UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)



x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2017



¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 001-36227

FIDELITY & GUARANTY LIFE

(Exact name of registrant as specified in its charter)



Delaware	46-3489149
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
Two Ruan Center 601 Locust Street, 14th Floor Des Moines, Iowa	50309
(Address of principal executive offices)	(Zip Code)

(800) 445-6758

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x or No ¨.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x or No ¨.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.



Large Accelerated Filer	¨		Accelerated Filer	x
Non-accelerated Filer	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨
Emerging Growth Company	¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ or No x

There were 58,993,219 shares of the registrant’s common stock outstanding as of July 31, 2017.

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES

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	Page
PART I. FINANCIAL INFORMATION & FORWARD LOOKING STATEMENTS
Item 1. Financial Statements:	4
Condensed Consolidated Balance Sheets as of June 30, 2017 (unaudited) and September 30, 2016	4
Condensed Consolidated Statements of Operations for the three and nine months ended June 30, 2017 and 2016 (unaudited)	5
Condensed Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended June 30, 2017 and 2016 (unaudited)	6
Condensed Consolidated Statement of Changes in Shareholders' Equity for the nine months ended June 30, 2017 (unaudited)	7
Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2017 and 2016 (unaudited)	8
Notes to Unaudited Condensed Consolidated Financial Statements	9
(1) Basis of Presentation	9
(2) Significant Accounting Policies and Practices	9
(3) Significant Risks and Uncertainties	12
(4) Investments	14
(5) Derivative Financial Instruments	22
(6) Fair Value of Financial Instruments	25
(7) Intangible Assets	37
(8) Debt	38
(9) Equity	38
(10) Stock Compensation	40
(11) Income Taxes	43
(12) Commitments and Contingencies	44
(13) Reinsurance	46
(14) Related Party Transactions	46
(15) Earnings Per Share	50
(16) Insurance Subsidiary Financial Information and Regulatory Matters	50
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
Item 3. Quantitative and Qualitative Disclosures about Market Risk	77
Item 4. Controls and Procedures	81

PART II. OTHER INFORMATION
Item 1. Legal Proceedings	83
Item 1A. Risk Factors	83
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	84
Item 3. Defaults Upon Senior Securities	84
Item 4. Mine Safety Disclosures	84
Item 5. Other Information	84
Item 6. Exhibits	85
Signatures	86

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PART I: FINANCIAL INFORMATION


Item 1.	Financial Statements

FIDELITY & GUARANTY LIFE AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In millions, except share data)



	June 30, 2017			September 30, 2016
	(Unaudited)
ASSETS
Investments:
Fixed maturity securities, available-for-sale, at fair value (amortized cost: June 30, 2017 - $19,845; September 30, 2016 - $18,521)	$	20,766		$	19,411
Equity securities, available-for-sale, at fair value (amortized cost: June 30, 2017 - $732; September 30, 2016 - $640)	774			683
Derivative investments	361			276
Commercial mortgage loans	550			595
Other invested assets	176			60
Total investments	22,627			21,025
Related party loans	71			71
Cash and cash equivalents	799			864
Accrued investment income	204			214
Reinsurance recoverable	3,390			3,464
Intangibles, net	1,097			1,026
Other assets	214			371
Total assets	$	28,402		$	27,035

LIABILITIES AND SHAREHOLDERS' EQUITY

Contractholder funds	$	20,342		$	19,251
Future policy benefits	3,423			3,467
Funds withheld for reinsurance liabilities	1,106			1,172
Liability for policy and contract claims	57			55
Debt	300			300
Revolving credit facility	105			100
Deferred tax liability, net	11			10
Other liabilities	945			746
Total liabilities	26,289			25,101

Commitments and contingencies ("Note 12")

Shareholders' equity:
Preferred stock ($.01 par value, 50,000,000 shares authorized, no shares issued at June 30, 2017 and September 30, 2016)	$	—		$	—
Common stock ($.01 par value, 500,000,000 shares authorized, 58,993,219 issued and outstanding at June 30, 2017; 58,956,127 shares issued and outstanding at September 30, 2016)	1			1
Additional paid-in capital	716			714
Retained earnings	942			792
Accumulated other comprehensive income	467			439
Treasury stock, at cost (568,847 shares at June 30, 2017; 537,613 shares at September 30, 2016)	(13		)	(12		)
Total shareholders' equity	2,113			1,934
Total liabilities and shareholders' equity	$	28,402		$	27,035

See accompanying notes to unaudited condensed consolidated financial statements.

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FIDELITY & GUARANTY LIFE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In millions, except share data)



	Three months ended						Nine months ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
	(Unaudited)						(Unaudited)
Revenues:
Premiums	$	12		$	21		$	26		$	52
Net investment income	257			236			744			685
Net investment gains (losses)	67			(28		)	199			(7		)
Insurance and investment product fees and other	44			32			126			93
Total revenues	380			261			1,095			823
Benefits and expenses:
Benefits and other changes in policy reserves	235			216			523			585
Acquisition and operating expenses, net of deferrals	40			28			101			83
Amortization of intangibles	51			(4		)	207			34
Total benefits and expenses	326			240			831			702
Operating income	54			21			264			121
Interest expense	(6		)	(5		)	(18		)	(17		)
Income before income taxes	48			16			246			104
Income tax expense	(16		)	(6		)	(84		)	(37		)
Net income	$	32		$	10		$	162		$	67

Net income per common share:

Basic	$	0.54		$	0.16		$	2.78		$	1.14
Diluted	$	0.54		$	0.16		$	2.77		$	1.14
Weighted average common shares used in computing net income per common share:
Basic	58,335,216			58,309,849			58,313,880			58,278,505
Diluted	58,444,618			58,656,008			58,391,066			58,599,059

Cash dividend per common share	$	0.065		$	0.065		$	0.195		$	0.195


Supplemental disclosures:
Total other-than-temporary impairments	$	—		$	(17	)	$	(22	)	$	(28	)
Portion of other-than-temporary impairments included in other comprehensive income	—			—			—			—
Net other-than-temporary impairments	—			(17		)	(22		)	(28		)
Gains (losses) on derivative and embedded derivatives	74			(23		)	224			(2		)
Other realized investment (losses) gains	(7		)	12			(3		)	23
Total net investment gains (losses)	$	67		$	(28	)	$	199		$	(7	)

See accompanying notes to unaudited condensed consolidated financial statements.

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FIDELITY & GUARANTY LIFE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In millions)



	Three months ended						Nine months ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
	(Unaudited)						(Unaudited)
Net income	$	32		$	10		$	162		$	67

Other comprehensive income:
Unrealized investment gains/(losses):
Change in unrealized investment gains/losses before reclassification adjustment	374			623			9			497
Net reclassification adjustment for gains included in net income	7			1			22			1
Changes in unrealized investment gains/losses after reclassification adjustment	381			624			31			498
Adjustments to intangible assets	(113		)	(220		)	11			(164		)
Changes in deferred income tax asset/liability	(92		)	(141		)	(14		)	(117		)
Net changes to derive comprehensive income for the period	176			263			28			217
Comprehensive income net of tax	$	208		$	273		$	190		$	284

See accompanying notes to unaudited condensed consolidated financial statements.

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FIDELITY & GUARANTY LIFE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY

(Unaudited) (In millions)



	Preferred Stock		Common Stock		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income		Treasury Stock			Total Shareholders' Equity

Balance, September 30, 2016	$	—	$	1	$	714	$	792		$	439	$	(12	)	$	1,934
Treasury shares purchased	—		—		—		—			—		(1		)	(1		)
Dividends	—		—		—		(12		)	—		—			(12		)
Common stock issued under employee plans	—		—		1		—			—		—			1
Net income	—		—		—		162			—		—			162
Unrealized investment gains, net	—		—		—		—			28		—			28
Stock compensation	—		—		1		—			—		—			1
Balance, June 30, 2017	$	—	$	1	$	716	$	942		$	467	$	(13	)	$	2,113

See accompanying notes to unaudited condensed consolidated financial statements.

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FIDELITY & GUARANTY LIFE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In millions)



	Nine months ended
	June 30, 2017			June 30, 2016
	(Unaudited)
Cash flows from operating activities:
Net income	$	162		$	67
Adjustments to reconcile net income to net cash provided by operating activities:
Stock based compensation	4			5
Amortization	(21		)	(32		)
Deferred income taxes	(14		)	27
Interest credited/index credit to contractholder account balances and other reserve movements	426			463
Net recognized (gains) losses on investments and derivatives	(199		)	8
Charges assessed to contractholders for mortality and administration	(99		)	(77		)
Deferred policy acquisition costs, net of related amortization	(60		)	(224		)
Changes in operating assets and liabilities:
Reinsurance recoverable	(8		)	11
Future policy benefits	(44		)	(2		)
Funds withheld from reinsurers	(76		)	(68		)
Collateral posted	59			79
Other assets and other liabilities	(34		)	30
Net cash provided by operating activities	96			287
Cash flows from investing activities:
Proceeds from available-for-sale investments sold, matured or repaid	2,190			1,744
Proceeds from derivatives instruments and other invested assets	340			167
Proceeds from commercial mortgage loans	45			8
Cost of available-for-sale investments acquired	(3,240		)	(2,511		)
Costs of derivatives instruments and other invested assets	(291		)	(215		)
Originated commercial mortgage loans	—			(99		)
Other capital expenditures	(9		)	(6		)
Net cash (used in) investing activities	(965		)	(912		)
Cash flows from financing activities:
Treasury stock	(1		)	(1		)
Common stock issued under employee plans	1			2
Draw on revolving credit facility	5			—
Dividends paid	(12		)	(12		)
Contractholder account deposits	2,272			2,138
Contractholder account withdrawals	(1,461		)	(1,285		)
Net cash provided by financing activities	804			842
Change in cash & cash equivalents	(65		)	217
Cash & cash equivalents, beginning of period	864			502
Cash & cash equivalents, end of period	$	799		$	719

Supplemental disclosures of cash flow information
Interest paid	$	22		$	10
Taxes paid	$	114		$	5
Deferred sales inducements	$	10		$	14

See accompanying notes to unaudited condensed consolidated financial statements.

