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10-Q
HRG GROUP, INC. filed this Form 10-Q on 08/09/2016
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
Form 10-Q
 
 
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2016
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to
Commission file number: 1-4219
 
 
 
HRG Group, Inc.
(Exact name of registrant as specified in its charter)
 
 
 

Delaware
74-1339132
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
450 Park Avenue, 29th Floor
New York, NY
10022
(Address of principal executive offices)
(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  x    or    No  ¨.
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  x    or    No  ¨.
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.
Large Accelerated Filer
x
 
Accelerated Filer
¨
Non-accelerated Filer
¨
(Do not check if a smaller reporting company)
Smaller reporting company
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    or    No  x
There were 200,783,392 shares of the registrant’s common stock outstanding as of August 4, 2016.
 


HRG GROUP, INC.
TABLE OF CONTENTS
 
PART I. FINANCIAL INFORMATION
Page
PART II. OTHER INFORMATION
 

2

PART I: FINANCIAL INFORMATION
Item 1.    Financial Statements
HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions)
 
June 30,
2016
 
September 30,
2015
 
(Unaudited)
 
(As Adjusted)
ASSETS
 
 
 
Investments
$
50.7

 
$
278.9

Cash and cash equivalents
487.5

 
695.2

Funds withheld receivables
1,661.0

 
1,710.1

Receivables, net
658.3

 
632.9

Inventories, net
842.3

 
780.8

Deferred tax assets
279.3

 
51.2

Properties, including oil and natural gas properties, net
639.1

 
798.4

Goodwill
2,479.7

 
2,487.4

Intangibles
2,399.6

 
2,480.3

Other assets
148.4

 
134.3

Assets of business held for sale
26,164.9

 
24,984.5

Total assets
$
35,810.8

 
$
35,034.0

 
 
 
 
LIABILITIES AND EQUITY
 
 
 
Insurance reserves
$
1,752.1

 
$
1,856.0

Debt
5,944.5

 
6,310.5

Accounts payable and other current liabilities
902.4

 
1,095.6

Employee benefit obligations
87.5

 
92.9

Deferred tax liabilities
815.3

 
574.5

Other liabilities
64.3

 
95.5

Liabilities of business held for sale
24,556.1

 
23,420.9

Total liabilities
34,122.2

 
33,445.9

 
 
 
 
 Commitments and contingencies
 
 
 
 
 
 
 
 HRG Group, Inc. shareholders' equity:
 
 
 
Common stock
2.0

 
2.0

Additional paid-in capital
1,447.1

 
1,458.5

Accumulated deficit
(1,024.6
)
 
(833.1
)
Accumulated other comprehensive income (loss)
130.9

 
(40.7
)
Total HRG Group, Inc. shareholders' equity
555.4

 
586.7

 Noncontrolling interest
1,133.2

 
1,001.4

Total shareholders' equity
1,688.6

 
1,588.1

Total liabilities and equity
$
35,810.8

 
$
35,034.0

See accompanying notes to condensed consolidated financial statements.

3

HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In millions, except per share data)
 
Three months ended June 30,
 
Nine months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Net consumer and other product sales
$
1,361.6

 
$
1,249.7

 
$
3,790.0

 
$
3,425.0

Oil and natural gas
9.7

 
24.3

 
36.0

 
84.6

Net investment income
16.3

 
21.5

 
53.3

 
65.4

Net investment gains (losses)
57.4

 
(70.2
)
 
64.6

 
(65.4
)
Insurance and investment product fees and other
2.1

 
1.9

 
6.2

 
5.1

Total revenues
1,447.1

 
1,227.2

 
3,950.1

 
3,514.7

Operating costs and expenses:
 
 
 
 
 
 
 
Cost of consumer products and other goods sold
830.9

 
791.3

 
2,355.8

 
2,210.3

Oil and natural gas direct operating costs
9.1

 
22.3

 
35.4

 
66.1

Benefits and other changes in policy reserves
30.5

 
(16.4
)
 
74.3

 
33.9

Selling, acquisition, operating and general expenses
328.7

 
369.6

 
947.8

 
1,030.0

Impairments and bad debt expense
15.7

 
112.6

 
106.5

 
577.0

Amortization of intangibles
23.5

 
22.3

 
70.5

 
64.0

Total operating costs and expenses
1,238.4

 
1,301.7

 
3,590.3

 
3,981.3

Operating income (loss)
208.7

 
(74.5
)
 
359.8

 
(466.6
)
Interest expense
(98.4
)
 
(149.1
)
 
(291.7
)
 
(306.6
)
Gain on sale of oil and gas properties
—

 
—

 
105.6

 
—

Gain on deconsolidation of subsidiary
—

 
38.5

 
—

 
38.5

Gain upon gaining control of equity method investment
—

 
—

 
—

 
141.2

Other (expense) income, net
(3.3
)
 
3.0

 
(1.7
)
 
49.9

Income (loss) from continuing operations before income taxes
107.0

 
(182.1
)
 
172.0

 
(543.6
)
Income tax benefit
(8.4
)
 
(37.8
)
 
(15.0
)
 
(32.6
)
Net income (loss) from continuing operations
115.4

 
(144.3
)
 
187.0

 
(511.0
)
(Loss) income from discontinued operations, net of tax
(208.4
)
 
102.9

 
(257.1
)
 
125.7

Net loss
(93.0
)
 
(41.4
)
 
(70.1
)
 
(385.3
)
Less: Net income attributable to noncontrolling interest
39.9

 
34.2

 
121.4

 
28.4

Net loss attributable to controlling interest
$
(132.9
)
 
$
(75.6
)
 
$
(191.5
)
 
$
(413.7
)
 
 
 
 
 
 
 
 
Amounts attributable to controlling interest:
 
 
 
 
 
 
 
Net income (loss) from continuing operations
$
77.4

 
$
(161.9
)
 
$
78.7

 
$
(522.3
)
Net (loss) income from discontinued operations
(210.3
)
 
86.3

 
(270.2
)
 
108.6

Net loss attributable to controlling interest
$
(132.9
)
 
$
(75.6
)
 
$
(191.5
)
 
$
(413.7
)
 
 
 
 
 
 
 
 
Net loss per common share attributable to controlling interest:
 
 
 
 
 
 
 
Basic income (loss) from continuing operations
$
0.39

 
$
(0.82
)
 
$
0.40

 
$
(2.64
)
Basic (loss) income from discontinued operations
(1.06
)
 
0.44

 
(1.37
)
 
0.55

Basic
$
(0.67
)
 
$
(0.38
)
 
$
(0.97
)
 
$
(2.09
)
 
 
 
 
 
 
 
 
Diluted income (loss) from continuing operations
$
0.38

 
$
(0.82
)
 
$
0.39

 
$
(2.64
)
Diluted (loss) income from discontinued operations
(1.04
)
 
0.44

 
(1.34
)
 
0.55

Diluted
$
(0.66
)
 
$
(0.38
)
 
$
(0.95
)
 
$
(2.09
)
See accompanying notes to condensed consolidated financial statements.



