Harbinger Group Inc. -SEC Filings

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SEC Filings

10-Q

HRG GROUP, INC. filed this Form 10-Q on 08/09/2016

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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
									(As Adjusted)
	Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value
Assets
Derivatives:
Call options	$	—	$	13.9	$	—	$	13.9	$	—	$	6.4	$	—	$	6.4
Foreign exchange contracts	—		7.6		—		7.6		—		6.0		—		6.0
Commodity contracts	—		1.9		—		1.9		—		7.9		—		7.9
Corporate fixed maturity securities AFS	—		—		—		—		—		—		14.1		14.1
Equity securities - trading	—		—		—		—		32.8		—		—		32.8
Other invested assets	—		—		—		—		—		—		2.8		2.8
Funds withheld receivables	143.0		1,443.3		74.7		1,661.0		45.8		1,579.9		84.4		1,710.1
Total financial assets	$	143.0	$	1,466.7	$	74.7	$	1,684.4	$	78.6	$	1,600.2	$	101.3	$	1,780.1
Liabilities
Front Street future policyholder benefit liability	$	—	$	—	$	608.9	$	608.9	$	—	$	—	$	629.2	$	629.2
Derivatives:
Embedded derivatives in Front Street's assumed FIA business	—		—		133.5		133.5		—		—		142.3		142.3
Commodity contracts	—		2.0		—		2.0		—		5.6		—		5.6
Interest rate contracts	—		1.8		—		1.8		—		2.6		—		2.6
Foreign exchange contracts	—		2.4		—		2.4		—		1.6		—		1.6
Total financial liabilities	$	—	$	6.2	$	742.4	$	748.6	$	—	$	9.8	$	771.5	$	781.3

Valuation Methodologies

Fixed Maturity Securities, Equity Securities and Other Invested Assets

The Company measures the fair value of its securities based on assumptions used by market participants in pricing the security. The appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and the Company will then consistently apply the valuation methodology to measure the security’s fair value. The Company’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market

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