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FIDELITY & GUARANTY LIFE AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(1) Basis of Presentation

Fidelity & Guaranty Life (“FGL” and, collectively with its subsidiaries, the “Company”) is a subsidiary of HRG Group, Inc. (formerly, Harbinger Group Inc. (“HRG”)). The accompanying unaudited consolidated financial statements are prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions for the Securities and Exchange Commission (“SEC”) Quarterly Report on Form 10-Q, including Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. Therefore, the information contained in the Notes to Consolidated Financial Statements included in Fidelity & Guaranty Life and Subsidiaries' Annual Report on Form 10-K, for the year ended September 30, 2016 (“2016 Form 10-K”), should be read in connection with the reading of these interim unaudited condensed consolidated financial statements. Dollar amounts in the accompanying sections are presented in millions, unless otherwise noted.

FGL markets products through its wholly-owned insurance subsidiaries, Fidelity & Guaranty Life Insurance Company (“FGL Insurance”) and Fidelity & Guaranty Life Insurance Company of New York (“FGL NY Insurance”), which together is licensed in all fifty states and the District of Columbia.

In the opinion of management, these statements include all normal recurring adjustments necessary for a fair presentation of the Company’s results. Operating results for the three and nine months ended June 30, 2017, are not necessarily indicative of the results that may be expected for the full year ending September 30, 2017. Amounts reclassified out of other comprehensive income are reflected in net investment gains in the unaudited Condensed Consolidated Statements of Operations.

On May 24, 2017, FGL entered into an Agreement and Plan of Merger (as amended, the “Merger Agreement”)with CF Corporation, a company organized under the laws of the Cayman Islands (“CF Corp”), FGL US Holdings Inc., a Delaware corporation and a newly formed, indirect wholly owned subsidiary of CF Corp (“Parent”), and FGL Merger Sub Inc., a Delaware corporation and a newly formed, direct wholly owned subsidiary of Parent (“Merger Sub”). Subject to the terms and conditions of the Merger Agreement, at the time of the closing of the transactions contemplated by the Merger Agreement, Merger Sub will merge with and into FGL, with FGL continuing as the surviving entity, which will become an indirect, wholly owned subsidiary of CF Corp (the “Merger”). The Merger is subject to certain closing conditions, including the receipt of regulatory approvals from the Iowa Insurance Division, the New York Department of Financial Services and the Vermont Department of Financial Regulations and the expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”). On June 16, 2017, the Federal Trade Commission granted early termination of the waiting period under the HSR Act.

As previously disclosed, on April 17, 2017, FGL terminated its Agreement and Plan of Merger (as amended, the “Anbang Merger Agreement”) with Anbang Insurance Group Co., Ltd. and its affiliates. As a result of the termination, FGL has no remaining obligations under the Anbang Merger Agreement.

(2) Significant Accounting Policies and Practices

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and all other entities in which FGL has a controlling financial interest and any variable interest entities ("VIEs") in which we are the primary beneficiary. All intercompany accounts and transactions have been eliminated in consolidation.

We are involved in certain entities that are considered VIEs as defined under GAAP. Our involvement with VIEs is primarily to invest in assets that allow us to gain exposure to a broadly diversified portfolio of asset classes. A VIE is an entity that does not have sufficient equity to finance its own activities without additional financial support or where investors lack certain characteristics of a controlling financial interest. We assess our relationships to determine if we have the ability to direct the activities, or otherwise exert control to evaluate if we are the primary

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beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and liabilities of the VIE in our consolidated financial statements. See "Note 4. Investments" to the Company’s unaudited Condensed Consolidated Financial Statements for additional information on the Company’s investments in unconsolidated VIEs.

Adoption of New Accounting Pronouncements

Share-Based Payments When a Performance Target is Achieved after the Requisite Service Period

In June 2014, the Financial Accounting Standards Board ("FASB") issued new guidance on Stock Compensation ( Accounting Standards Update ("ASU") 2014-12, Accounting for Share-Based Payments When the Term of an Award Provide that a Performance Target Could Be Achieved after the Requisite Service Period), effective for fiscal years beginning after December 15, 2015 and interim periods within those years. The new guidance requires performance targets that affect vesting and that could be achieved after the requisite service period to be treated as performance conditions. Such performance targets will not be included in the grant-date fair value calculation of the award, rather compensation cost will be recorded when it is probable the performance target will be reached and should represent the compensation cost attributable to period(s) for which the requisite service has already been rendered. The Company adopted this guidance effective October 1, 2016, as required. The adoption of ASU 2014-12 did not impact the Company's consolidated financial statements or related disclosures, as the Company has historically treated the performance targets for its share-based payment awards as a performance condition that affects vesting and has not reflected the targets in the grant-date fair value calculation of the awards.

Amendments to the Consolidation Analysis

In February 2015, the FASB issued amended consolidation guidance (ASU 2015-02, Amendments to the Consolidation Analysis), effective for fiscal years beginning after December 15, 2015. The amended guidance changes the consolidation analysis of reporting entities with variable interest entity ("VIE") relationships by i) modifying the criteria used to evaluate whether limited partnerships and similar legal entities are VIEs or voting interest entities and revising the primary beneficiary determination of a VIE, ii) eliminating the specialized consolidation model and guidance for limited partnerships thereby removing the presumption that a general partner should consolidate a limited partnership, iii) reducing the criteria in the variable interest model contained in Accounting Standards Codification Topic 810, Consolidation, that is used to evaluate whether the fees paid to a decision maker or service provider represents a variable interest, and iv) exempting reporting entities from consolidating money market funds that operate in accordance with Rule 2a-7 of the Investment Company Act of 1940. The Company adopted ASU 2015-02 effective October 1, 2016, as required. The adoption of ASU 2015-02 did not impact the Company's consolidated financial statements or related disclosure as the Company determined that this new guidance does not change its conclusions regarding consolidation of its VIEs.

Presentation of Debt Issuance Costs

In April 2015, the FASB issued amended guidance (ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs), effective for fiscal years beginning after December 15, 2015 and interim periods within those years. The amended guidance requires debt issuance costs related to a recognized debt liability to be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts or premiums. The cost of issuing debt will no longer be recorded as a separate asset, except when incurred before the receipt of the funding from the associated debt liability. Instead, debt issuance costs will be presented on the balance sheet as a direct deduction from the carrying amount of the related debt liability, and the costs will be amortized to interest expense using the effective interest method. The Company adopted ASU 2015-03 effective October 1, 2016, as required. The Company retrospectively considered adjustments to adjust its historical balance sheets to present deferred debt issuance costs related to the Company's debt as a reduction of the debt liability. As the Company's debt issuance costs were fully amortized as of the period ended September 30, 2016, there is no impact to the current period financial statements.

Accounting for Fees Paid in Cloud Computing Arrangements

In April 2015, the FASB issued amended guidance (ASU 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement), effective for fiscal years beginning after December 15, 2015 and interim periods within those years. Previous GAAP did not include explicit guidance regarding a customer's accounting for fees paid in a cloud computing arrangement, which may include software as a service, platform as a service, infrastructure

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as a service, and other similar hosting arrangements. The adopted guidance addresses whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If the cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The Company prospectively adopted ASU 2015-05 effective as of October 1, 2016, as required, for all new or materially modified cloud computing arrangements that contain a software license component.