4

HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In millions)
 
Three months ended June 30,
 
Nine months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Unaudited)
 
(Unaudited)
Net loss
$
(93.0
)
 
$
(41.4
)
 
$
(70.1
)
 
$
(385.3
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss)
 
 
 
 
 
 
 
Foreign currency translation (loss) gain
(13.7
)
 
9.5

 
(6.0
)
 
(68.6
)
Net unrealized gain (loss) on derivative instruments
 
 
 
 
 
 
 
Changes in derivative instruments before reclassification adjustment
9.6

 
(7.8
)
 
8.8

 
9.3

Net reclassification adjustment for losses (gains) included in net income
1.1

 
(8.1
)
 
0.2

 
(19.9
)
Changes in derivative instruments after reclassification adjustment
10.7

 
(15.9
)
 
9.0

 
(10.6
)
Changes in deferred income tax asset/liability
(2.9
)
 
0.9

 
(1.4
)
 
—

Deferred tax valuation allowance adjustments
—

 
3.0

 
1.0

 
2.0

Net unrealized gain (loss) on hedging derivative instruments
7.8

 
(12.0
)
 
8.6

 
(8.6
)
Actuarial adjustments to pension plans
 
 
 
 
 
 
 
Changes in actuarial adjustments before reclassification adjustment
0.9

 
(1.1
)
 
0.4

 
2.6

Net reclassification adjustment for losses included in cost of goods sold
0.4

 
0.2

 
1.1

 
0.5

Net reclassification adjustment for losses included in selling and general and administrative expenses
0.2

 
0.1

 
0.7

 
0.6

Net actuarial adjustments to pension plans
1.5

 
(0.8
)
 
2.2

 
3.7

Changes in deferred income tax asset/liability
(0.3
)
 
0.2

 
(0.5
)
 
(0.9
)
Net actuarial adjustments to pension plans
1.2

 
(0.6
)
 
1.7

 
2.8

Unrealized investment gains (losses):
 
 
 
 
 
 
 
Changes in unrealized investment gains (losses) before reclassification adjustment
615.8

 
(522.8
)
 
492.0

 
(420.5
)
Net reclassification adjustment for (gains) losses included in net income
(0.1
)
 
(48.3
)
 
0.2

 
13.8

Changes in unrealized investment gains (losses) after reclassification adjustment
615.7

 
(571.1
)
 
492.2

 
(406.7
)
Adjustments to intangible assets
(220.4
)
 
211.5

 
(164.3
)
 
141.5

Changes in deferred income tax asset/liability
(138.1
)
 
127.4

 
(116.0
)
 
93.1

Net unrealized gains (losses) on investments
257.2

 
(232.2
)
 
211.9

 
(172.1
)
Net change to derive comprehensive income (loss) for the period
252.5

 
(235.3
)
 
216.2

 
(246.5
)
Comprehensive income (loss)
159.5

 
(276.7
)
 
146.1

 
(631.8
)
Less: Comprehensive income (loss) attributable to the noncontrolling interest:
 
 
 
 
 
 
 
Net income
39.9

 
34.2

 
121.4

 
28.4

Other comprehensive income (loss)
49.2

 
(46.2
)
 
44.2

 
(64.5
)
Comprehensive income (loss) attributable to the noncontrolling interest
89.1

 
(12.0
)
 
165.6

 
(36.1
)
Comprehensive income (loss) attributable to the controlling interest
$
70.4

 
$
(264.7
)
 
$
(19.5
)
 
$
(595.7
)
See accompanying notes to condensed consolidated financial statements.


5

HRG GROUP, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
 
Nine months ended June 30,
 
2016
 
2015
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net loss
$
(70.1
)
 
$
(385.3
)
(Loss) income from discontinued operations, net of tax
(257.1
)
 
125.7

Net income (loss) from continuing operations
187.0

 
(511.0
)
Adjustments to reconcile net income (loss) to operating cash flows from continuing operations:
 
 
 
Depreciation of properties
81.2

 
97.5

Amortization of intangibles
70.5

 
64.0

Impairment of intangible assets and goodwill
10.7

 
60.2

Impairment of oil and gas properties
93.2

 
439.4

Loan provision and bad debt expense
3.5

 
77.5

Stock-based compensation
58.4

 
56.6

Amortization of debt issuance costs
12.9

 
11.2

Amortization of debt discount
1.9

 
3.1

Write-off of debt issuance costs and discounts on retired debt
—

 
12.5

Deferred income taxes
(61.3
)
 
(68.8
)
Gain on disposal of oil and gas properties
(105.6
)
 
—

Gain on deconsolidation of subsidiary
—

 
(38.5
)
Gain upon gaining control of equity method investment
—

 
(141.2
)
Interest credited/index credits to contractholder account balances
27.2

 
28.1

Net recognized (gains) losses on investments and derivatives
(22.0
)
 
39.6

Charges assessed to contractholders for mortality and administration
(1.0
)
 
(1.1
)
Non-cash increase to cost of goods sold due to acquisition inventory step up
—

 
7.7

Non-cash restructuring and related charges
3.3

 
16.1

Changes in operating assets and liabilities:
(261.0
)
 
(423.0
)
Net change in cash due to continuing operating activities
98.9

 
(270.1
)
Net change in cash due to discontinued operating activities
288.1

 
107.0

Net change in cash due to operating activities
387.0

 
(163.1
)
Cash flows from investing activities:
 
 
 
Proceeds from investments sold, matured or repaid
52.7

 
84.9

Cost of investments acquired
(3.6
)
 
(3.9
)
Acquisitions, net of cash acquired
—

 
(1,322.1
)
Net asset-based loan repayments
175.6

 
241.4

Capital expenditures
(64.0
)
 
(65.8
)
Proceeds from sales of assets
154.3

 
20.7

Other investing activities, net
(1.9
)
 
(0.4
)
Net change in cash due to continuing investing activities
313.1

 
(1,045.2
)
Net change in cash due to discontinued investing activities
(911.7
)
 
(900.1
)
Net change in cash due to investing activities
(598.6
)
 
(1,945.3
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of new debt
5.4

 
3,691.8

Repayment of debt, including tender and call premiums
(407.8
)
 
(2,641.6
)
Revolving credit facility activity
(3.5
)
 
63.8

Debt issuance costs
(2.5
)
 
(45.8
)
Purchases of subsidiary stock, net
(50.1
)
 
(36.8
)
Contractholder account deposits
4.1

 
77.5

Contractholder account withdrawals
(108.6
)
 
(103.9
)
Dividend paid by subsidiary to noncontrolling interest
(27.9
)
 
(22.5
)
Share based award tax withholding payments
(28.0
)
 
(20.3
)
Net proceeds from issuance subsidiary common stock
—

 
281.1

Common stock repurchased
—

 
(22.2
)
Other financing activities, net
0.9

 
3.9

Net change in cash due to continuing financing activities
(618.0
)
 
1,225.0

Net change in cash due to discontinued financing activities
841.3

 
870.0

Net change in cash due to financing activities
223.3

 
2,095.0

Effect of exchange rate changes on cash and cash equivalents
(1.7
)
 
(13.0
)
Net change in cash and cash equivalents
10.0

 
(26.4
)
Net change in cash and cash equivalents in discontinued operations
217.7

 
76.9

Net change in cash and cash equivalents in continuing operations
(207.7
)
 
(103.3
)
Cash and cash equivalents at beginning of period
695.2

 
742.8

Cash and cash equivalents at end of period
$
487.5

 
$
639.5

See accompanying notes to condensed consolidated financial statements.

