Fair Value of Financial Instruments

The Company’s consolidated assets and liabilities measured at fair value are summarized according to the hierarchy previously described as follows:



	September 30, 2015								September 30, 2014
	Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value
Assets
Contingent purchase price reduction receivable	$	—	$	—	$	—	$	—	$	—	$	—	$	41.5	$	41.5
Derivatives:
Interest contracts	—		—		—		—		—		0.6		—		0.6
Commodity contracts	—		7.9		—		7.9		—		3.2		—		3.2
Foreign exchange contracts	—		6.0		—		6.0		—		12.8		—		12.8
Call options and futures contracts	—		81.9		—		81.9		—		296.3		—		296.3
Fixed maturity securities, available-for-sale:
Asset-backed securities	—		1,850.4		10.1		1,860.5		—		1,755.9		37.0		1,792.9
Commercial mortgage-backed securities	—		738.6		143.6		882.2		—		553.8		83.1		636.9
Corporates	—		8,566.5		978.2		9,544.7		—		8,945.8		850.0		9,795.8
Hybrids	—		1,213.3		—		1,213.3		—		1,316.1		—		1,316.1
Municipals	—		1,569.1		38.5		1,607.6		—		1,222.6		37.2		1,259.8
Residential mortgage-backed securities	—		2,162.5		—		2,162.5		—		2,114.0		—		2,114.0
U.S. Government	60.0		184.0		—		244.0		115.6		180.4		—		296.0
Equity securities:
Available-for-sale	26.5		559.6		30.5		616.6		59.2		598.4		6.0		663.6
Trading	32.8		—		—		32.8		104.5		—		—		104.5
Other invested assets	—		—		13.0		13.0		—		2.1		11.2		13.3
Funds withheld receivable (a)	32.8		600.3		19.2		652.3		—		154.4		—		154.4
Total financial assets	$	152.1	$	17,540.1	$	1,233.1	$	18,925.3	$	279.3	$	17,156.4	$	1,066.0	$	18,501.7

Liabilities
Derivatives:
FIA embedded derivatives, included in contractholder funds	$	—	$	—	$	2,149.4	$	2,149.4	$	—	$	—	$	1,908.1	$	1,908.1
Front Street future policyholder benefit liability	—		—		629.2		629.2		—		—		151.3		151.3
Foreign exchange contracts	—		1.6		—		1.6		—		0.1		—		0.1
Commodity contracts	—		5.6		—		5.6		—		0.4		—		0.4
Futures contracts	—		—		—		—		—		0.5		—		0.5
Interest rate contracts	—		2.6		—		2.6		—		1.8		—		1.8
Total financial liabilities	$	—	$	9.8	$	2,778.6	$	2,788.4	$	—	$	2.8	$	2,059.4	$	2,062.2

(a) included in “Other assets” in the Consolidated Balance Sheets.

Valuation Methodologies

Fixed Maturity Securities, Equity Securities and Other Invested Assets

The Company measures the fair value of its securities based on assumptions used by market participants in pricing the security. The 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 AFS for which the market-approach valuation technique is employed, is yields for comparable securities. Increase (decrease) in such yields, respectively, would result in lower or higher 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 Company did not adjust prices received from third parties as of September 30, 2015 and 2014. 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.

Fair value of FGL’s AFS embedded derivative, included in “Other invested assets,” in the accompanying Consolidated Balance Sheets is based on an unobservable input, the net asset value of the AnchorPath Fund at the balance sheet date. The AFS 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 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.

Funds Withheld Receivables and Future Policy Holder Benefits Reserve

Front Street elected to apply the fair value option to account for its Funds Withheld Receivables, non-Funds Withheld assets and Future Policy Holder Benefits Reserve related to its assumed reinsurance. Front Street measures fair value of the Funds Withheld Receivables based on the fair values of the securities in the underlying funds withheld portfolio held by the cedant. The non-Funds Withheld assets held by Front Street, backing the Future Policy Holder Benefits Reserve, are measured at fair value. Front Street uses a discounted cash flows approach to measure the fair value of the Future Policy Holder Benefits Reserve. The cash flows associated with future policy premiums and benefits are generated using best estimate assumptions (plus a risk margin, where applicable) and are consistent with market prices, where available. Risk margins are typically applied to non-observable, non-hedgeable market inputs such as long term volatility, mortality, morbidity, lapse, etc.