Investments That Calculate Net Asset Value per Share

In May 2015, the FASB issued amended guidance (ASU 2015-07, Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)), effective for fiscal years beginning after December 15, 2015 and interim periods within those years. Previous GAAP required that investments for which fair value is measured at net asset value (or its equivalent) using the practical expedient in Topic 820 be categorized within the fair value hierarchy using criteria that differ from the criteria used to categorize other fair value measurements within the hierarchy. Previously, investments valued using the practical expedient were categorized within the fair value hierarchy on the basis of whether the investment is redeemable with the investee at net asset value on the measurement date, never redeemable with the investee at net asset value, or redeemable with the investee at net asset value at a future date. For investments that are redeemable with the investee at a future date, a reporting entity will take into account the length of time until those investments become redeemable to determine the classification within the fair value hierarchy. There is diversity in practice related to how certain investments measured at net asset value with redemption dates in the future (including periodic redemption dates) are categorized within the fair value hierarchy. Under the amendments in this Update, investments for which fair value will be measured at net asset value per share (or its equivalent) using the practical expedient should not be categorized in the fair value hierarchy. Removing those investments from the fair value hierarchy not only eliminates the diversity in practice resulting from the way in which investments measured at net asset value per share (or its equivalent) with future redemption dates are classified, but also ensures that all investments categorized in the fair value hierarchy are classified using a consistent approach. Investments that calculate net asset value per share (or its equivalent), but for which the practical expedient is not applied will continue to be included in the fair value hierarchy. The Company adopted ASU 2015-07 effective October 1, 2016, as required, and has updated the fair value disclosures to reflect the amended guidance. Refer to "Note 6. Fair Value of Financial Instruments" for further details.

Future Adoption of Accounting Pronouncements

Presentation of Changes in Restricted Cash on the Cash Flow Statement

In November 2016, the FASB issued amended guidance (ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash), effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years. The ASU will require amounts generally described as changes in restricted cash and restricted cash equivalents to be included with cash and cash equivalents on the statement of cash flows. The amendments in this ASU may be early adopted during any period or interim period, however, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The amendments should be applied using a retrospective transition method to each period presented. The Company will not early adopt this standard. The adoption of this guidance is not expected to have a material impact on the Company's consolidated statements of cash flows.

Technical Corrections and Improvements

In December 2016, the FASB issued new guidance on the Simplification of Topics Within Insurance and Debt Restructuring (ASU 2016-19, Technical Corrections and Improvements), effective upon issuance for most amendments in the Update. For several items requiring transition guidance, the ASU identifies adoption dates specific to those items. The amendments cover a wide range of topics in the Accounting Standards Codification ("ASC") and will correct differences between original guidance and the ASC, clarify guidance through updated wording or corrected references, and simplify guidance through minor editing. The amendments in this ASU that do not require transition guidance were effective upon issuance, however, those that require transition guidance may be early adopted. The Company adopted the amendments that do not require transition guidance upon issuance of ASU 2016-19 with no impact on its financial statements. The Company will not early adopt the guidance in this

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standard that require transition guidance. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

Premium Amortization on Purchased Callable Debt Securities

In March 2017, the FASB issued new guidance on the amortization of callable securities (ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20), Premium Amortization on Purchased Callable Debt Securities), effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2017-08 may be early adopted. The ASU will require premiums paid on purchased debt securities with an explicit call option to be amortized to the earliest call date, as opposed to the maturity date (as under current GAAP). The updated guidance is applicable to instruments that are callable based on explicit, non-contingent call features that are callable at fixed prices on preset dates. The amendments in this update should be applied using the modified retrospective method through a cumulative effect adjustment directly to retained earnings as of the beginning of the period of adoption. The Company will not early adopt this standard and is currently evaluating the impact of this new accounting guidance on its consolidated financial statements.

Scope of Modification Accounting for Stock Compensation

In May 2017, the FASB issued new guidance on the scope of modification accounting for stock compensation (ASU 2017-09, Compensation-Stock Compensation (Topic 718), Scope of Modification Accounting), effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. ASU 2017-09 may be early adopted. The ASU provides guidance on which changes to the terms or conditions of a share-based payment award would require an entity to apply modification accounting in Topic 718, Stock Compensation. Under the new guidance, an entity would account for the effects of a modification unless the fair value of the modified award is the same as the fair value of the original award, the vesting conditions of the modified award are the same as the vesting conditions of the original award, and the classification of the modified award (equity instrument or liability instrument) is the same as the classification of the original award, all immediately before the original award is modified. The amendments in this update should be applied prospectively to an award modified on or after the adoption date. The Company will not early adopt this standard. The adoption of this guidance is not expected to have a material impact on the Company's consolidated financial statements.

(3) Significant Risks and Uncertainties

Federal Regulation

In April 2016, the Department of Labor (“DOL”) issued its “fiduciary” rule which could have a material impact on the Company, its products, distribution, and business model. The final rule treats persons who provide investment advice for a fee or other compensation with respect to assets of an employer plan or individual retirement account ("IRA") as fiduciaries of that plan or IRA. Significantly, the rule expands the definition of fiduciary to apply to persons, including insurance agents, who advise and sell products to IRA owners. As a practical matter, this means commissioned insurance agents selling the Company’s IRA products must qualify for a prohibited transaction exemption which requires the agent and financial institution to meet various conditions including that an annuity sale be in the “best interest” of the client without regard for the agent’s, financial institution’s or other party’s financial or other interests, and that any compensation paid to the agent and financial institution be reasonable. The final rule was effective June 2016 and was supposed to become applicable in April 2017. However, the rule has generated considerable controversy and the "applicability date" was delayed by the DOL for 60 days from April 10, 2017 to June 9, 2017. DOL also acted to delay certain aspects of the prohibited transaction exemption requirements during a transition period through January 1, 2018. Industry efforts to block implementation of the rule continue both in Congress and in court actions. The success or failure of these efforts cannot be predicted. Assuming the rule is not blocked, the precise impact of the rule on the financial services industry more generally, and the impact on the Company and its business in particular, is difficult to assess. We believe however it could have an adverse effect on sales of annuity products to IRA owners particularly in the independent agent distribution channel. A significant portion of our annuity sales are to IRAs. Compliance with the prohibited transaction exemptions when fully phased in would likely require additional supervision of agents, cause changes to

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compensation practices and product offerings, and increase litigation risk, all of which could adversely impact our business, results of operations and/or financial condition. Regardless of the outcome of the court and political challenges, FGL Insurance believes that it is prepared to execute on its implementation plans on the revised applicability date.

Use of Estimates and Assumptions

The preparation of the Company’s unaudited Condensed Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions used.

Concentrations of Financial Instruments

As of June 30, 2017 and September 30, 2016, the Company’s most significant investment in one industry, excluding United States ("U.S.") Government securities, was its investment securities in the banking industry with a fair value of $2,699 or 12% and $2,448 or 12%, respectively, of the invested assets portfolio, and an amortized cost of $2,581 and $2,352, respectively. As of June 30, 2017, the Company’s holdings in this industry include investments in 110 different issuers with the top ten investments accounting for 31% of the total holdings in this industry. As of June 30, 2017 and September 30, 2016, the Company had no investments in issuers that exceeded 10% of shareholders' equity. The Company's largest concentration in any single issuer as of June 30, 2017 and September 30, 2016 was Wells Fargo & Company with a total fair value of $156 or 1% and $171 or 1% of the invested assets portfolio, respectively.

Concentrations of Financial and Capital Markets Risk

The Company is exposed to financial and capital markets risk, including changes in interest rates and credit spreads which can have an adverse effect on the Company’s results of operations, financial condition and liquidity. The Company expects to continue to face challenges and uncertainties that could adversely affect its results of operations and financial condition. The Company attempts to mitigate the risk, including changes in interest rates by investing in less rate-sensitive investments, including senior tranches of collateralized loan obligations, non-agency residential mortgage-backed securities, and various types of asset backed securities.

The Company’s exposure to such financial and capital markets risk relates primarily to the market price and cash flow variability associated with changes in interest rates. A rise in interest rates, in the absence of other countervailing changes, will decrease the net unrealized gain position of the Company’s investment portfolio and, if long-term interest rates rise dramatically within a six to twelve month time period, certain of the Company’s products may be exposed to disintermediation risk. Disintermediation risk refers to the risk that policyholders may surrender their contracts in a rising interest rate environment, requiring the Company to liquidate assets in an unrealized loss position. Management believes this risk is mitigated to some extent by surrender charge protection provided by the Company’s products.

Concentration of Reinsurance Risk

The Company has a significant concentration of reinsurance with Wilton Reassurance Company (“Wilton Re”), a third-party reinsurer, and Front Street Re (Cayman) Ltd. ("FSRCI"), an affiliate, that could have a material impact on the Company’s financial position in the event that Wilton Re or FSRCI fail to perform their obligations under the various reinsurance treaties. Wilton Re is a wholly owned subsidiary of Canada Pension Plan Investment Board ("CPPIB"). CPPIB has an AAA issuer credit rating from Standard & Poor's Ratings Services ("S&P") as of June 30, 2017. As of June 30, 2017, the net amount recoverable from Wilton Re was $1,536 and the net amount recoverable from FSRCI was $1,037. The coinsurance agreement with FSRCI is on a funds withheld basis. The Company monitors both the financial condition of individual reinsurers and risk concentration arising from similar geographic regions, activities and economic characteristics of reinsurers to attempt to reduce the risk of default by such reinsurers.