6

HRG GROUP, INC. AND SUBSIDIARIES
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 diversified holding company focused on owning businesses that the Company believes can, in the long term, generate sustainable free cash flow or attractive returns on investment. 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 four reporting segments: (i) Consumer Products, (ii) Insurance, (iii) Energy, and (iv) Asset Management. For the results of operations by segment, and other segment data, see Note 15, Segment Data.
Consumer Products Segment
The Consumer Products segment represents the Company’s 57.8% controlling interest in Spectrum Brands Holdings, Inc. (“Spectrum Brands”). Spectrum Brands is a diversified global branded consumer products company with positions in seven major product 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 June 30, 2016, the Company’s insurance operations were conducted through Front Street Re (Delaware) Ltd., (“Front Street”) and its Bermuda and Cayman-based wholly-owned life and annuity reinsurers, Front Street Re Ltd. (“Front Street Bermuda”) and Front Street Re (Cayman) Ltd. (“Front Street Cayman”), respectively.
During the three months ended June 30, 2016, Front Street was provided information on a recapture notice of a reinsurance agreement between third parties covering a block of long-term care business. The original reinsurance agreement was entered into on a funds withheld modified coinsurance basis and the assuming company had retroceded 74.9% of the assumed business to Ability Reinsurance (Bermuda) which was subsequently merged with Front Street Cayman upon the acquisition of Ability Reinsurance (Bermuda) in 2014. As a result of the recapture notice, during the three and nine months ended June 30, 2016, Front Street’s funds withheld receivables and insurance reserves decreased by approximately $83.0.
The Company also owns 80.4% 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.
As discussed further in Note 4, Divestitures, 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 (the “FGL Merger Agreement” and such merger, the “FGL Merger”) to acquire FGL for $26.80 per share. As a result of the FGL Merger Agreement, as of June 30, 2016, 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 accompanying 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. As a result of classifying FGL as held for sale, all segmented information has been adjusted to exclude FGL from the Insurance segment. See Note 4, Divestitures.
Energy Segment
The Energy segment represents the Company’s wholly-owned subsidiary, HGI Energy Holdings, LLC (“HGI Energy”) and HGI Energy’s wholly-owned subsidiary, Compass Production GP, LLC (“Compass GP”) and its respective subsidiaries (collectively, “Compass”). Compass is an owner and operator of conventional oil and natural gas properties in East Texas and North Louisiana.
On December 1, 2015, Compass completed the sale of its oil and gas interests located in the Holly, Waskom and Danville Fields in East Texas and North Louisiana (the “Compass Asset Sale”). At closing, proceeds from the transaction, which were approximately $147.5, less estimated expenses of $1.9, were used primarily to reduce borrowings under Compass’ existing credit facility (the “Compass Credit Agreement”). For the nine months ended June 30, 2016, Compass received an additional $5.9 as a result of resolving certain title and consent matters in connection with the Compass Asset Sale.
As further discussed in Note 17, Subsequent Events, on July 1, 2016, subsequent to the end of the fiscal quarter, the Company, through HGI Energy, entered into an agreement to sell its equity interests in Compass to a third party for a cash purchase price of $145.0 (such agreement, the “Compass Sale Agreement” and such sale, the “Compass Sale”). The purchase price will be reduced

7

by the balance of Compass Credit Agreement outstanding at closing ($125.0 as of June 30, 2016) and is subject to other customary closing purchase price adjustments for title and environmental defects. The closing of the Compass Sale is subject to the satisfaction of customary closing conditions. HRG is a party to the Compass Sale Agreement for the purpose of satisfying HGI Energy’s post-closing obligations to the buyer. Upon the completion of the Compass Sale, HGI Energy’s existing notes, $100.0 notional aggregate amount held by the Company’s affiliates, will be canceled and replaced with $92.0 notional aggregate amount of new notes of HGI Energy and HGI Energy will be recapitalized with an equity contribution of $110.0 in assets or cash to satisfy its future obligations.
Given the inherent decline in the production potential of its existing asset base, Compass’ indebtedness and the continued declines in commodity prices, if the Compass Sale is not completed, Compass may also pursue a variety of strategies to generate cash flows and reduce its leverage, including pursuing dispositions, acquisitions, other strategic transactions and the issuance of debt and equity securities.
Asset Management Segment
The Asset Management segment represents the Company’s ownership of Salus Capital Partners, LLC (“Salus”), an asset based lender, and CorAmerica Capital, LLC (“CorAmerica”), a commercial real estate lender. During the three months ended June 30, 2016, the operations of Energy & Infrastructure Capital, LLC (“EIC”), a debt capital investment manager focused on direct lending to companies in the North America energy and infrastructure sectors, were wound down.

(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, 2015, filed with the SEC on November 20, 2015 (the “Form 10-K”). The results of operations for the nine months ended June 30, 2016 are not necessarily indicative of the results for any subsequent periods or the entire fiscal year ending September 30, 2016.
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 June 30, 2016, the noncontrolling interest component of total equity primarily represents the 42.2% share of Spectrum Brands and the 19.6% of FGL not owned by HRG.
Assets Held for Sale and Discontinued Operations
The Company reports a business as held for sale when management has approved or received approval to sell the business and is committed to a formal plan, the business is available for immediate sale, the business is being actively marketed, the sale is anticipated to occur during the next twelve months and certain other specified criteria are met, in accordance with Accounting Standard Codification (“ASC”) Topic 360, Property, Plant and Equipment (“ASC 360”). A business classified as held for sale is recorded at the lower of its carrying amount or estimated fair value less cost to sell. If the carrying amount of the business exceeds its estimated fair value less cost to sell, a loss is recognized. Assets and liabilities related to a business classified as held for sale are segregated in the current and prior balance sheets in the period in which the business is classified as held for sale. Transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale. If a business is classified as held for sale after the balance sheet date but before the financial statements are issued or are available to be issued, the business continues to be classified as held and used in those financial statements when issued or when available to be issued.
The Company reports the results of operations of a business as discontinued operations if a disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when the business is classified as held for sale,

8

in accordance with ASC 360 and Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial Statements (Topic 2015) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The results of discontinued operations are reported in “(Loss) income from discontinued operations, net of tax” in the accompanying Condensed Consolidated Statements of Operations for current and prior periods commencing in the period in which the business meets the criteria of a discontinued operation, and include any gain or loss recognized on closing or adjustment of the carrying amount to fair value less cost to sell. Transactions between the businesses held for sale and businesses held for use that are expected to continue to exist after the disposal are not eliminated to appropriately reflect the continuing operations and balances held for sale.
The guidance above does not apply to oil and gas properties that are accounted for using the full-cost method of accounting as prescribed by the U.S. SEC (Regulation S-X, Rule 4-10, Financial Accounting and Reporting for Oil and Gas Producing Activities Pursuant to the Federal Securities Laws and the Energy Policy and Conservation Act of 1975) unless the disposal represents all or substantially all of a full cost pool as a discontinued operation.
Adoption of Recent Accounting Pronouncements
Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs (“ASU 2015-03”). The accounting guidance requires that debt issuance costs related to a recognized debt liability be reported in the accompanying Condensed Consolidated Balance Sheets as a direct deduction from the carrying amount of that debt liability. ASU 2015-03 is effective for annual periods and interim periods within those annual periods beginning after March 31, 2016 and early adoption is permitted. The Company elected to early adopt ASU 2015-03 effective March 31, 2016. The Company applied the new guidance on a retrospective basis, wherein the balance sheet of each individual period presented was adjusted to reflect the period-specific effects of applying the new guidance. The reclassification of unamortized debt issuance costs resulted in reductions in other assets and debt of $102.9 as of September 30, 2015. Other than this reclassification, the adoption of this guidance did not have an impact in the Company’s Condensed Consolidated Financial Statements.
Simplifying the Accounting for Measurement-Period Adjustments
In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (“ASU 2015-16”). ASU 2015-16 simplifies the presentation of provisional amounts recognized in a business combination during the measurement period (one year from the date of acquisition). Whereas the prior guidance required retrospective adjustment of prior periods, ASU 2015-16 eliminates this requirement. The Company adopted ASU 2015-16 effective March 31, 2016, resulting in the recognition of adjustments to goodwill of $3.4 during the nine months ended June 30, 2016 related to Spectrum Brands’ acquisition of Armored AutoGroup Parent Inc. (“AAG”) See Note 8, Goodwill and Intangibles for adjustments to goodwill.
Balance Sheet Classification of Deferred Taxes
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”). ASU 2015-17 requires that the presentation of deferred tax assets and liabilities be classified as noncurrent on the balance sheet instead of separating deferred taxes into current and noncurrent amounts. The Company elected to early adopt ASU 2015-07 effective March 31, 2016. The Company applied the new guidance on a retrospective basis, resulting in a reclassification reducing both deferred tax assets and deferred tax liabilities by $39.1 in the accompanying Condensed Consolidated Balance Sheets at September 30, 2015.
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 provides for changes to the accounting for share-based payment awards issued to employees, primarily income taxes upon award vesting or settlement, cash flow presentations of excess tax benefits and employee withheld taxes paid, as well as an entity forfeiture policy election. ASU 2016-09 is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for any interim or annual period. The Company has elected to early adopt ASU 2016-09 for the three months ended June 30, 2016 using a modified retrospective approach, effective as if adopted the first day of the fiscal year, October 1, 2015.
Under the new guidance, all excess tax benefits and tax deficiencies related to employee stock compensation will be recognized within income tax expense. Under prior guidance, excess tax benefits were recognized to additional paid-in capital and tax deficiencies were only recognized to the extent they exceeded the pool of excess tax benefits.
As of September 30, 2015, there was $28.4 of unrecognized deferred tax assets attributable to excess tax benefits that were not previously recognized as they did not reduce income taxes payable. The cumulative adjustment for the adoption of ASU 2016-09