Derivatives

FGL’s fair value of call option assets is based upon valuation pricing models, which represents what the FGL 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 using market-observable inputs, including interest rates, yield curve volatilities, and other factors. Fair values for call option assets were determined externally by an independent consulting firm for reporting periods prior to September 30, 2015 and were determined internally using similar valuation pricing models as of September 30, 2015. The fair values of the embedded derivatives in the Company’s FIA products are derived using market indices, pricing assumptions and historical data. 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 represented what FGL would expect to receive or pay at the balance sheet date if it canceled the futures contract and entered into offsetting positions.

Compass evaluates derivative assets and liabilities in accordance with master netting agreements with the derivative counterparties, and reports them on a gross or net basis on the Consolidated Balance Sheets as determined by the nature of the trade with the counterparty. Net derivative asset values are determined primarily by quoted futures prices and utilization of risk-free rate curves and net derivative liabilities are determined by utilization of the risk-free rate curve. The risk-free rates of Compass’ counterparties are based on the London Interbank Offered Rate (“LIBOR”) curve as of the end of the reporting period. Compass’ oil derivatives are swap contracts for notional Bbls of oil at fixed NYMEX West Texas Intermediate (“WTI”) oil prices. The asset and liability values attributable to oil derivatives as of the end of the reporting period are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for WTI oil, and (iii) the applicable risk-free rate curve, as described above. Compass’ natural gas derivatives are swap contracts and three-way collar contracts for notional Mmbtus of natural gas at posted price indexes, including NYMEX HH swap contracts. The asset and liability values attributable to natural gas derivatives as of the end of the reporting period are based on (i) the contracted notional volumes, (ii) independent active NYMEX futures price quotes for HH for natural gas swaps, (iii) the applicable risk-free rate curve, as described above, and (iv) the implied rate of volatility inherent in the option contracts.

Spectrum Brands’ derivative assets and liabilities are valued on a recurring basis using internal models, which are based on market observable inputs including interest rate curves and both forward and spot prices for currencies and commodities, which are generally based on quoted or observed market prices and classified as Level 2. The fair value of certain derivatives is estimated using pricing models based on contracts with similar terms and risks. Modeling techniques assume market correlation and volatility, such as using prices of one delivery point to calculate the price of the contract’s different delivery point. The nominal value of interest rate transactions is discounted using applicable forward interest rate curves. In addition, by applying a credit reserve which is calculated based on credit default swaps or published default probabilities for the actual and potential asset value, the fair value of Spectrum Brands’ derivative assets reflects the risk that the counterparties to these contracts may default on the obligations. Likewise, by assessing the requirements of a reserve for non-performance which is calculated based on the probability of default by Spectrum Brands, it adjusts its derivative liabilities to reflect the price at which a potential market participant would be willing to assume Spectrum Brands’ liabilities.

The Company has not changed its valuation techniques in measuring the fair value of any derivative assets and liabilities during the year.

Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value as of September 30, 2015 and 2014 were as follows:



	Fair Value at						Range (Weighted average)
Assets	September 30, 2015		September 30, 2014		Valuation Technique	Unobservable Input(s)	September 30, 2015	September 30, 2014
Contingent purchase price reduction receivable	$	—	$	41.5	Discounted cash flow	Probability of collection	—	88% - 96% (92%)
						Expected term	—	4.5 months
						Discount rate	—	1%
						Credit insurance risk premium	—	12%
Asset-backed securities	10.1		37.0		Broker-quoted	Offered quotes	100% - 108% (103%)	100% - 109% (101%)
Commercial mortgage-backed securities	143.6		83.1		Broker-quoted	Offered quotes	99% - 119% (111%)	105% - 121% (118%)
Corporates	911.7		848.0		Broker-quoted	Offered quotes	57% - 114% (101%)	62% - 120% (100%)
Corporates	66.5		2.0		Matrix Pricing	Quoted prices	105% - 142% (110%)	142%
Municipals	38.5		37.2		Broker-quoted	Offered quotes	111%	107%
Equity	24.5		—		Net Asset Value	Not applicable	100%	—%
Equity	6.0		6.0		Matrix Pricing	Quoted prices	100%	100%
Other invested assets	10.2		11.2		Black scholes model	Market value of AnchorPath Fund	100%	—
Other invested assets	2.8		—		Discounted Cash Flow	Probability of collection	50%	—%
						Discount rate	10%	—%
Funds withheld receivable	19.2		—		Discounted Cash Flow	Discount rate	6% - 12% (8%)	—%
Total	$	1,233.1	$	1,066.0
Liabilities
FIA embedded derivatives, included in contractholder funds	$	2,149.4	$	1,908.1	Discounted cash flow	Market value of option	0% - 34% (1%)	0% - 50% (3%)
						SWAP rates	1% - 2% (2%)	2% - 3% (2%)
						Mortality multiplier	80%	80%
						Surrender rates	0.50% - 75% (10%)	0.50% - 75% (7%)
						Non-performance risk spread	0.25%	0.25%
Front Street future policyholder benefit liability	629.2		151.3		Discounted cash flow	Non-performance risk spread	0.16% - 0.46%	0.50% - 1.50%
						Risk margin to reflect uncertainty	0.50% - 1.00%	0.50%
Total	$	2,778.6	$	2,059.4