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(4) Investments

The Company’s fixed maturity and equity securities investments have been designated as available-for-sale and are carried at fair value with unrealized gains and losses included in accumulated other comprehensive income (loss) (“AOCI”) net of associated adjustments for deferred acquisition costs (“DAC”), value of business acquired (“VOBA”), and deferred income taxes. The Company’s consolidated investments at June 30, 2017 and September 30, 2016 are summarized as follows:



	June 30, 2017
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value

Available-for sale securities
Asset-backed securities	$	2,777	$	33	$	(7	)	$	2,803	$	2,803
Commercial mortgage-backed securities	950		12		(12		)	950		950
Corporates	11,877		714		(116		)	12,475		12,475
Equities	732		45		(3		)	774		774
Hybrids	1,362		86		(17		)	1,431		1,431
Municipals	1,589		152		(15		)	1,726		1,726
Residential mortgage-backed securities	1,205		97		(8		)	1,294		1,294
U.S. Government	85		2		—			87		87
Total available-for-sale securities	20,577		1,141		(178		)	21,540		21,540
Derivative investments	220		146		(5		)	361		361
Commercial mortgage loans	550		—		—			551		550
Other invested assets	176		—		—			174		176
Total investments	$	21,523	$	1,287	$	(183	)	$	22,626	$	22,627



	September 30, 2016
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value

Available-for-sale securities
Asset-backed securities	$	2,528	$	16	$	(45	)	$	2,499	$	2,499
Commercial mortgage-backed securities	850		23		(9		)	864		864
Corporates	10,712		760		(132		)	11,340		11,340
Equities	640		47		(4		)	683		683
Hybrids	1,356		77		(47		)	1,386		1,386
Municipals	1,515		206		(4		)	1,717		1,717
Residential mortgage-backed securities	1,327		63		(28		)	1,362		1,362
U.S. Government	233		10		—			243		243
Total available-for-sale securities	19,161		1,202		(269		)	20,094		20,094
Derivative investments	221		78		(23		)	276		276
Commercial mortgage loans	595		—		—			614		595
Other invested assets	60		—		—			58		60
Total investments	$	20,037	$	1,280	$	(292	)	$	21,042	$	21,025

Included in AOCI were cumulative gross unrealized gains of $1 and gross unrealized losses of $3 related to the non-credit portion of other-than-temporary impairments ("OTTI") on non-agency residential mortgage-backed securities ("RMBS") at June 30, 2017 and gross unrealized gains of $1 and gross unrealized losses of $3 related to the non-credit portion of OTTI on RMBS at September 30, 2016.

Securities held on deposit with various state regulatory authorities had a fair value of $19,326 and $18,075 at June 30, 2017 and September 30, 2016, respectively. Under Iowa regulations, insurance companies are required to hold securities on deposit in an amount no less than the Company's legal reserve as prescribed by Iowa regulations.

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At June 30, 2017 and September 30, 2016, the company held investments that were non-income producing for a period greater than twelve months with fair values of $0 and $2, respectively.

In accordance with the Company's Federal Home Loan Bank of Atlanta (“FHLB”) agreements, the investments supporting the funding agreement liabilities are pledged as collateral to secure the FHLB funding agreement liabilities. The collateral investments had a fair value of $741 and $649 at June 30, 2017 and September 30, 2016, respectively.

The amortized cost and fair value of fixed maturity available-for-sale securities by contractual maturities, as applicable, are shown below. Actual maturities may differ from contractual maturities because issuers may have the right to call or pre-pay obligations.



	June 30, 2017
	Amortized Cost		Fair Value
Corporates, Non-structured Hybrids, Municipal and U.S. Government securities:
Due in one year or less	$	325	$	327
Due after one year through five years	1,711		1,762
Due after five years through ten years	3,254		3,393
Due after ten years	8,871		9,468
Subtotal	14,161		14,950
Other securities which provide for periodic payments:
Asset-backed securities	2,777		2,803
Commercial mortgage-backed securities	950		950
Structured hybrids	752		769
Residential mortgage-backed securities	1,205		1,294
Subtotal	5,684		5,816
Total fixed maturity available-for-sale securities	$	19,845	$	20,766

The Company's available-for-sale securities with unrealized losses are reviewed for potential OTTI. In evaluating whether a decline in value is other-than-temporary, the Company considers several factors including, but not limited to the following: (1) the extent and the duration of the decline; (2) the reasons for the decline in value (credit event, currency or interest-rate related, including general credit spread widening); and (3) the financial condition of and near-term prospects of the issuer. As part of this assessment, we review not only a change in current price relative to the asset's amortized cost, but also the issuer’s current credit rating and the probability of full recovery of principal based upon the issuer’s financial strength. The Company also considers the ability and intent to hold the investment for a period of time to allow for a recovery of value.

The Company analyzes its ability to recover the amortized cost by comparing the net present value of cash flows expected to be collected with the amortized cost of the security. For mortgage-backed and asset-backed securities, cash flow estimates consider the payment terms of the underlying assets backing a particular security, including interest rate and prepayment assumptions, based on data from widely accepted third-party data sources or internal estimates. In addition to interest rate and prepayment assumptions, cash flow estimates also include other assumptions regarding the underlying collateral including default rates and recoveries, which vary based on the asset type and geographic location, as well as the vintage year of the security. For structured securities, the payment priority within the tranche structure is also considered. For all other fixed maturity securities, cash flow estimates are driven by assumptions regarding probability of default and estimates regarding timing and amount of recoveries associated with a default. If the net present value is less than the amortized cost of the investment, an OTTI is recognized.

Based on the results of our process for evaluating available-for-sale securities in unrealized loss positions for OTTI discussed above, the Company determined that the unrealized losses as of June 30, 2017 decreased due to downward movement in the U.S. Treasury rates coupled with improvement in credit spreads. Bond prices in most sectors moved higher based on these factors. Based on an assessment of all securities in the portfolio in unrealized loss positions, the Company determined that the unrealized losses on the securities presented in the table below were not other-than-temporarily impaired as of June 30, 2017.

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The fair value and gross unrealized losses of available-for-sale securities, aggregated by investment category and duration of fair value below amortized cost, were as follows:



	June 30, 2017
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-sale securities
Asset-backed securities	$	518	$	(2	)	$	437	$	(5	)	$	955	$	(7	)
Commercial mortgage-backed securities	206		(4		)	170		(8		)	376		(12		)
Corporates	1,227		(31		)	721		(85		)	1,948		(116		)
Equities	40		(1		)	69		(2		)	109		(3		)
Hybrids	54		(2		)	299		(15		)	353		(17		)
Municipals	170		(11		)	40		(4		)	210		(15		)
Residential mortgage-backed securities	2		—			233		(8		)	235		(8		)
U.S. Government	6		—			—		—			6		—
Total available-for-sale securities	$	2,223	$	(51	)	$	1,969	$	(127	)	$	4,192	$	(178	)
Total number of available-for-sale securities in an unrealized loss position less than twelve months													357
Total number of available-for-sale securities in an unrealized loss position twelve months or longer													324
Total number of available-for-sale securities in an unrealized loss position													681



	September 30, 2016
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Available-for-sale securities
Asset-backed securities	$	352	$	(4	)	$	1,368	$	(41	)	$	1,720	$	(45	)
Commercial mortgage-backed securities	44		(1		)	182		(8		)	226		(9		)
Corporates	413		(9		)	1,031		(123		)	1,444		(132		)
Equities	51		(1		)	75		(3		)	126		(4		)
Hybrids	41		(2		)	412		(45		)	453		(47		)
Municipals	69		(2		)	38		(2		)	107		(4		)
Residential mortgage-backed securities	70		(1		)	544		(27		)	614		(28		)
Total available-for-sale securities	$	1,040	$	(20	)	$	3,650	$	(249	)	$	4,690	$	(269	)
Total number of available-for-sale securities in an unrealized loss position less than twelve months													193
Total number of available-for-sale securities in an unrealized loss position twelve months or longer													543
Total number of available-for-sale securities in an unrealized loss position													736

At June 30, 2017 and September 30, 2016, securities in an unrealized loss position were primarily concentrated in investment grade, corporate debt, asset-backed, hybrid, and municipal instruments.

At June 30, 2017 and September 30, 2016, securities with a fair value of $61 and $183, respectively, had an unrealized loss greater than 20% of amortized cost (excluding U.S. Government and U.S. Government sponsored agency securities), which represented less than 0% and 1% of the carrying value of all investments, respectively.

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The following table provides a reconciliation of the beginning and ending balances of the credit loss portion of OTTI on fixed maturity available-for-sale securities held by the Company for the three and nine months ended June 30, 2017 and 2016, for which a portion of the OTTI was recognized in AOCI:



	Three months ended				Nine months ended
	June 30, 2017		June 30, 2016		June 30, 2017		June 30, 2016
Beginning balance	$	3	$	3	$	3	$	3
Increases attributable to credit losses on securities:
OTTI was previously recognized	—		—		—		—
OTTI was not previously recognized	—		—		—		—
Ending balance	$	3	$	3	$	3	$	3

The Company recognized $0 and $22 of credit impairment losses in operations during the three and nine months ended June 30, 2017 and $0 and $0 of change of intent impairment losses in operations during the three and nine months ended June 30, 2017, related to fixed maturity securities with an amortized cost of $13 and a fair value of $13 at June 30, 2017. During the three and nine months ended June 30, 2016, the Company recognized $13 and $24 of credit impairment losses, respectively, and $4 of change of intent losses during both the three and nine months ended June 30, 2016, respectively, in operations related to fixed maturity securities with an amortized cost of $189 and a fair value of $172 at June 30, 2016.

