than any shares of common stock owned by FGL as treasury stock or otherwise or owned by Anbang, AB Infinity or Merger Sub (which will be canceled and no payment will be made with respect thereto), shares of common stock