The significant unobservable inputs used in the fair value measurement of the equity investment are revenue multiple and probability of the transaction closing. Significant increases (decreases) in the revenue multiple and the probability of the transaction closing would result in a higher (lower) fair value measurement. Generally, a change in any one unobservable input would not result in a change in any other unobservable input.

The significant unobservable inputs used in the fair value measurement of FIA embedded derivatives included in contractholder funds are market value of option, interest swap rates, mortality multiplier, surrender rates, and non-performance spread. The mortality multiplier at September 30, 2015 and 2014, was applied to the Annuity 2000 mortality tables. Significant increases (decreases) in the market value of option in isolation would result in a higher or lower, respectively, fair value measurement. Significant increases or decreases in interest swap rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower or higher, respectively, fair value measurement. Generally, a change in any one unobservable input would not result in a change in any other unobservable input.

The significant unobservable inputs used in the fair value measurement of the Front Street future policyholder benefit liability are non-performance risk spread and risk spread to reflect uncertainty. Significant increases (decreases) in non-performance risk spread and risk margin to reflect uncertainty would result in a lower (higher) fair value measurement.

The following tables summarize changes to the Company’s financial instruments carried at fair value and classified within Level 3 of the fair value hierarchy for Fiscal 2015, 2014 and 2013. This summary excludes any impact of amortization of VOBA and DAC. The gains and losses below may include changes in fair value due in part to observable inputs that are a component of the valuation methodology.



	Fiscal 2015
	Balance at Beginning of Period		Total Gains (Losses)														Net transfer In (Out) of Level 3 (a)			Balance at End of Period
	Balance at Beginning of Period		Included in Earnings			Included in AOCI			Purchases		Sales			Settlements			Net transfer In (Out) of Level 3 (a)			Balance at End of Period
Assets
Contingent purchase price reduction receivable	$	41.5	$	8.5		$	—		$	—	$	—		$	(50.0	)	$	—		$	—
Fixed maturity securities available-for-sale:
Asset-backed securities	37.0		0.1			(0.1		)	14.2		—			(30.7		)	(10.4		)	10.1
Commercial mortgage-backed securities	83.1		—			(1.8		)	63.9		—			(1.6		)	—			143.6
Corporates	850.0		1.9			10.1			201.4		(1.6		)	(59.5		)	(24.1		)	978.2
Municipals	37.2		—			1.7			—		—			(0.4		)	—			38.5
Equity securities - available-for-sale	6.0		—			—			24.5		—			—			—			30.5
Other invested assets	11.2		(17.3		)	—			—		—			—			19.1			13.0
Funds withheld receivable	—		—			—			19.2		—			—			—			19.2
Total assets at fair value	$	1,066.0	$	(6.8	)	$	9.9		$	323.2	$	(1.6	)	$	(142.2	)	$	(15.4	)	$	1,233.1