Details underlying write-downs taken as a result of OTTI that were recognized in "Net income" and included in net realized gains on securities were as follows:



	Three months ended					Nine months ended
	June 30, 2017			June 30, 2016		June 30, 2017		June 30, 2016
OTTI Recognized in Net Income:
Asset-backed securities	$	1		$	4	$	2	$	9
Corporates	—			—		20		6
Related party loans	—			4		—		4
Other invested assets	(1		)	9		—		9
Total	$	—		$	17	$	22	$	28

The portion of OTTI recognized in AOCI is disclosed in the unaudited Condensed Consolidated Statements of Comprehensive Income (Loss).

In the second fiscal quarter ended March 31, 2017, the Company recognized credit-related impairment losses of $20 on available-for-sale debt securities related to investments in First National Bank Holding Co. On April 28, 2017, the Federal Deposit Insurance Company (“FDIC”) shutdown First NBC Bank and named the FDIC as receiver. The bank was the holding company’s principal asset and as a result of the closure of the bank the holding company has limited remaining tangible assets. The Company expects no further recovery of its investment in First National Bank Holding Co. and has reflected the impairment in its financial statements for the nine months ended June 30, 2017 as the events are reflective of conditions that existed at the balance sheet date.

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Commercial Mortgage Loans

Commercial mortgage loans ("CMLs") represented approximately 2% and 3% of the Company’s total investments as of June 30, 2017 and September 30, 2016, respectively. The Company primarily makes mortgage loans on income producing properties including hotels, industrial properties, retail buildings, multifamily properties and office buildings. The Company diversifies its CML portfolio by geographic region and property type to attempt to reduce concentration risk. Subsequent to origination, the Company continuously evaluates CMLs based on relevant current information to ensure properties are performing at a consistent and acceptable level to secure the related debt. The distribution of CMLs, gross of valuation allowances, by property type and geographic region is reflected in the following tables:



	June 30, 2017					September 30, 2016
	Gross Carrying Value			% of Total		Gross Carrying Value			% of Total
Property Type:
Funeral Home	$	1		—	%	$	1		—	%
Hotel	23			4	%	23			4	%
Industrial - General	46			8	%	58			10	%
Industrial - Warehouse	38			7	%	64			11	%
Multifamily	69			13	%	70			11	%
Office	157			29	%	160			27	%
Retail	217			39	%	220			37	%
Total commercial mortgage loans, gross of valuation allowance	$	551		100	%	$	596		100	%
Allowance for loan loss	(1		)			(1		)
Total commercial mortgage loans	$	550				$	595

U.S. Region:
East North Central	$	108		20	%	$	137		23	%
East South Central	20			4	%	21			4	%
Middle Atlantic	85			15	%	97			16	%
Mountain	67			12	%	67			12	%
New England	14			3	%	14			2	%
Pacific	135			24	%	136			23	%
South Atlantic	66			12	%	67			11	%
West North Central	14			3	%	14			2	%
West South Central	42			7	%	43			7	%
Total commercial mortgage loans, gross of valuation allowance	$	551		100	%	$	596		100	%
Allowance for loan loss	(1		)			(1		)
Total commercial mortgage loans	$	550				$	595

Within the Company's CML portfolio, 100% of all CMLs had a loan-to-value (“LTV”) ratio of less than 75% at inception at June 30, 2017 and September 30, 2016. As of June 30, 2017, all CMLs are current and have not experienced credit or other events which would require the recording of an impairment loss.

LTV and debt service coverage (“DSC”) ratios are measures commonly used to assess the risk and quality of mortgage loans. The LTV ratio, calculated at time of origination, is expressed as a percentage of the amount of the loan relative to the value of the underlying property. A LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the underlying collateral. The DSC ratio, based upon the most recently received financial statements, is expressed as a percentage of the amount of a property’s net income to its debt service payments. A DSC ratio of less than 1.00 indicates that a property’s operations do not generate sufficient income to cover debt payments.

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The following table presents the recorded investment in CMLs by LTV and DSC ratio categories and estimated fair value by the indicated loan-to-value ratios at June 30, 2017 and September 30, 2016:



	Debt Service Coverage Ratios								Total Amount		% of Total		Estimated Fair Value		% of Total
	>1.25		1.00 - 1.25		< 1.00		N/A(a)		Total Amount		% of Total		Estimated Fair Value		% of Total
June 30, 2017
LTV Ratios:
Less than 50%	$	183	$	—	$	18	$	1	$	202	37	%	$	201	36	%
50% to 60%	256		—		—		—		256		46	%	257		47	%
60% to 75%	86		7		—		—		93		17	%	93		17	%
Commercial mortgage loans	$	525	$	7	$	18	$	1	$	551	100	%	$	551	100	%
September 30, 2016
LTV Ratios:
Less than 50%	$	158	$	18	$	—	$	1	$	177	29	%	$	181	29	%
50% to 60%	189		—		—		—		189		32	%	194		32	%
60% to 75%	230		—		—		—		230		39	%	239		39	%
Commercial mortgage loans	$	577	$	18	$	—	$	1	$	596	100	%	$	614	100	%

(a) N/A - Current DSC ratio not available.

We establish a general mortgage loan allowance based upon the underlying risk and quality of the mortgage loan portfolio using DSC ratio and LTV ratio. A higher LTV ratio will result in a higher allowance. A higher DSC ratio will result in a lower allowance. We believe that the DSC ratio is an indicator of default risk on loans. We believe that the LTV ratio is an indicator of the principal recovery risk for loans that default.



	June 30, 2017			September 30, 2016
Gross balance commercial mortgage loans	$	551		$	596
Allowance for loan loss	(1		)	(1		)
Net balance commercial mortgage loans	$	550		$	595

The Company recognizes a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At June 30, 2017 and September 30, 2016, we had no CMLs that were delinquent in principal or interest payments. The following provides the current and past due composition of our CMLs:



	June 30, 2017		September 30, 2016
Current to 30 days	$	551	$	596
Past due	—		—
Total carrying value	$	551	$	596

A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty:

•borrower is in default,

•borrower has declared bankruptcy,

•there is growing concern about the borrower's ability to continue as a going concern,

•borrower has insufficient cash flows to service debt,

•borrower's inability to obtain funds from other sources, and

•there is a breach of financial covenants by the borrower.

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If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower will be granted a concession:

•assets used to satisfy debt are less than our recorded investment,

•interest rate is modified,

•maturity date extension at an interest rate less than market rate,

•capitalization of interest,

•delaying principal and/or interest for a period of three months or more, and

•partial forgiveness of the balance or charge-off.

Mortgage loan workouts, refinances or restructures that are classified as TDRs are individually evaluated and measured for impairment. As of June 30, 2017, our CML portfolio had no impairments, modifications or troubled debt restructuring.

Net investment income

The major sources of “Net investment income” on the accompanying unaudited Condensed Consolidated Statements of Operations were as follows:



	Three months ended						Nine months ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Fixed maturity securities, available-for-sale	$	242		$	223		$	706		$	644
Equity securities, available-for-sale	11			7			31			23
Commercial mortgage loans	6			6			18			18
Related party loans	—			1			—			3
Invested cash and short-term investments	2			1			2			3
Other investments	2			3			4			8
Gross investment income	263			241			761			699
Investment expense	(6		)	(5		)	(17		)	(14		)
Net investment income	$	257		$	236		$	744		$	685

During the fiscal quarter ended June 30, 2015, the Company received notice that we are entitled to receive a settlement as a result of our ownership of certain RMBS that were issued by Countrywide Financial Corp. ("Countrywide"), an entity which was later acquired by Bank of America Corporation. An $18 cash settlement was received in the fiscal quarter ended June 30, 2016 for a majority of the Countrywide securities, and another $2 was expected to be paid in the third fiscal quarter of 2017; however, the two bonds involved are a part of ongoing litigation, and the settlement proceeds have been escrowed pending resolution of this process. In compliance with the Company's accounting policy described in "Note 2. Significant Accounting Policies and Practices" of the 2016 Form 10-K, the Company updated its cash flow projections for its best estimate of the recovery as of May 31, 2016 and determined the new effective yield, with the resulting immaterial impact recognized in “Net investment income”.

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Net investment Gains (Losses)

Details underlying “Net investment gains (losses)” reported on the accompanying unaudited Condensed Consolidated Statements of Operations were as follows:



	Three months ended						Nine months ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Net realized (losses) gains on fixed maturity available-for-sale securities	$	(8	)	$	4		$	(23	)	$	6
Realized gains (losses) on equity securities	—			1			—			2
Change in fair value of other derivatives and embedded derivatives	1			(2		)	2			(1		)
Realized gains (losses) on other invested assets	1			(10		)	(2		)	(13		)
Net realized (losses) gains on available-for-sale securities	(6		)	(7		)	(23		)	(6		)
Realized gains (losses) on certain derivative instruments	73			(32		)	149			(86		)
Unrealized gains on certain derivative instruments	9			48			81			112
Change in fair value of reinsurance related embedded derivative	(9		)	(37		)	(8		)	(27		)
Realized gains (losses) on hedging derivatives and reinsurance-related embedded derivatives	73			(21		)	222			(1		)
Net investment gains (losses)	$	67		$	(28	)	$	199		$	(7	)

For the three and nine months ended June 30, 2017, proceeds from the sale of fixed maturity available-for-sale securities totaled $169 and $529, gross gains on such sales totaled $6 and $16, and gross losses totaled $11 and $15, respectively.

