The Insurance segment had operating income of $56 million for the second quarter of Fiscal 2012 compared to $37 million for the first quarter of Fiscal 2012. Income for the period included net realized investment gains from the sale of securities of $36 million during the quarter, net of amortization. The realized gains resulted from sales made to shorten the duration of the Insurance segment’s portfolio and improve its asset/liability matching profile. Adjusted operating income was $14 million (pre-tax) for the second quarter of Fiscal 2012, compared to $24 million (pre-tax) in the first quarter of Fiscal 2012. The $10 million decrease is primarily due to the temporary accounting mismatch related to FIA and a decrease in the net investment spread as a result of an increase in the level of cash held during the quarter ended April 1, 2012, and other one-time items. Adjusted operating income is a non-U.S. GAAP insurance industry measure that eliminates the impact of realized investment gains (losses), the effect of interest rate changes on the FIA embedded derivative liability, and the effects of acquisition-related reinsurance transactions – see “Non-U.S. GAAP Measures” and Table 4 for a reconciliation of adjusted operating income to the Insurance segment’s operating income.
Insurance segment FIA product sales improved substantially during the period to $540 million, compared to $344 million in the first quarter of Fiscal 2012. FIA sales volume in the second quarter was at a five-year high primarily driven by the newly launched Prosperity Elite SM product line. Accordingly, FGL has returned to the top ten market share position for FIA sales.
As of April 1, 2012, the Insurance segment’s investment portfolio had net unrealized gains on a U.S. GAAP basis of $568 million compared to net unrealized gains of $823 million (unaudited) on a statutory basis. FGL continued to defensively position its investment portfolio and strengthen the company’s asset/liability matching profile. Asset repositioning included the sale of longer-dated, lower-rated instruments in favor of higher-rated investments with shorter durations, while also holding higher than normal levels of cash. Statutory unrealized gains differ substantially from U.S. GAAP because the amortized cost of FGL’s invested assets was adjusted to fair value as of the date HGI completed its acquisition of FGL, while it was not adjusted for statutory reporting. The investment portfolio is reported at fair value under U.S. GAAP compared to amortized cost generally for statutory reporting. Because the investment portfolio is in an unrealized gain position, the asset values are higher for meeting policyholder benefits than reported in the statutory balance sheet where investments are reported at amortized cost.