	Balance at Beginning of Period		Total (Gains) Losses														Net transfer In (Out) of Level 3 (a)			Balance at End of Period
	Balance at Beginning of Period		Included in Earnings			Included in AOCI			Purchases		Sales			Settlements			Net transfer In (Out) of Level 3 (a)			Balance at End of Period
Liabilities
FIA embedded derivatives, included in contractholder funds	$	1,908.1	$	241.3		$	—		$	—	$	—		$	—		$	—		$	2,149.4
Front Street future policyholder benefit liability	151.3		24.7			—			445.4		—			7.8			—			629.2
Total liabilities at fair value	$	2,059.4	$	266.0		$	—		$	445.4	$	—		$	7.8		$	—		$	2,778.6

(a) During Fiscal 2015, the net transfers out of Level 3 were exclusively to Level 2 and the net transfer to Level 3 was related to a loan receivable previously eliminated upon consolidation.



	Fiscal 2014
	Balance at Beginning of Period		Total Gains (Losses)														Net transfer In (Out) of Level 3 (a)			Balance at End of Period
	Balance at Beginning of Period		Included in Earnings			Included in AOCI			Purchases		Sales			Settlements			Net transfer In (Out) of Level 3 (a)			Balance at End of Period
Assets
Contingent purchase price reduction receivable	$	41.0	$	0.5		$	—		$	—	$	—		$	—		$	—		$	41.5
Fixed maturity securities available-for-sale:
Asset-backed securities	5.0		—			(0.3		)	36.1		—			—			(3.8		)	37.0
Commercial mortgage-backed securities	5.7		—			—			83.7		(0.3		)	—			(6.0		)	83.1
Corporates	461.1		—			19.1			398.1		(11.8		)	(2.4		)	(14.1		)	850.0
Municipals	—		—			2.2			35.0		—			—			—			37.2
Equity securities - trading	10.7		1.3			—			1.5		—			(13.5		)	—			—
Equity securities - available-for-sale	—		—			1.2			4.8		—			—			—			6.0
Other invested assets	—		(0.1		)	—			11.3		—			—			—			11.2
Total assets at fair value	$	523.5	$	1.7		$	22.2		$	570.5	$	(12.1	)	$	(15.9	)	$	(23.9	)	$	1,066.0

	Balance at Beginning of Period		Total (Gains) Losses														Net transfer In (Out) of Level 3 (a)			Balance at End of Period
	Balance at Beginning of Period		Included in Earnings			Included in AOCI			Purchases		Sales			Settlements			Net transfer In (Out) of Level 3 (a)			Balance at End of Period
Liabilities
FIA embedded derivatives, included in contractholder funds	$	1,544.4	$	363.7		$	—		$	—	$	—		$	—		$	—		$	1,908.1
Front Street future policyholder benefit liability	—		7.0			—			150.6		—			(6.3		)	—			151.3
Equity conversion feature of preferred stock	330.8		12.7			—			—		—			(343.5		)	—			—
Total liabilities at fair value	$	1,875.2	$	383.4		$	—		$	150.6	$	—		$	(349.8	)	$	—		$	2,059.4

(a) The net transfers in and out of Level 3 during Fiscal 2014 were exclusively to or from Level 2.



	Fiscal 2013
	Balance at Beginning of Period		Total Gains (Losses)														Net transfer In (Out) of Level 3 (a)			Balance at End of Period
	Balance at Beginning of Period		Included in Earnings			Included in AOCI			Purchases		Sales			Settlements			Net transfer In (Out) of Level 3 (a)			Balance at End of Period
Assets
Contingent purchase price reduction receivable	$	41.0	$	—		$	—		$	—	$	—		$	—		$	—		$	41.0
Fixed maturity securities available-for-sale:
Asset-backed securities	15.9		—			(0.2		)	—		—			(0.2		)	(10.5		)	5.0
Commercial mortgage-backed securities	5.0		—			(0.3		)	1.0		—			—			—			5.7
Corporates	135.3		(0.3		)	(13.4		)	406.0		(9.6		)	(23.1		)	(33.8		)	461.1
Hybrids	8.8		—			(0.1		)	—		—			—			(8.7		)	—
Equity securities- trading	—		—			—			10.7		—			—			—			10.7
Equity securities- available-for-sale	—		0.2			—			10.5		(10.7		)	—			—			—
Total assets at fair value	$	206.0	$	(0.1	)	$	(14.0	)	$	428.2	$	(20.3	)	$	(23.3	)	$	(53.0	)	$	523.5