For the three and nine months ended June 30, 2016, proceeds from the sale of fixed maturity available-for-sale securities, totaled $190 and $939, gross gains on such sales totaled $7 and $25, and gross losses totaled $3 and $15, respectively.

Unconsolidated Variable Interest Entities

The Company owns investments in VIEs that are not consolidated within the Company’s financial statements. VIEs do not have sufficient equity to finance their own activities without additional financial support and certain of its investors lack certain characteristics of a controlling financial interest. These VIEs are not consolidated in the Company’s financial statements for the following reasons: 1) FGL Insurance either does not control or does not have any voting rights or notice rights; 2) the Company does not have any rights to remove the investment manager; and 3) the Company was not involved in the design of the investment. These characteristics indicate that FGL Insurance lacks the ability to direct the activities, or otherwise exert control, of the VIEs and is not considered the primary beneficiary of them.

FGL Insurance participates in loans to third parties originated by Salus. Salus is an affiliated, limited liability company indirectly owned by HRG that originates senior secured asset-based loans to unaffiliated third-party borrowers. FGL Insurance also participates in CLOs managed by Salus and owns preferred equity in Salus within the funds withheld portfolio of the FSRCI treaty. The Company’s maximum exposure to loss as a result of its investments in or with Salus is limited to the carrying value of its investments in Salus which totaled $1 and $22 as of June 30, 2017 and September 30, 2016, respectively. FGL’s investments in or with Salus are detailed in “Note 14. Related Party Transactions” to the Company’s unaudited Condensed Consolidated Financial Statements.

FGL also executed a commitment of $75 to purchase common shares in an unaffiliated private business development company ("BDC"). The BDC invests in secured and unsecured fixed maturity and equity securities of middle market companies in the United States. Due to the voting structure of the transaction, FGL does not have voting power. The initial capital call occurred June 30, 2015, with the remaining commitment expected to fund through 2017. FGL has funded $42 as of June 30, 2017.

In the normal course of its activities, the Company invests in various limited partnerships as a passive investor. These investments are in corporate credit and real estate debt strategies that have a current income bias. Limited partnership interests are accounted for under the equity method and are included in “Other invested assets” on the Company’s consolidated balance sheet. The Company's maximum exposure to loss with respect to these investments is limited to the investment carrying amounts reported in the Company's consolidated balance sheet in addition to any required unfunded commitments. As of June 30, 2017, the Company's maximum exposure to loss was $145 in recorded carrying value and $122 in unfunded commitments.

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(5) Derivative Financial Instruments

The carrying amounts of derivative instruments, including derivative instruments embedded in fixed indexed annuity (“FIA”) contracts, is as follows:



	June 30, 2017		September 30, 2016
Assets:
Derivative investments:
Call options	$	361	$	276
Futures contracts	—		—
Other invested assets:
Other derivatives and embedded derivatives	15		13
Other assets:
Reinsurance related embedded derivative	111		119
	$	487	$	408



Liabilities:
Contractholder funds:
FIA embedded derivative	$	2,442	$	2,383
Funds withheld for reinsurance liabilities:
Call options payable to FSRCI	13		11
	$	2,455	$	2,394

The change in fair value of derivative instruments included in the accompanying unaudited Condensed Consolidated Statements of Operations is as follows:



	Three months ended						Nine months ended
	June 30, 2017			June 30, 2016			June 30, 2017			June 30, 2016
Revenues:
Net investment gains (losses):
Call options	$	81		$	14		$	225		$	21
Futures contracts	1			2			5			5
Other derivatives and embedded derivatives	1			(2		)	2			(1		)
Reinsurance related embedded derivative	(9		)	(37		)	(8		)	(27		)
	$	74		$	(23	)	$	224		$	(2	)
Benefits and other changes in policy reserves
FIA embedded derivatives	$	80		$	77		$	59		$	176

Additional Disclosures

Other Derivatives and Embedded Derivatives

On June 16, 2014, FGL Insurance invested in a $35 fund-linked note issued by Nomura International Funding Pte. Ltd. The note provides for an additional payment at maturity based on the value of an embedded derivative in AnchorPath Dedicated Return Fund (the "AnchorPath Fund") of $11 which was based on the actual return of the fund. At June 30, 2017 the fair value of the fund-linked note and embedded derivative were $25 and $15, respectively. At maturity of the fund-linked note, FGL Insurance will receive the $35 face value of the note plus the value of the embedded derivative in the AnchorPath Fund. The additional payment at maturity is an embedded derivative reported in "Other invested assets", while the host is an available-for-sale security reported in "Fixed maturities, available-for-sale".

FGL Insurance participates in loans to third parties originated by Salus, an affiliated VIE, indirectly owned by HRG that provides asset-based financing. These participating loans are denominated in Canadian ("CAD") currency which is different from FGL Insurance's functional currency. At September 30, 2015, four loan participations were denominated in

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CAD currency. Three of the four loans denominated in CAD currency were settled prior to June 30, 2016. Therefore, as of June 30, 2017 and September 30, 2016 only one loan denominated in CAD currency remained.

FGL Insurance also had two participating loans denominated in CAD currency which also required reimbursement from the borrower in CAD currency, but did not include a provision for reimbursement for any net foreign exchange losses from the borrower. Salus executed CAD swap agreements with FGL Insurance to convert the CAD cash flows into United States dollar ("USD") cash flows. Under these swap agreements, Salus reimbursed the Company for certain realized foreign exchange losses related to cash flows on these loan participations from origination date through the earlier of the maturity date of the loan or expiration of the swap agreement. Reimbursement under the swap agreements was reduced in the event the counterparties on the underlying loan participations were unable to fully repay amounts due on those loan participations. FGL Insurance's ability to recover the foreign exchange losses under these swap agreements was such that the Company established derivatives equal to FGL Insurance's cumulative net foreign exchange losses on these loan participations. During the year ended September 30, 2016, one of the loan participations was repaid in full and FGL Insurance recovered the full amount due under the related swap agreement. No other loan participations remain outstanding at June 30, 2017. The Company recognized an OTTI loss on the loan during the quarter ended September 30, 2016 and also recorded a reduction in the amount recoverable under the swap agreement. The related swap agreement with Salus expired in July 2016 and FGL Insurance recovered the amount due under the swap agreement. The value of these derivatives was reflected in “Other invested assets” with the changes in the fair value reflected in the Company’s Condensed Consolidated Statements of Operations. The value of these derivatives was $0 and $0 at June 30, 2017 and September 30, 2016, respectively, which is equal to the cumulative net realized foreign exchange loss recognized on these loan participations, net of allowance for counterparty credit risk. The Company had realized losses of $0 and $0 for the three and nine months ended June 30, 2017; and $2 and $2 realized losses for the three and nine months ended June 30, 2016 related to these foreign exchange derivatives included in "Net investment gains (losses)". Additionally, a subsidiary of HRG, HGI Funding LLC, executed an agreement with the Company to guarantee, subject to the terms of the agreement, the fulfillment of the accumulated foreign exchange loss recoverable from Salus. The guarantee was terminated in the quarter ended September 30, 2016 concurrent with the settlement of the Salus swap agreement.

FGL Insurance entered into several CAD currency forward contracts since August 2016 to economically hedge against unfavorable movements in CAD on one CAD-denominated loan participation. Under the forward contracts, FGL Insurance sold CAD equal to the estimated recovery amounts on the loan participation and will receive USD. The forward contracts settled in cash prior to March 31, 2017. No cash was exchanged upon execution of the forward contracts. The value of these derivatives at each balance sheet date is equal to the cumulative unrealized value and is reflected in “Other invested assets” with the changes in the fair value reflected in the Company’s Condensed Consolidated Statements of Operations. The value of the forward contracts as of June 30, 2017 was $0. The Company had realized gains of $0 and $0 for the three and nine months ended June 30, 2017 related to the forward contracts included in "Net investment gains".

Credit Risk

The Company is exposed to credit loss in the event of non-performance by its counterparties on the call options and reflects assumptions regarding this non-performance risk in the fair value of the call options. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. The Company maintains a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.