9

did not have an impact on net equity as the incremental deferred tax assets were fully offset by a corresponding increase in the deferred tax asset valuation allowance as of September 30, 2015.
For the three months ended December 31, 2015, there was an additional $4.3 of unrecognized deferred tax assets attributable to excess tax benefits that were not previously recognized. The Company did not record an adjustment for the adoption of ASU 2016-09 as the incremental deferred tax assets were also fully offset by a corresponding increase in the deferred tax asset valuation allowance as of December 31, 2015.
The impact of the adoption of ASU 2016-09 to the Company’s previously reported quarterly results for the three and six months ended March 31, 2016 was as follows:
 
Three months ended March 31, 2016
 
Six months ended March 31, 2016
 
Reported
 
Adjustment
 
As Revised
 
Reported
 
Adjustment
 
As Revised
Income tax expense (benefit)
$
8.9

 
$
(17.4
)
 
$
(8.5
)
 
$
10.8

 
$
(17.4
)
 
$
(6.6
)
Net income from continuing operations
11.6

 
17.4

 
29.0

 
54.2

 
17.4

 
71.6

Net (loss) income
(1.5
)
 
17.4

 
15.9

 
5.5

 
17.4

 
22.9

Net income attributable to noncontrolling interest
33.3

 
7.3

 
40.6

 
74.2

 
7.3

 
81.5

Net (loss) income attributable to controlling interest
(34.8
)
 
10.1

 
(24.7
)
 
(68.7
)
 
10.1

 
(58.6
)
Earnings Per Share
 
 
 
 
 
 
 
 
 
 
 
Basic (loss) income from continuing operations
$
(0.10
)
 
$
0.09

 
$
(0.01
)
 
$
(0.05
)
 
$
0.09

 
$
0.04

Basic earnings per share
(0.18
)
 
0.05

 
(0.12
)
 
(0.35
)
 
0.05

 
(0.30
)
Diluted (loss) income from continuing operations
$
(0.10
)
 
$
0.09

 
$
(0.01
)
 
$
(0.05
)
 
$
0.09

 
$
0.04

Diluted earnings per share
(0.18
)
 
0.05

 
(0.12
)
 
(0.35
)
 
0.05

 
(0.30
)
Further, as part of the adoption, the Company elected to account for forfeitures in compensation cost as they occur. The cumulative impact for the change in election was not material and was recognized in the three months ended June 30, 2016.
Oil and Natural Gas Properties
Ceiling Test
Pursuant to Rule 4-10(c)(4) of Regulation S-X, Compass is required to compute its ceiling test using the simple average first day of the month spot price for the trailing 12 month period for oil and natural gas at the end of each fiscal quarter. The ceiling test involves comparing the net book value of the full cost pool, after taxes, to the full cost ceiling limitation defined below. In the event the full cost ceiling limitation is less than the full cost pool, Compass is required to record a ceiling test impairment of its oil and natural gas properties. The full cost ceiling limitation is computed as the sum of the present value of estimated future net revenues from Compass’ proved reserves by applying the average price as prescribed by the SEC Release No. 33-8995, less estimated future expenditures (based on current costs) to develop and produce the proved reserves, discounted at 10%, plus the cost of properties not being amortized and the lower of cost or estimated fair value of unproved properties included in the costs being amortized, net of income tax effects.
The ceiling test is computed using the simple average first day of the month spot price for the trailing 12 month period using the first day of each month. As of June 30, 2016, the trailing 12 month period month reference prices were $2.24 per Million British Thermal Units (“Mmbtu”) for natural gas at Henry Hub (“HH”), and $43.12 per barrel (“Bbl”) of oil for West Texas Intermediate (“WTI”) at Cushing, Oklahoma. Each of the reference prices for oil and natural gas are further adjusted for quality factors and regional differentials to derive estimated future net revenues. The price used for natural gas liquids was $16.72 per Bbl and was based on the trailing 12 month period month average of realized prices. Under full cost accounting rules, any ceiling test impairments of oil and natural gas properties may not be reversed in subsequent periods. Since Compass does not designate its derivative financial instruments as hedging instruments, Compass is not allowed to use the impacts of the derivative financial instruments in the ceiling test computations.
During the three and nine months ended June 30, 2016, Compass recognized impairments of $17.6 and $93.2, respectively, to its proved oil and natural gas properties due to the continued decline in oil and natural gas prices.
For the three months ended June 30, 2015, Compass recognized impairments to its proved oil and natural gas properties of $102.8 primarily due to a decline in oil and natural gas prices. During the nine months ended June 30, 2015, Compass recognized impairments of $439.4 to its proved oil and natural gas properties due to the sharp decline in oil and natural gas prices, as well as the acquisition by HGI Energy of EXCO Resources, Inc.’s (“EXCO”) interest in Compass, which triggered the remeasurement of the Company’s initial basis in Compass at fair value which increased Compass’ full cost pool. The purchase price for the acquisition was based on both the income and market approach models which incorporate, among other things, market prices based on the New York Mercantile Exchange (“NYMEX”) futures as of the acquisition date, which the Company believes reflects an independent proxy point for determining fair value. The ceiling test, however, requires companies using the full cost accounting method to

