Harbinger Group Inc.
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SEC Filings

10-Q
HRG GROUP, INC. filed this Form 10-Q on 02/07/2017
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(6) 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:
 
December 31, 2016
 
September 30, 2016
Assets
Level 1
 
Level 2
 
Level 3
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Fair Value
Fixed maturity and equity securities included in funds withheld receivables
$
79.6

 
$
1,406.8

 
$
46.4

 
$
1,532.8

 
$
69.9

 
$
1,387.1

 
$
78.1

 
$
1,535.1

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Call option receivable from FGL included in funds withheld receivables

 
12.2

 

 
12.2

 

 
11.3

 

 
11.3

Call options

 
8.3

 

 
8.3

 

 
5.9

 

 
5.9

Foreign exchange contracts

 
10.3

 

 
10.3

 

 
5.8

 

 
5.8

Commodity contracts

 
3.3

 

 
3.3

 

 
2.9

 

 
2.9

Total financial assets
$
79.6

 
$
1,440.9

 
$
46.4

 
$
1,566.9

 
$
69.9

 
$
1,413.0

 
$
78.1

 
$
1,561.0

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Front Street future policyholder benefit liability
$

 
$

 
$
634.5

 
$
634.5

 
$

 
$

 
$
631.8

 
$
631.8

Derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Embedded derivatives in Front Street's assumed FIA business

 

 
121.2

 
121.2

 

 

 
131.2

 
131.2

Commodity contracts

 
0.2

 

 
0.2

 

 
0.1

 

 
0.1

Interest rate contracts

 
0.7

 

 
0.7

 

 
1.1

 

 
1.1

Foreign exchange contracts

 
0.5

 

 
0.5

 

 
2.0

 

 
2.0

Total financial liabilities
$

 
$
1.4

 
$
755.7

 
$
757.1

 
$

 
$
3.2

 
$
763.0

 
$
766.2

Valuation Methodologies
Reinsurance Agreements with FGL
Front Street Cayman has entered into certain reinsurance agreements with FGL on a funds withheld basis. The funds withheld receivables 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. The funds withheld receivables portfolio also includes cash, derivatives and accrued income.
The liabilities for contractholder funds for deferred annuities consist of contract account balances that accrue to the benefit of the contractholders, excluding surrender charges and other liabilities. The liabilities for FIA consist of the value of the host contract plus the value of the embedded derivative. The embedded derivative is carried at fair value in the accompanying Condensed Consolidated Balance Sheets with changes in fair value reported in “Benefits and other changes in policy reserves” in the accompanying Condensed Consolidated Statements of Operations. Liabilities for immediate annuities without life contingencies are recorded at the present value of future benefits.
Liabilities for investment-type contracts are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes.
The liabilities for future policy benefits and claim reserves life contingent pay-out annuity policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. The investment yield assumptions for life contingent pay-out annuities range from 0.8% to 6.0%.
Reinsurance agreements with third parties
Front Street elected to apply the fair value option to account for its funds withheld receivables, non-funds withheld assets and future policyholder benefits reserve 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. The non-funds withheld assets held by Front Street, backing the future policyholder benefits reserve, are measured at fair value. Policy loans included in the funds withheld receivables with third parties are measured at amortized cost, which approximates fair value.
Front Street uses a discounted cash flows approach to measure the fair value of the future policyholder benefits reserve. The cash flows associated with future policy premiums and benefits are generated using best estimate assumptions (plus a risk margin, where applicable) and are consistent with market prices, where available. Risk margins are typically applied to non-observable,

16

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