Information regarding the Company’s exposure to credit loss on the call options it holds is presented in the following table:



		June 30, 2017									September 30, 2016
Counterparty	Credit Rating (Fitch/Moody's/S&P) (a)	Notional Amount		Fair Value		Collateral		Net Credit Risk			Notional Amount		Fair Value		Collateral		Net Credit Risk
Merrill Lynch	A/*/A+	$	3,993	$	149	$	109	$	40		$	2,302	$	55	$	10	$	45
Deutsche Bank	A/A3/A-	510		17		18		(1		)	1,620		46		12		34
Morgan Stanley	*/A1/A+	1,676		66		72		(6		)	2,952		87		58		29
Barclay's Bank	A/A1/A-	1,608		48		6		42			1,389		39		—		39
Canadian Imperial Bank of Commerce	AA-/*/A+	2,523		81		81		—			1,623		49		48		1
Total		$	10,310	$	361	$	286	$	75		$	9,886	$	276	$	128	$	148

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(a) An * represents credit ratings that were not available.

Collateral Agreements

The Company is required to maintain minimum ratings as a matter of routine practice as part of its over-the-counter derivative agreements on ISDA forms. Under some ISDA agreements, the Company has agreed to maintain certain financial strength ratings. A downgrade below these levels provides the counterparty under the agreement the right to terminate the open derivative contracts between the parties, at which time any amounts payable by the Company or the counterparty would be dependent on the market value of the underlying derivative contracts. The Company’s current rating allows multiple counterparties the right to terminate ISDA agreements. No ISDA agreements have been terminated, although the counterparties have reserved the right to terminate the ISDA agreements at any time. In certain transactions, the Company and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. As of June 30, 2017 and September 30, 2016, counterparties posted $286 and $128 of collateral, respectively, of which $177 and $118 is included in "Cash and cash equivalents" with an associated payable for this collateral included in "Other liabilities" on the unaudited Condensed Consolidated Balance Sheets. The remaining $109 and $10 of non-cash collateral was held by a third-party custodian and may not be sold or re-pledged, except in the event of default, and, therefore, is not included in the Company's unaudited Condensed Consolidated Balance Sheets at June 30, 2017 and September 30, 2016, respectively. This collateral generally consists of US treasury bonds and mortgage-backed securities. Accordingly, the maximum amount of loss due to credit risk that the Company would incur if parties to the call options failed completely to perform according to the terms of the contracts was $75 and $148 at June 30, 2017 and September 30, 2016, respectively.

In June 2017, the Company began a program to reduce the negative interest cost associated with cash collateral posted from counterparties under various IDSA agreements by reinvesting derivative cash collateral. The Company is required to pay counterparties the effective federal funds rate each day for cash collateral posted to FGL for daily mark to market margin changes. The new program permits collateral cash received to be invested in short term Treasury securities and A1/P1 commercial paper which are included in "Cash and cash equivalents" in the accompanying unaudited Condensed Consolidated Balance Sheets.

The Company held 874 and 559 futures contracts at June 30, 2017 and September 30, 2016, respectively. The fair value of the futures contracts represents the cumulative unsettled variation margin (open trade equity, net of cash settlements). The Company provides cash collateral to the counterparties for the initial and variation margin on the futures contracts which is included in "Cash and cash equivalents" in the accompanying unaudited Condensed Consolidated Balance Sheets. The amount of cash collateral held by the counterparties for such contracts was $4 and $3 at June 30, 2017 and September 30, 2016, respectively.

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(6) Fair Value of Financial Instruments

The Company’s measurement of fair value is based on assumptions used by market participants in pricing the asset or liability, which may include inherent risk, restrictions on the sale or use of an asset, or non-performance risk, which may include the Company’s own credit risk. The Company’s estimate of an exchange price is the price in an orderly transaction between market participants to sell the asset or transfer the liability (“exit price”) in the principal market, or the most advantageous market in the absence of a principal market, for that asset or liability, as opposed to the price that would be paid to acquire the asset or receive a liability (“entry price”). The Company categorizes financial instruments carried at fair value into a three-level fair value hierarchy, based on the priority of inputs to the respective valuation technique. The three-level hierarchy for fair value measurement is defined as follows:

Level 1 - Values are unadjusted quoted prices for identical assets and liabilities in active markets accessible at the measurement date.

Level 2 - Inputs include quoted prices for similar assets or liabilities in active markets, quoted prices from those willing to trade in markets that are not active, or other inputs that are observable or can be corroborated by market data for the term of the instrument. Such inputs include market interest rates and volatilities, spreads, and yield curves.

Level 3 - Certain inputs are unobservable (supported by little or no market activity) and significant to the fair value measurement. Unobservable inputs reflect the Company’s best estimate of what hypothetical market participants would use to determine a transaction price for the asset or liability at the reporting date based on the best information available in the circumstances.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lower level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the investment.

When a determination is made to classify an asset or liability within Level 3 of the fair value hierarchy, the determination is based upon the significance of the unobservable inputs to the overall fair value measurement. Because certain securities trade in less liquid or illiquid markets with limited or no pricing information, the determination of fair value for these securities is inherently more difficult. However, Level 3 fair value investments may include, in addition to the unobservable or Level 3 inputs, observable components, which are components that are actively quoted or can be validated to market-based sources.

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The carrying amounts and estimated fair values of the Company’s financial instruments for which the disclosure of fair values is required, including financial assets and liabilities measured and carried at fair value on a recurring basis, with the exception of investment contracts, related party loans, portions of other invested assets and debt which are disclosed later within this footnote, are summarized according to the hierarchy previously described, as follows:



	June 30, 2017
	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets
Cash and cash equivalents	$	799	$	—	$	—	$	799	$	799
Fixed maturity securities, available-for-sale:
Asset-backed securities	—		2,584		219		2,803		2,803
Commercial mortgage-backed securities	—		866		84		950		950
Corporates	—		11,402		1,073		12,475		12,475
Hybrids	—		1,421		10		1,431		1,431
Municipals	—		1,688		38		1,726		1,726
Residential mortgage-backed securities	—		1,294		—		1,294		1,294
U.S. Government	54		33		—		87		87
Equity securities, available-for-sale	10		720		1		731		731
Derivative financial instruments	—		361		—		361		361
Reinsurance related embedded derivative, included in other assets	—		111		—		111		111
Other invested assets	—		—		15		15		15
Total financial assets at fair value	$	863	$	20,480	$	1,440	$	22,783	$	22,783
Liabilities
Derivatives:
FIA embedded derivatives, included in contractholder funds	$	—	$	—	$	2,442	$	2,442	$	2,442
Call options payable for FSRCI, included in funds withheld for reinsurance liabilities	—		13		—		13		13
Total financial liabilities at fair value	$	—	$	13	$	2,442	$	2,455	$	2,455

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	September 30, 2016
	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets
Cash and cash equivalents	$	864	$	—	$	—	$	864	$	864
Fixed maturity securities, available-for-sale:
Asset-backed securities	—		2,327		172		2,499		2,499
Commercial mortgage-backed securities	—		785		79		864		864
Corporates	—		10,219		1,121		11,340		11,340
Hybrids	—		1,386		—		1,386		1,386
Municipals	—		1,676		41		1,717		1,717
Residential mortgage-backed securities	—		1,362		—		1,362		1,362
U.S. Government	61		182		—		243		243
Equity securities, available-for-sale	22		617		3		642		642
Derivative financial instruments	—		276		—		276		276
Reinsurance related embedded derivative, included in other assets	—		119		—		119		119
Other invested assets	—		—		34		34		34
Total financial assets at fair value	$	947	$	18,949	$	1,450	$	21,346	$	21,346
Liabilities
Derivatives:
FIA embedded derivatives, included in contractholder funds	$	—	$	—	$	2,383	$	2,383	$	2,383
Call options payable for FSRCI, included in funds withheld for reinsurance liabilities	—		11		—		11		11
Total financial liabilities at fair value	$	—	$	11	$	2,383	$	2,394	$	2,394

The carrying amounts of accrued investment income, and portions of other insurance liabilities, approximate fair value due to their short duration and, accordingly, they are not presented in the tables above.

Valuation Methodologies

Fixed Maturity Securities & Equity Securities

The Company measures the fair value of its securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and the Company will then consistently apply the valuation methodology to measure the security’s fair value. The Company's fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include a third-party pricing service, independent broker quotations, or pricing matrices. The Company uses observable and unobservable inputs in its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data. In addition, market indicators and industry and economic events are monitored and further market data will be acquired when certain thresholds are met.

For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. The Company has an equity investment in a private business development company which is not traded on an exchange or valued by other sources such as analytics or brokers. The Company based the fair value of this investment on an estimated net asset value provided by the investee. Management did not make any adjustments to this valuation. The significant unobservable input used in the fair value measurement of equity securities available-for-sale for which the market approach valuation technique is employed is yields for comparable securities. Increases (decreases) in the yields would result in lower or higher, respectively, fair value measurements. For broker-quoted only securities, quotes from market makers or broker-dealers are obtained from sources recognized to be market participants. Management believes the broker quotes are prices at which trades could be executed based on historical trades executed at broker-quoted or slightly higher prices. The fair value of the Company's investment in mutual funds is based on the net asset value published by the respective mutual fund and represents the value the Company would have received if it withdrew its investment on the balance sheet date.

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The Company did not adjust prices received from third parties as of June 30, 2017 and September 30, 2016. However, the Company does analyze the third-party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy.