10

price period-ending proved reserves using the simple average first day of the month spot price for the trailing 12 month period, which may not be indicative of actual market values. As a result, Compass’ full cost pool exceeded its ceiling test limitation at June 30, 2015 resulting in impairment.
As a result of the continued decline in oil and natural gas prices, if the Compass Sale is not completed, Compass expects to incur additional impairments to its oil and natural gas properties in fiscal year 2016 if prices do not increase. The possibility and amount of any future impairment is difficult to predict, and will depend, in part, upon future oil and natural gas prices to be utilized in the ceiling test, estimates of proved reserves and future capital expenditures and operating costs.
The ceiling test calculation and impairment evaluation are based upon estimates of proved reserves. There are numerous uncertainties inherent in estimating quantities of proved reserves, in projecting the future rates of production and in the timing of development activities. The accuracy of any reserve estimate is a function of the quality of available data and of engineering and geological interpretation and judgment. Results of drilling, testing and production subsequent to the date of the estimate may justify revision of such estimate. Accordingly, reserve estimates are often different from the quantities of oil, natural gas and natural gas liquids that are ultimately recovered.
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 $207.5 and $226.3 at June 30, 2016 and September 30, 2015, 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 $3.2 and $2.5 at June 30, 2016 and September 30, 2015, respectively. Without such permitted statutory accounting practices, Raven Re’s statutory capital and surplus would be negative $0.1 and negative $33.1 as of June 30, 2016 and September 30, 2015, 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 carrying value of Raven Re at June 30, 2016 and September 30, 2015 was $210.6 and $195.6, 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 a $26.2 increase to statutory capital and surplus at June 30, 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.
Concentrations of Investments
As of June 30, 2016, the Company’s most significant investment in one industry was the Company’s asset-based loan in the apparel industry with carrying value of $12.3, or 24.3% of the Company’s investment portfolio. As of September 30, 2015, the Company’s most significant investment in one industry was the Company’s asset-based loan in the electronics industry with carrying value of $45.9, or 16.5%, of the Company’s investments portfolio. No investment in a single issuer exceeded 10% of the Company’s stockholders’ equity as of June 30, 2016 and September 30, 2015.
Concentration of Securities Included in Funds Withheld Receivables
As of June 30, 2016 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 June 30, 2016 and September 30, 2015, the carrying value of the fixed maturity securities in the financial sector was $225.5, or 13.6%, and $269.7, or 15.8%, respectively, of Front Street’s funds withheld receivables. At June 30, 2016 and September 30, 2015, the holdings in this sector included investments in 80 and 107 different issuers, respectively, with the top ten investments accounting for 47.4% and 41.0%, respectively, of the total holdings in this sector.
As of June 30, 2016 and September 30, 2015, the carrying value of the fixed maturity securities in the energy, mining and metals industries was $200.4, or 12.1%, and $236.6, or 13.8%, respectively, of Front Street’s funds withheld receivables. At June 30,

11

2016 and September 30, 2015, the holdings in these industries included investments in 80 and 98 different issuers, respectively, with the top ten investments accounting for 43.4% 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 June 30, 2016 and September 30, 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 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 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 surrender charge protection provided by the products reinsured by Front Street.
Receivables
The allowance for uncollectible receivables as of June 30, 2016 and September 30, 2015 was $46.0 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 15.0% and 12.7% of the Company’s “Receivables, net” in the accompanying Condensed Consolidated Balance Sheets at June 30, 2016 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 granted pursuant to FGL’s equity plans and those shares of common stock with respect to appraisal rights under Delaware law are properly exercised and not withdrawn.
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 (“CFIUS”).
On November 25, 2015, FGL obtained the requisite approval for the FGL Merger from the Vermont Department of Financial Regulation. On March 14, 2016, FGL received notification from CFIUS that it had concluded all action under Section 721 of the Defense Production Act of 1950, as amended, and determined that there are no unresolved national security concerns with respect to the FGL Merger. The parties are not required to file a notification of the FGL Merger under the Hart-Scott Rodino Antitrust Improvements Act of 1976, as amended, due to an available exemption. The adoption of the FGL Merger Agreement by FGL’s stockholders required the affirmative vote or written consent of holders of at least a majority of the outstanding shares of FGL’s common stock. On November 8, 2015, FS Holdco II Ltd., a wholly-owned subsidiary of the Company and the direct holder of 47.0 million shares of FGL’s common stock representing approximately 80.5% of the outstanding shares of FGL’s common stock, delivered a written consent adopting, authorizing, accepting and approving in all respects the FGL Merger Agreement and the transactions contemplated thereby, including the merger.
Anbang continues to work on securing the 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. 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.

12

At June 30, 2016, the Company determined that as a result of the FGL Merger Agreement, the Company’s ownership interest in FGL met the criteria established by ASC 360 to classify it as held for sale. The following table summarizes the major categories of assets and liabilities classified as held for sale in the accompanying Condensed Consolidated Balance Sheets at June 30, 2016 and September 30, 2015:
 
June 30,
2016
 
September 30,
2015
Assets
 
 
 
Investments, including loans and receivables from affiliates
$
20,665.6

 
$
19,206.7

Cash and cash equivalents
719.5

 
501.8

Accrued investment income
191.6

 
191.2

Reinsurance recoverable
3,475.9

 
3,578.7

Deferred tax assets
52.7

 
194.7

Properties
17.1

 
14.4

Deferred acquisition costs and value of business acquired, net
1,101.1

 
1,048.6

Other assets
182.1

 
248.4

Write-down of assets of business held for sale to fair value less cost to sell
(240.7
)
 
—

Total assets held for sale
$
26,164.9

 
$
24,984.5

Liabilities
 
 
 
Insurance reserves
$
23,575.8

 
$
22,560.1

Debt
300.0

 
298.3

Accounts payable and other current liabilities
39.3

 
43.7

Other liabilities
641.0

 
518.8

Total liabilities held for sale
$
24,556.1

 
$
23,420.9

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:
 
June 30,
2016
 
September 30,
2015
Assets
 
 
 
Funds withheld receivable
$
1,011.2

 
$
1,058.0

Other assets
15.4

 
15.9

Assets of business held for sale
1,531.2

 
1,769.8

Total assets
$
2,557.8

 
$
2,843.7

Liabilities
 
 
 
Insurance reserves
$
1,143.2

 
$
1,226.8

Debt
198.9

 
330.7

Accounts payable and other current liabilities
0.3

 
1.6

Other liabilities
9.6

 
11.0

Liabilities of business held for sale
1,205.8

 
1,273.6

Total liabilities
$
2,557.8

 
$
2,843.7

The carrying value of the Company’s interest in FGL was higher than the fair value less cost to sell based on the sales price at June 30, 2016 and as a result, the Company recorded a write-down of assets of business held for sale of $217.2 and $240.7 for the three and nine months ended June 30, 2016, respectively.
In accordance with ASU 2014-08, the Company has determined that the FGL Merger Agreement represented a strategic shift for the Company and, accordingly, has presented the results of operations for FGL as discontinued operations in the accompanying Condensed Consolidated Statements of Operations.

