SEC Filings
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| 10-K | |
| HRG GROUP, INC. filed this Form 10-K on 11/23/2016 | |
| Entire Document | |
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Front Street assumes reinsurance business from counterparties that seek to manage the risk of default and rating migration by applying credit evaluation and underwriting standards and limiting allocations to lower quality, higher risk investments. In addition, Front Street’s reinsurance counterparties diversify their exposure by issuer and country, using rating based issuer and country limits and set investment constraints that limit its exposure by industry segment. To limit the impact that credit risk can have on earnings and capital adequacy levels, Front Street has portfolio-level credit risk constraints in place. Limit compliance is monitored on a daily or, in some cases, monthly basis. In connection with the use of call options, Front Street is exposed to counterparty credit risk- the risk that a counterparty fails to perform under the terms of the derivative contract. 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 the Company will not suffer losses in the event of counterparty non-performance. No collateral was posted by Front Street’s counterparties; accordingly, at September 30, 2016, 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 $5.9 million. Asset-Based Loans The Company’s asset-based loan portfolio consists of loans originated by Salus and its co-lender Front Street. Salus and Front Street are exposed to the risk that some of its borrowers may be unable to repay their loans according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce the Company’ earnings. The Company’s asset-based loans are a financing tool where the loans are primarily based on the value of the borrowers’ available collateral, which is typically accounts receivable, inventory or other such assets. This collateral is viewed as the primary source of repayment of the loans, while the borrowers’ creditworthiness is viewed as a secondary source of repayment. The Company utilizes a loan structure and collateral monitoring process that focuses on the value of the available collateral, which is designed to reduce the risk of loss associated in delayed intervention and/or asset recovery. The Company has developed a variety of processes to value and monitor the collateral related to its loans, and maintains its lien position in the collateral securing its loans. However, there can be no assurance that the Company will not suffer a partial or complete loss if its loans became non-performing for any reason. As of September 30, 2016, $30.1 million of the Company’s outstanding loans were classified as doubtful. Most of these loans were placed on nonaccrual status during the year and all were reserved to reflect the amounts the Company expected to recover through the normal recovery process, not giving effect to any ongoing litigation. The carrying value of all outstanding loans represented approximately 68.8% of the eligible collateral for the loans, without the impaired loan, it would have been 62.7%. See Note 13, Other Assets, to our Consolidated Financial Statements, for further details on the Company’s asset-based loan portfolio. Sensitivity Analysis The analysis below is hypothetical and should not be considered a projection of future risks. Earnings projections are before tax and noncontrolling interest. Interest Rate Risk Spectrum Brands At September 30, 2016, the potential change in fair value of Spectrum Brands’ outstanding interest rate derivative instruments assuming a 100 basis points decline in interest rates would be a loss of $0.2 million. The net impact on reported earnings, after also including the effect of the change on one year’s underlying interest rate exposure on Spectrum Brands’ variable rate Term Loan would be a net loss of $0.2 million. At September 30, 2016, Spectrum Brands had $1,140.3 million, or 31%, of its total debt subject to variable interest rates, the majority related to its term loan of $1,123.4 million subject to a 0.75% floor. After inclusion of a weighted average $155.3 million of interest rate swaps, which expire in April 2017, that hedge a portion of the variable rate debt, $985.0 million, or 27% of Spectrum Brands’ debt is subject to variable rates. Assuming an increase to market rates of 1.0% as of September 30, 2016, Spectrum Brands would incur an increase to interest expense of $9.4 million. Front Street Front Street assesses interest rate exposures for financial assets, liabilities and derivatives using hypothetical test scenarios that assume either increasing or decreasing 100 basis point parallel shifts in the yield curve, reflecting changes in either credit spreads or risk-free rates. If interest rates were to increase one percentage point from levels at September 30, 2016, the estimated fair value of the fixed maturity securities related to the Reinsurance Agreements with FGL would decrease by approximately $47.2 million and the estimated fair value of the fixed maturity securities related to the Reinsurance Agreements with Third Parties would decrease by approximately $48.4 million. If interest rates were to decrease by 100 basis points from levels at September 30, 2016, the estimated impact on the FIA embedded derivative liability of such a decrease would be an increase of $8.8 million. The actuarial models used to estimate the impact of a 100 basis points change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel change in interest rates without any management 113 | |
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