In April 2011, Fidelity & Guaranty Life Holdings, Inc. was acquired by Harbinger Group Inc. (HGI). To see HGI’s most recent SEC filings which include Fidelity & Guaranty Life’s financial information, please visit Harbinger Group Inc.’s website.
Second Quarter Fiscal 2013 Results on a U.S. GAAP Basis
The table below shows the adjustments made to the reported operating income (loss) of the HGI Insurance segment to calculate its pretax adjusted operating income. HGI has four segments, one of which is the Insurance segment, which includes Fidelity & Guaranty Life Holdings, Inc. (“FGL”) and Front Street Re, Ltd. (“FSR”).
| (in millions) ||Three Months Ended ||Six Months Ended |
Reconciliation to reported operating income:
|March 31, 2013 ||April 1, 2012 || March 31, 2013 || April 1, 2012 |
| ||(Unaudited) ||(Unaudited) |
|Reported operating income - insurance segment ||$109.4 ||$55.8 ||$273.0 ||$91.0 |
|Effect of investment gains, net of offsets ||(60.0) ||(36.8) ||(185.7) ||(55.0) |
|Effect of change in FIA embedded derivative discount rate, net of offsets ||(17.8) ||(9.9) ||(24.4) ||(7.1) |
|Effects of transaction-related reinsurance ||- ||4.5 ||- ||7.6 |
| Adjusted operating income - |
|$31.6 ||$13.6 ||$62.9 ||$36.5 |
Adjusted operating income was $31.6 million (pre-tax) for the Fiscal 2013 Quarter, an increase of $18.0 million from $13.6 million for the Fiscal 2012 Quarter. The increase is primarily due to mortality gains and lower intangible amortization due to stronger expected future profits. Adjusted operating income is a non-GAAP insurance industry measure that eliminates the impact of realized investment gains (losses), the effect of interest rate changes on the fixed indexed annuities ("FIA") embedded derivative liability, and the effects of acquisition-related reinsurance transactions - see “Non-GAAP Measures” below and a reconciliation of adjusted operating income to the Insurance segment's operating income above.
FGL annuity sales for the Fiscal 2013 Quarter, which for GAAP purposes are recorded as deposit liabilities (i.e. contract holder funds), were $243.8 million, compared to $568.2 million in the Fiscal 2012 Quarter. The decrease reflects product pricing changes made by FGL to maintain target profitability.
The company continued to report positive earnings with favorable operating income compared to Fiscal 2012 Quarter. The increase was primarily due to favorable investment portfolio performance and mortality gains.
FGL has approximately $18.1 billion of cash and invested assets under management as of March 31, 2013, compared to $17.7 billion as of December 30, 2012. Estimated risk-based capital (RBC) ratio at March 31, 2013 remained well in excess of 350%. FGL's statutory total adjusted capital at March 31, 2013, was approximately $1,170 million.
As of March 31, 2013, FGL's investment portfolio had $1.1 billion in net unrealized gains on a GAAP basis. FGL's investment portfolio continues to be conservatively positioned in its credit and duration profile and well matched against its liabilities.
In March 2013, FGL issued $300.0 million aggregate principal amount of their 6.375% senior notes, due April 1, 2021, at par value. FGL expects to use the net proceeds from the issuance of the notes for general corporate purposes and to support the growth of its subsidiary life insurance company. It also used proceeds to pay a $73.0 million dividend to HGI.
Non-U.S. GAAP Measures
Management believes that certain non- GAAP financial measures may be useful in certain instances to provide additional meaningful comparisons between current results and results in prior operating periods. Reconciliations of such measures to the most comparable GAAP measures are included herein.
The Insurance segment uses Adjusted Operating Income, a non-GAAP financial measure frequently used throughout the insurance industry. Adjusted Operating Income is calculated by adjusting the reported insurance segment operating income to eliminate the impact of net investment gains, excluding gains and losses on derivatives and including net other-than-temporary impairment losses recognized in operations, the effect of changes in the rates used to discount the FIA embedded derivative liability and the effects of acquisition-related reinsurance transactions. While these adjustments are an integral part of the overall performance of our Insurance segment, market conditions impacting these items can overshadow the underlying performance of the business. Accordingly, we believe using a measure which excludes their impact is effective in analyzing the trends of our Insurance segment's operations.
While management believes that non- GAAP measurements are useful supplemental information, such adjusted results are not intended to replace GAAP financial results and should be read in conjunction with those GAAP results.