13

The following table summarizes the components of “Net (loss) income from discontinued operations” in the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015:
 
Three months ended June 30,
 
Nine months ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Insurance premiums
$
20.8

 
$
17.2

 
$
52.4

 
$
43.0

Net investment income (a)
236.3

 
212.1

 
685.2

 
628.1

Net investment (losses) gains (b)
(21.0
)
 
76.8

 
3.5

 
101.9

Insurance and investment product fees and other
33.0

 
23.2

 
93.5

 
65.1

Total revenues
269.1

 
329.3

 
834.6

 
838.1

Operating costs and expenses:
 
 
 
 
 
 
 
Benefits and other changes in policy reserves
216.3

 
78.5

 
585.3

 
474.1

Selling, acquisition, operating and general expenses
25.6

 
27.2

 
82.2

 
84.8

Amortization of intangibles
7.4

 
77.4

 
41.3

 
85.7

Total operating costs and expenses
249.3

 
183.1

 
708.8

 
644.6

Operating income
19.8

 
146.2

 
125.8

 
193.5

Interest expense
(5.1
)
 
(5.9
)
 
(16.9
)
 
(17.7
)
Other income (expense), net
1.9

 
2.1

 
4.4

 
(2.9
)
Write-down of assets of business held for sale to fair value less cost to sell
(217.2
)
 
—

 
(240.7
)
 
—

Net (loss) income before income taxes
(200.6
)
 
142.4

 
(127.4
)
 
172.9

Income tax expense (c)
7.8

 
39.5

 
129.7

 
47.2

Net (loss) income
(208.4
)
 
102.9

 
(257.1
)
 
125.7

Less: net income attributable to noncontrolling interest
1.9

 
16.6

 
13.1

 
17.1

Net (loss) income - attributable to controlling interest
$
(210.3
)
 
$
86.3

 
$
(270.2
)
 
$
108.6

(a) Included in the net investment income attributable to FGL is interest income of $1.1 for the three months ended June 30, 2016 and 2015 and $3.4 for the nine months ended June 30, 2016 and 2015 on debt instruments issued by entities consolidated by HRG as they will continue to exist following the closing of the FGL Merger. The corresponding interest expense is recorded in continuing operations in the accompanying Condensed Consolidated Statements of Operations.
(b) Included in “Net investments (losses) gains” are charges related to the change in expected recovery rates of asset-based loans. Such charges are presented as “Impairments and bad debt expense” on the Company’s accompanying Condensed Consolidated Statements of Operations.
(c) Included in the income tax expense for the nine months ended June 30, 2016 was a $90.9 of net income tax expense related to the establishment of a deferred tax liability of $253.0 at June 30, 2016 as a result of classifying the Company’s ownership interest in FGL as held for sale. The deferred tax liability was partially offset by a $162.1 reduction of valuation allowance on HRG’s net operating and capital loss carryforwards expected to offset the FGL taxable gain at June 30, 2016. The remaining liability is expected to be offset by current year losses recognized in continuing operations except for $15.0 of estimated alternative minimum taxes.
Compass Asset Sale and Compass Sale
As discussed in Note 1, Description of Business, on December 1, 2015, Compass completed the sale of its oil and gas interests located in the Holly, Waskom and Danville Fields in East Texas and North Louisiana. The Company accounted for the sale in accordance with ASC Topic 932, Property, Plant and Equipment: Extractive Activities - Oil and Gas and recorded a gain on sale of oil and natural gas assets of $105.6 for the nine months ended June 30, 2016. The Holly, Waskom and Danville Fields did not represent all or substantially all of Compass’ full-cost method assets and, as a result, the operations associated with these assets were presented as continuing operations in the accompanying Condensed Consolidated Statements of Operations.
Further, as discussed in Note 1, Description of Business, on July 1, 2016, the Company entered into the Compass Sale Agreement. The Company’s interest in Compass met all of the held for sale criteria established by ASC 360 on July 1, 2016, subsequent to the end of the third fiscal quarter of 2016. The disposal represents all of the remaining oil and gas properties that were accounted for using the full-cost method as of June 30, 2016. The operations of Compass will be presented as discontinued operations starting in the fourth fiscal quarter of 2016. See Note 17, Subsequent Events for additional details.


14

(5) Investments
The Company’s consolidated investments are summarized as follows:
 
June 30, 2016
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
Asset-based loans
$
48.2

 
$
—

 
$
—

 
$
48.2

 
$
48.2

Other invested assets
2.5

 
—

 
—

 
2.5

 
2.5

Total Investments
$
50.7

 
$
—

 
$
—

 
$
50.7

 
$
50.7

 
September 30, 2015
 
(As Adjusted)
 
Cost or Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
Corporate fixed-maturity securities, available-for-sale
$
14.1

 
$
—

 
$
—

 
$
14.1

 
$
14.1

Equity securities - held for trading
18.7

 
14.1

 
—

 
32.8

 
32.8

Asset-based loans
226.7

 
—

 
—

 
226.7

 
226.7

Other invested assets
5.3

 
—

 
—

 
5.3

 
5.3

Total Investments
$
264.8

 
$
14.1

 
$
—

 
$
278.9

 
$
278.9

Asset-based Loans
As of June 30, 2016 and September 30, 2015, the Company’s portfolio of asset-based loans receivable originated by Salus and its co-lender Front Street consisted of the following:
 
June 30,
2016
 
September 30,
2015
 
 
 
(As Adjusted)
Asset-based loans, net of deferred fees, by major industry:
 
 
 
Apparel
$
34.9

 
$
66.0

Jewelry
16.8

 
36.9

Manufacturing
11.9

 
32.7

Electronics
5.2

 
45.9

Other
13.2

 
93.1

Total asset-based loans
82.0

 
274.6

Less: Allowance for credit losses
33.8

 
47.9

Total asset-based loans, net
$
48.2

 
$
226.7

The Company establishes its allowance for credit losses through a provision for credit losses based on Salus’ evaluation of the credit quality of its loan portfolio. The following table presents the activity in its allowance for credit losses for the three and nine months ended June 30, 2016 and 2015:
 
Three months ended June 30,
 
Nine months ended June 30,
 
2016
 
2015
 
2016
 
2015
Allowance for credit losses:
 
 
 
 
 
 
 
Balance at beginning of period
$
47.8

 
$
22.7

 
$
47.9

 
$
5.5

Provision for credit losses
(11.7
)
 
9.4

 
2.7

 
77.7

Charge-offs
(5.2
)
 
—

 
(19.7
)
 
(51.1
)
Recoveries
2.9

 
—

 
2.9

 
—

Balance at end of period
$
33.8

 
$
32.1

 
$
33.8

 
$
32.1

Credit Quality Indicators
Salus monitors credit quality as indicated by various factors and utilizes such information in its evaluation of the adequacy of the allowance for credit losses. As of June 30, 2016 and September 30, 2015, there were eleven and nine loans with a net carrying value of $68.4 and $79.8, respectively, considered delinquent by Salus and placed on non-accrual status. It is Salus’ policy to

15

discontinue accruing interest when there is a reasonable doubt as to collectability in the normal course of business. Nonaccrual loans are considered impaired for reporting purposes and are individually evaluated for impairment.
During the three and nine months ended June 30, 2016, the Company recognized charge-offs of $5.2 and $19.7, respectively. For the three and nine months ended June 30, 2016, the Company recorded net decreases in the allowance for credit losses of $16.9 and $17.0, respectively, and recoveries of $2.9 for the three and nine months ended June 30, 2016. The internal risk rating of one and seven delinquent loans was categorized as doubtful during the three and nine months ended June 30, 2016, respectively. Salus has assessed the adequacy of its allowance for credit losses and believes the level of allowance for credit losses to be adequate to mitigate inherent losses in the portfolio.
During the nine months ended June 30, 2015, the Company recognized charge-offs of $51.1. For the three and nine months ended June 30, 2015, the Company also recorded additional net increases in the provision of credit losses of $9.4 and $26.6, respectively. The internal risk rating of three and four delinquent loan was categorized as doubtful during the three and nine months ended June 30, 2015, respectively.
During the fiscal year ended September 30, 2015, the bankruptcy court overseeing the Chapter 11 proceedings of RadioShack Corp. (“RadioShack”) approved the sale of 1,743 of the company’s stores to General Wireless Inc., an affiliate of Standard General LP. Salus was the lender under RadioShack’s $250.0 term loan placed in December 2013 with a net exposure to Salus and Front Street of $93.0 and $7.0, respectively, after giving effect to a $50.0 participation by FGL and a non-qualifying participation of $100.0 held by a third party. During the fiscal year ended September 30, 2015, the $100.0 held by a third party was repaid in full because this third party had the right of first payment in the case of a bankruptcy under an intercreditor agreement with Salus. During the nine months ended June 30, 2015, the Company recognized charge-offs of $51.1, excluding any charge-offs related to FGL’s participations which are included in “(Loss) income from discontinued operations, net of tax” in the accompanying Condensed Consolidated Statements of Operations; and an additional net increase in the provision of credit losses of $19.2 related to the loan with RadioShack.
During the three and nine months ended June 30, 2016, Salus and Front Street received a partial repayment on the loan to RadioShack of $43.4, excluding $21.7 repayment on FGL’s participation on the loan. At June 30, 2016, the Company expects additional $5.0 of future recoveries of the loan to RadioShack, excluding $2.5 related to FGL’s participation on the loan that is included in “Assets of business held for sale” in the accompanying Condensed Consolidated Balance Sheets. As a result of the higher than expected recovery rates during the quarter, the Company reversed $18.0 of previously recorded allowance for credit losses, excluding $9.0 of realized gains by FGL recorded in “(Loss) income from discontinued operations, net of tax” in the accompanying Condensed Consolidated Statements of Operations.
 