Derivative Financial Instruments

The fair value of call option assets is based upon valuation pricing models, which represents what the Company would expect to receive or pay at the balance sheet date if it canceled the options, entered into offsetting positions, or exercised the options. Fair values for these instruments are determined internally, based on valuation pricing models which use market-observable inputs, including interest rates, yield curve volatilities, and other factors.

The fair value of the reinsurance-related embedded derivative in the funds withheld reinsurance agreement with FSRCI is estimated based upon the fair value of the assets supporting the funds withheld from reinsurance liabilities. As the fair value of the assets is based on a quoted market price of similar assets (Level 2), the fair value of the embedded derivative is based on market-observable inputs and is classified as Level 2.

The fair value of futures contracts represents the cumulative unsettled variation margin (open trade equity, net of cash settlements) which represents what the Company would expect to receive or pay at the balance sheet date if it canceled the futures contract or entered into offsetting positions. These contracts are classified as Level 1.

The fair value measurement of the FIA embedded derivatives included in contractholder funds is determined through a combination of market observable information and significant unobservable inputs. The market observable inputs are the market value of option and interest swap rates. The significant unobservable inputs are the mortality multiplier, surrender rates, and non-performance spread. The mortality multiplier at June 30, 2017 and September 30, 2016 was applied to the Annuity 2000 mortality tables. Significant increases (decreases) in the market value of an option in isolation would result in a higher or lower, respectively, fair value measurement. Significant increases (decreases) in interest swap rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower (higher) fair value measurement. Generally, a change in any one unobservable input would not directly result in a change in any other unobservable input.

Investment Contracts

Investment contracts include deferred annuities, FIAs, indexed universal life policies (“IULs”) and immediate annuities. The fair value of deferred annuity, FIA, and IUL contracts is based on their cash surrender value (i.e. the cost the Company would incur to extinguish the liability) as these contracts are generally issued without an annuitization date. The fair value of immediate annuities contracts is derived by calculating a new fair value interest rate using the updated yield curve and treasury spreads as of the respective reporting date. At June 30, 2017 and September 30, 2016, this resulted in higher fair value reserves relative to the carrying value. The Company is not required to, and has not, estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value.

Other Invested Assets

Fair value of our loan participation interest securities approximated the unpaid principal balance of the participation interest as of June 30, 2017. In making this assessment, the Company considered the sufficiency of the underlying loan collateral, movements in the benchmark interest rate between origination date and June 30, 2017, the primary market participant for these securities, and the short-term maturity of these loans (less than 1 year).

Fair value of our loan participation interest JSN Jewellery, Inc. is based upon a best estimate of the expected liquidation value of the underlying collateral.

Fair value of the AnchorPath embedded derivative is based on an unobservable input, the net asset value of the AnchorPath fund at the balance sheet date. The embedded derivative is similar to a call option on the net asset value of the AnchorPath fund with a strike price of zero since FGL Insurance will not be required to make any additional payments at maturity of the fund-linked note in order to receive the net asset value of the AnchorPath fund on the maturity date. Therefore, the Black-Scholes model returns the net asset value of the AnchorPath fund as the fair value of the call option regardless of the values used for the other inputs to the option pricing model. The net asset value of the AnchorPath fund is provided by the fund manager at the end of each calendar month and represents the value an investor would receive if it withdrew its investment on the balance sheet date. Therefore, the key unobservable input used in the Black-Scholes model is the value of the AnchorPath fund. As the value of the AnchorPath fund increases or decreases, the fair value of the embedded derivative will increase or decrease.

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Fair value of foreign exchange derivatives and embedded derivatives, including CAD currency forward contracts, is based on the quoted USD/CAD exchange rates.

Related Party Loans - HGI Energy Loan

The HGI Energy loan's (discussed in "Note 14. Related Party Transactions" to the Company's unaudited Consolidated Financial Statements) fair value is based on the discounted cash flows of the loan. The discount rate was set by observing the market rate on other debt instruments of the issuer with an adjustment for liquidity.

Valuation Methodologies and Associated Inputs for Financial Instruments Not Carried at Fair Value

The following discussion outlines the methodologies and assumptions used to determine the fair value of our financial instruments not carried at fair value. Considerable judgment is required to develop these assumptions used to measure fair value. Accordingly, the estimates shown are not necessarily indicative of the amounts that would be realized in a one-time, current market exchange of all of our financial instruments.

Commercial Mortgage loans

The fair value of commercial mortgage loans is established using a discounted cash flow method based on credit rating, maturity and future income. This yield-based approach was sourced from our third-party vendor. The ratings for mortgages in good standing are based on property type, location, market conditions, occupancy, debt service coverage, loan-to-value, quality of tenancy, borrower, and payment record. The carrying value for impaired mortgage loans is based on the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s market price or the fair value of the collateral if the loan is collateral-dependent. The inputs used to measure the fair value of our commercial mortgage loans are classified as Level 3 within the fair value hierarchy.

Policy Loans (included within Other Invested Assets)

Fair values for policy loans are estimated from a discounted cash flow analysis, using interest rates currently being offered for loans with similar credit risk. Loans with similar characteristics are aggregated for purposes of the calculations.

Related Party Loans

The related party loans (discussed in "Note 14. Related Party Transactions" to the Company's unaudited Consolidated Financial Statements) carrying value at par approximates fair value, as this is the exit price for the obligation of these loans.

Debt

The fair value of debt is based on quoted market prices. The inputs used to measure the fair value of our outstanding debt are classified as Level 2 within the fair value hierarchy. Our revolving credit facility debt is classified as Level 3 within the fair value hierarchy, and the estimated fair value reflects the carrying value as the revolver has no maturity date.

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Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value as of June 30, 2017 and September 30, 2016 are as follows:



	Fair Value at		Valuation		Range (Weighted average)
	June 30, 2017		Technique	Unobservable Input(s)	June 30, 2017
Assets
Asset-backed securities	$	218	Broker-quoted	Offered quotes	90.00% - 102.50% (99.78%)
Asset-backed securities	1		Matrix pricing	Quoted prices	100.04% - 100.04% (100.04%)
Commercial mortgage-backed securities	80		Broker-quoted	Offered quotes	99.50% - 123.63% (113.44%)
Commercial mortgage-backed securities	4		Matrix pricing	Quoted prices	100.22% - 100.22% (100.22%)
Corporates	821		Broker-quoted	Offered quotes	59.00% - 111.40% (100.45%)
Corporates	252		Matrix pricing	Quoted prices	94.32% - 116.95% (104.02%)
Hybrids	10		Broker-quoted	Offered quotes	97.12% - 97.12% (97.12%)
Municipals	38		Broker-quoted	Offered quotes	112.76% - 112.76% (112.76%)
Equity securities available-for-sale (Salus preferred equity)	1		Income-approach	Yield	0.70% - 3.10%
				Discount rate	7.00% - 9.00%
				Salus CLO Equity	2.00%
Other invested assets:
Available-for-sale embedded derivative	15		Black-Scholes model	Market value of AnchorPath fund	100.00%
Total	$	1,440
Liabilities
Derivatives:
FIA embedded derivatives, included in contractholder funds	$	2,442	Discounted cash flow	Market value of option	0.00% - 25.79% (3.21%)
				SWAP rates (discount rates)	2.05% - 2.38% (2.22%)
				Mortality multiplier	80.00% - 80.00% (80.00%)
				Surrender rates	0.50% - 75.00% (9.91%)
				Non-performance spread	0.25% - 0.25% (0.25%)
				Future option budget	1.13% - 5.57% (2.90%)
Total liabilities at fair value	$	2,442

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	Fair Value at		Valuation	Unobservable	Range (Weighted average)
	September 30, 2016		Technique	Input(s)	September 30, 2016
Assets
Asset-backed securities	$	144	Broker-quoted	Offered quotes	97.54% - 101.55% (99.66%)
Asset-backed securities	9		Matrix Pricing	Quoted prices	98.75%
Asset-backed securities (Salus CLO equity tranche)	19		Third-Party Valuation	Offered quotes	28.37%
				Discount rate	15.00%
				RSH recovery	5.50%
				Other loan recoveries	0.00% - 100.00%
Commercial mortgage-backed securities	75		Broker-quoted	Offered quotes	104.31% - 122.19% (114.10%)
Commercial mortgage-backed securities	4		Matrix pricing	Quoted prices	98.41% - 98.41% (98.41%)
Corporates	920		Broker-quoted	Offered quotes	50.00% - 118.33% (103.37%)
Corporates	201		Matrix pricing	Quoted prices	99.00% - 150.23% (107.65%)
Municipals	41		Broker-quoted	Offered quotes	119.04% - 119.04% (119.04%)
Equity securities available-for-sale (Salus preferred equity)	3		Market-approach	Yield	11.00%
				RSH recovery	5.50%
				Discount rate	15.00%
				Salus CLO equity	28.37%
Other invested assets:
Available-for-sale embedded derivative	13		Black-Scholes Model	Market value of AnchorPath fund	100.00%
Loan participations - Other	2		Market Pricing	Offered quotes	100.00%
Loan participations - JSN Jewellery Inc.	17

Fidelity & Guaranty Life 10-Q