Harbinger Group Inc.
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SEC Filings

10-K
HRG GROUP, INC. filed this Form 10-K on 11/23/2016
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Front Street’s assumed reinsurance business with FGL is reported on FGL’s historical basis. Upon completion of the FGL Merger, the Company’s consolidated results will reflect all reinsurance business on the fair value option.
Valuation of Funds Withheld Receivables
The funds withheld receivable portfolio related to the Reinsurance Agreements with FGL consists of investments in debt and equity securities that are carried at fair value with unrealized gains and losses included in AOCI, net of associated intangibles “shadow adjustments” and deferred income taxes. Unrealized gains and losses represent the difference between the cost or amortized cost basis and the fair value of these investments. We measure the fair value of such securities based on assumptions used by market participants, which may include inherent risk and restrictions on the sale or use of an asset. The estimate of fair value is the price that would be received to sell an asset in an orderly transaction between market participants (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability. We utilize independent pricing services in estimating the fair values of such securities. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including: reported trading prices, benchmark yields, broker-dealer quotes, benchmark securities, bids and offers, credit ratings, relative credit information and other reference data.
Front Street elected to apply the fair value option to account for its funds withheld receivables related to its assumed reinsurance with third parties. Front Street measures fair value of the funds withheld receivables based on the fair values of the securities in the underlying funds withheld portfolio held by the cedant. Policy loans included in the funds withheld receivables with third parties are measured at fair value, which approximates amortized cost.
We categorize the securities in Front Street’s funds withheld receivables portfolio into a three-level hierarchy based on the priority of the inputs to the valuation technique. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.
The following table presents the fair value of the funds withheld assets, by pricing source and hierarchy level as of September 30, 2016 (in millions):
 
 
Quoted Prices in
Active Markets
 for
Identical Assets
(Level 1)
 
Significant
Observable 
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
Fixed maturity securities, equity securities and call options:
 
 
 
 
 
 
 
 
Priced via third party pricing services
 
$
69.9

 
$
1,398.4

 
$
—

 
$
1,468.3

Priced via independent broker quotations
 
—

 
—

 
35.7

 
35.7

Priced via other methods
 
—

 
—

 
40.6

 
40.6

Total
 
69.9

 
1,398.4

 
76.3


1,544.6

Loan participations:
 
 
 
 
 
 
 
 
Priced via other methods
 
—

 
—

 
1.8

 
1.8

Total
 
$
69.9

 
$
1,398.4

 
$
78.1

 
$
1,546.4

% of total
 
4.5
%
 
90.4
%
 
5.1
%
 
100.0
%
Front Street’s assessment of all available data when determining fair value of the securities in the funds withheld receivables portfolio is necessary to appropriately apply fair value accounting. The independent pricing services also take into account perceived market movements and sector news, as well as a security’s terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary. Front Street generally obtains one value from its asset managers that utilize independent pricing services. In situations where a price is not available from the independent pricing service, Front Street’s asset managers may obtain broker quotes or prices from additional parties recognized to be market participants. Front Street believes the broker quotes are prices at which trades could be executed based on historical trades executed at broker-quoted or slightly higher prices. When quoted prices in active markets are not available, the determination of estimated fair value is based on market standard valuation methodologies, including discounted cash flows, matrix pricing, or other similar techniques. See Note 7, Fair Value of Financial Instruments, for further discussion.
Front Street validates external valuations (i) at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list; and (ii) at least annually, through comparisons to valuations from other independent pricing services.
Front Street’s assumed FIA contracts permit the holder to elect to receive a credit based on an interest rate or the performance of a market index. Certain portions of Front Street’s exposure to equity market risk is hedged assuming derivative transactions consisting of call options that hedge Front Street’s share of the FIA index credit. Front Street is exposed to credit loss in the

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