Internal Risk Rating
 
Pass
 
Special Mention
 
Substandard
 
Doubtful
 
Total
June 30, 2016
$
—

 
$
1.3

 
$
11.2

 
$
69.5

 
$
82.0

September 30, 2015 (As Adjusted)
$
69.0

 
$
32.4

 
$
74.0

 
$
99.2

 
$
274.6


(6) Derivatives
The fair value of outstanding derivatives recorded in the accompanying Condensed Consolidated Balance Sheets were as follows:
Asset Derivatives
 
Classification
 
June 30,
2016
 
September 30,
2015
 
 
 
 
 
 
(As Adjusted)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Foreign exchange contracts
 
Receivables, net
 
$
6.6

 
$
5.2

Commodity swaps
 
Receivables, net
 
1.3

 
—

Commodity swaps
 
Other assets
 
0.3

 
—

Foreign exchange contracts
 
Other assets
 
0.6

 
0.4

Total asset derivatives designated as hedging instruments
 
 
 
8.8

 
5.6

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Call options
 
Funds withheld receivables
 
9.4

 
5.4

Call options
 
Other assets
 
4.5

 
1.0

Commodity contracts
 
Receivables, net
 
0.3

 
7.9

Foreign exchange contracts
 
Receivables, net
 
0.4

 
0.4

Total asset derivatives
 
 
 
$
23.4

 
$
20.3


16

Liability Derivatives
 
Classification
 
June 30,
2016
 
September 30,
2015
 
 
 
 
 
 
(As Adjusted)
Derivatives designated as hedging instruments:
 
 
 
 
 
 
Interest rate swaps
 
Accounts payable and other current liabilities
 
$
1.3

 
$
1.4

Interest rate swaps
 
Other liabilities
 
0.5

 
1.2

Commodity swaps
 
Accounts payable and other current liabilities
 
0.4

 
4.7

Commodity swaps
 
Other liabilities
 
—

 
0.8

Foreign exchange contracts
 
Accounts payable and other current liabilities
 
1.7

 
1.5

Foreign exchange contracts
 
Other liabilities
 
0.1

 
—

Total liability derivatives designated as hedging instruments
 
 
 
4.0

 
9.6

Derivatives not designated as hedging instruments:
 
 
 
 
 
 
Embedded derivatives in Front Street's assumed FIA business
 
Insurance reserves
 
133.5

 
142.3

Foreign exchange
 
Accounts payable and other current liabilities
 
0.6

 
0.1

Commodity contracts
 
Accounts payable and other current liabilities
 
1.6

 
0.1

Total liability derivatives
 
 
 
$
139.7

 
$
152.1

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 summarizes the impact of derivative instruments on the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2016 and 2015:
 
 
 
 
Three months ended June 30,
 
 
 
 
2016
 
2015
 
 
 
 
Effective portion
 
Ineffective portion
 
Effective portion
 
Ineffective portion
 
 
Classification
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
 
Gain (Loss)
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
 
Gain (Loss)
Interest rate swaps
 
Interest expense
 
$
(0.2
)
 
$
(0.4
)
 
$
—

 
$
(0.4
)
 
$
(0.5
)
 
$
—

Commodity swaps
 
Cost of consumer products and other goods sold
 
2.1

 
(0.8
)
 
0.1

 
(0.7
)
 
—

 
—

Foreign exchange contracts
 
Net consumer and other product sales
 
(0.3
)
 
—

 
—

 
0.1

 
—

 
—

Foreign exchange contracts
 
Cost of consumer products and other goods sold
 
8.0

 
0.1

 
—

 
(6.8
)
 
8.6

 
—

 
 
 
 
$
9.6

 
$
(1.1
)
 
$
0.1

 
$
(7.8
)
 
$
8.1

 
$
—

 
 
 
 
Nine months ended June 30,
 
 
 
 
2016
 
2015
 
 
 
 
Effective portion
 
Ineffective portion
 
Effective portion
 
Ineffective portion
 
 
Classification
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
 
Gain (Loss)
 
Gain (Loss) in AOCI
 
Gain (Loss) reclassified to Earnings
 
Gain (Loss)
Interest rate swaps
 
Interest expense
 
$
(0.5
)
 
$
(1.4
)
 
$
—

 
$
(2.4
)
 
$
(1.4
)
 
$
—

Commodity swaps
 
Cost of consumer products and other goods sold
 
2.9

 
(3.8
)
 
0.1

 
(2.4
)
 
0.3

 
—

Foreign exchange contracts
 
Net consumer and other product sales
 
(0.4
)
 
—

 
—

 
0.1

 
—

 
—

Foreign exchange contracts
 
Cost of consumer products and other goods sold
 
6.8

 
5.0

 
—

 
14.0

 
21.0

 
—

 
 
 
 
$
8.8

 
$
(0.2
)
 
$
0.1

 
$
9.3

 
$
19.9

 
$
—


17

During the three and nine months ended June 30, 2016 and 2015, the Company recognized the following gains and losses on its derivatives:
 
 
 
 
Three months ended June 30,
 
Nine months ended June 30,
Classification
 
Derivatives Not Designated as Hedging Instruments
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
 
 
 
Net investment gains (losses)
 
Call options
 
$
0.2

 
$
(0.3
)
 
$
0.7

 
$
1.9

Other income and expense:
 
 
 
 
 
 
 
 
 
 
Benefits and other changes in policy reserves
 
Embedded derivatives in Front Street's assumed FIA business
 
$
3.0

 
$
6.9

 
$
8.8

 
$
1.8

Other (expense) income, net
 
Oil and natural gas commodity contracts
 
(2.2
)
 
(2.7
)
 
0.3

 
21.3

 
 
Foreign exchange contracts
 
0.8

 
5.0

 
1.6

 
(2.4
)
Additional Disclosures
Call options. Derivative financial instruments included within or outside of the funds withheld receivables at fair value in the accompanying Condensed Consolidated Balance Sheets are in the form of call options receivable to 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 gains (losses)” in the accompanying Condensed Consolidated Statements of Operations.
Embedded derivatives in Front Street’s assumed FIA business. 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. When it deems appropriate, Spectrum Brands has used 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 income (loss) (“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 from the underlying debt to which the swap is designated. As of June 30, 2016 and September 30, 2015, 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 losses estimated to be reclassified from AOCI into earnings over the next 12 months is $0.8, net of tax. Spectrum Brands’ interest rate swap derivative financial instruments at June 30, 2016 and September 30, 2015 were as follows:
 
 
June 30, 2016
 
September 30, 2015
 
 
Notional
 
Remaining Years
 
Notional
 
Remaining Years
Interest rate swaps - fixed
 
$
300.0

 
0.8
 
$
300.0

 
1.5
Foreign exchange contracts - cash flow hedges. Spectrum Brands periodically enters into forward foreign exchange contracts to hedge 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, Brazilian Reals, Mexican Pesos, Canadian Dollars 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 June 30, 2016, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2017. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $2.4, net of tax. At June 30, 2016 and September 30, 2015, Spectrum Brands had foreign exchange derivative contracts designated as cash flow hedges with a notional value of $224.7 and $300.6, 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

18

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 June 30, 2016, Spectrum Brands had a series of zinc and brass swap contracts outstanding through September 2017. The derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $0.3, net of tax. Spectrum Brands had the following commodity swap contracts outstanding as of June 30, 2016 and September 30, 2015:
 
 
June 30, 2016
 
September 30, 2015
 
 
Notional
 
Contract Value
 
Notional
 
Contract Value
Zinc swap contracts (tons)
 
7.2
 
$
13.6

 
10.8
 
$
22.2

Brass swap contracts (tons)
 
1.0

 
4.3

 
1.8

 
8.5

Foreign exchange contracts - not designated as hedges for accounting purposes. 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, Canadian Dollars (“CAD”), Euros 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 foreign exchange contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At June 30, 2016, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through August 2016. At June 30, 2016 and September 30, 2015, Spectrum Brands had $197.1 and $126.8, respectively, of notional value for such foreign exchange derivative contracts outstanding.
During the three and nine months ended June 30, 2016, Salus entered into a foreign exchange swap contract to economically hedge foreign exchange risk related to asset-based loans originated in CAD. The foreign exchange contract is a fair value hedge of a related liability or asset recorded in the accompanying Condensed Consolidated Balance Sheets. The gain or loss on the foreign exchange contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At June 30, 2016, Salus had one foreign exchange derivative contract outstanding through September 30, 2016 with $15.5 of notional value outstanding.
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 June 30, 2016, Spectrum Brands had a series of commodity swaps outstanding through August 2016. Spectrum Brands had the following commodity swaps outstanding as of June 30, 2016 and September 30, 2015:
 
 
June 30, 2016
 
September 30, 2015
 
 
Notional
 
Contract Value
 
Notional
 
Contract Value
Silver (troy oz.)
 
5
 
$
0.1

 
25
 
$
0.4

Oil and natural gas commodity contracts. Compass’ natural gas and oil commodity contracts are comprised of swap contracts, collars and three-way collars (“Derivative Financial Instruments”). Swap contracts allow Compass to receive a fixed price and pay a floating market price to the counterparty for the hedged commodity. A three-way collar is a combination of options including a sold call, a purchased put and a sold put. A three-way collar allows Compass to participate in the upside of commodity prices to the ceiling of the call option and provides Compass with partial downside protection through the combination of the put options.
Compass’ primary objective in entering into Derivative Financial Instruments is to manage its exposure to commodity price fluctuations, protect its returns on investments and achieve a more predictable cash flow in connection with its operations. These transactions limit exposure to declines in commodity prices, but also limit the benefits Compass would realize if commodity prices increase. When prices for oil and natural gas are volatile, a significant portion of the effect of its Derivative Financial Instruments management activities consists of non-cash income or expense due to changes in the fair value of its Derivative Financial Instruments. Cash losses or gains only arise from payments made or received on monthly settlements of contracts or if Compass terminates a contract prior to its expiration. Compass does not designate its Derivative Financial Instruments as hedging instruments for financial reporting purposes and, as a result, Compass recognizes the change in the respective Derivative Financial Instruments’ fair value in earnings.
Settlements in the normal course of maturities of Derivative Financial Instruments result in cash receipts from, or cash disbursements to, Compass’ derivative contract counterparties. Changes in the fair value of Compass’ Derivative Financial Instruments, which

19

includes both cash and non-cash changes in fair value, are included in “Net investment gains (losses)” in the accompanying Condensed Consolidated Statements of Operations with a corresponding increase or decrease in the Condensed Consolidated Balance Sheets fair value amounts.
The following table presents Compass’ volumes and fair value of the oil and natural gas Derivative Financial Instruments as of June 30, 2016 (presented on a calendar-year basis): 

 
Volume Mmbtus/Mbbls
 
Weighted average strike price per Mmbtu/Bbl
 
Fair Value at June 30, 2016
Natural gas:
 
 
 
 
 
 
Two-way collars:
 
 
 
 
 
 
     June - December 2016
 
1,840

 
 
 
$
(0.5
)
Short call
 
 
 
$
2.77

 
 
Long put
 
 
 
2.15

 
 
     June - October 2016
 
1,230

 
 
 
(0.5
)
Short call
 
 
 
2.48

 
 
Long put
 
 
 
2.15

 
 
     November 2016 - March 2017
 
2,265

 
 
 
(0.6
)
Short call
 
 
 
3.36

 
 
Long put
 
 
 
2.70

 
 
     January 2017 - March 2017
 
450

 
 
 
—

Short call
 
 
 
3.80

 
 
Long put
 
 
 
3.05

 
 
Swaps:
 
 
 
 
 
 
     January 2017 - March 2017
 
450

 
 
 
—

Short call
 
 
 
3.35

 
 
Total natural gas
 
6,235

 
 
 
(1.6
)
Oil:
 
 
 
 
 
 
Three-way collars:
 
 
 
 
 
 
     July - December 2016
 
18

 
 
 
—

Short call
 
 
 
$
54.00

 
 
Long put
 
 
 
40.00

 
 
     May - December 2016
 
92

 
 
 
0.3

Short call
 
 
 
76.00

 
 
Long put
 
 
 
56.00

 
 
Short put
 
 
 
42.00

 
 
Total oil
 
110

 
 
 
0.3

Total oil and natural gas Derivative Financial Instruments
 
 
 
 
 
$
(1.3
)
At September 30, 2015, Compass had outstanding Derivative Financial Instruments to mitigate price volatility covering 3,380 Billion British Thermal Units (“Mmbtus”) of natural gas and 273 Thousand Barrels (“Mbbls”) of oil. At June 30, 2016, the average forward NYMEX oil prices per Bbl for the next 12 months was $50.94, and the average forward NYMEX natural gas prices per Mmbtu for the next 12 months was $3.13. Compass’ Derivative Financial Instruments covered approximately 36% and 42% of production volumes for the three and nine months ended June 30, 2016, respectively, and 64% and 58% of production volumes for the three and nine months ended June 30, 2015, respectively.
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 such 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 June 30, 2016 and September 30, 2015.
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

20

collateral in the normal course of business to offset its liability positions. As of June 30, 2016, there was no cash collateral outstanding. As of September 30, 2015, there was $3.5 of posted cash collateral related to such liability positions. In addition, as of June 30, 2016 and September 30, 2015, 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.
Compass places Derivative Financial Instruments with the financial institutions that are lenders under the Compass Credit Agreement that it believes have high quality credit ratings. To mitigate risk of loss due to default, Compass has entered into master netting agreements with its counterparties on its Derivative Financial Instruments that allow it to offset its asset position with its liability position in the event of a default by the counterparty.
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, 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 is $4.5.
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.

(7) 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:
 
June 30, 2016
 
September 30, 2015