	Balance at Beginning of Period		Total (Gains) Losses														Net transfer In (Out) of Level 3 (a)			Balance at End of Period
	Balance at Beginning of Period		Included in Earnings			Included in AOCI			Purchases		Sales			Settlements			Net transfer In (Out) of Level 3 (a)			Balance at End of Period
Liabilities
FIA embedded derivatives, included in contractholder funds	$	1,550.8	$	(6.4	)	$	—		$	—	$	—		$	—		$	—		$	1,544.4
Equity conversion feature of preferred stock	232.0		101.6			—			—		—			(2.8		)	—			330.8
Total liabilities at fair value	$	1,782.8	$	95.2		$	—		$	—	$	—		$	(2.8	)	$	—		$	1,875.2

(a) The net transfers out of Level 3 during Fiscal 2013 were exclusively to Level 2.

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. There were no transfers between Level 1 and Level 2 for Fiscal 2015 and 2014. The Company transferred $79.3 U.S. Government securities from Level 1 into Level 2 during Fiscal 2013 reflecting the level of market activity in these instruments.

Primary market issuance and secondary market activity for certain asset-backed, hybrid and corporate securities during Fiscal 2015, 2014 and 2013 increased the market observable inputs used to establish fair values for similar securities. These factors, along with more consistent pricing from third-party sources, resulted in the Company’s conclusion that there was sufficient trading activity in similar instruments to support classifying these securities as Level 2 as of September 30, 2015, 2014 and 2013. Accordingly, the Company’s assessment resulted in a net transfer out of Level 3 of $34.5 related to asset-backed and corporate securities during Fiscal 2015, a net transfer out of Level 3 of $23.9 related to asset-backed, commercial mortgage-backed and corporate securities during Fiscal 2014, and a net transfer out of Level 3 of $53.0 related to asset-backed, corporate and hybrid securities during Fiscal 2013.

Non-Recurring Fair Value Measurements

The carrying value of goodwill, intangible assets and other long-lived assets are tested annually or more frequently if an event occurs that indicates an impairment loss may have been incurred, using fair value measurements with unobservable inputs (Level 3). See Note 12, Goodwill and Intangibles, including deferred acquisition costs and value of business acquired, net.

As discussed in Note 2, Significant Accounting Policies and Practices and Recent Accounting Pronouncements, Compass reviews its unproved oil and natural gas property costs on a quarterly basis to assess for impairment and transfer of unproved costs to proved properties as a result of extensions or discoveries from drilling operations or determine that no proved reserves are attributable to such costs. Compass expects these costs to be evaluated over approximately four years and transferred to the depletable portion of the full cost pool during that time. As a result of this evaluation, Compass impaired approximately $21.9, $6.1 and $10.3 of undeveloped properties which were transferred to the depletable portion of the full cost pool during Fiscal 2015, Fiscal 2014 and the period from inception to September 30, 2013, respectively. The impairment was recorded to reflect the estimated fair value based on Compass' evaluation of potential oil and natural gas reserves from these properties.

The fair value measurements utilized as part of the impairment calculation include significant unobservable inputs that are considered to be Level 3 within the fair value hierarchy. These unobservable inputs include management’s estimates of reserve quantities, commodity prices, operating costs, development costs, discount factors and other risk factors applied to the future cash flows.

Financial Assets and Liabilities Not Measured at Fair Value

The carrying amount, estimated fair value and the level of the fair value hierarchy of the Company’s financial instrument assets and liabilities which are not measured at fair value on the Consolidated Balance Sheets are summarized as follows:



	September 30, 2015
	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets (a)
Cash and cash equivalents	$	1,197.0	$	—	$	—	$	1,197.0	$	1,197.0
Commercial mortgage loans	—		—		489.6		489.6		489.2
Other invested assets	—		—		26.4		26.4		26.6
Asset-based loans	—		—		335.8		335.8		335.8
Total financial assets	$	1,197.0	$	—	$	851.8	$	2,048.8	$	2,048.6

Liabilities (a)
Total debt (b)	$	—	$	6,492.0	$	22.3	$	6,514.3	$	6,382.7
Investment contracts, included in contractholder funds	—		—		14,125.7		14,125.7		15,620.4
Total financial liabilities	$	—	$	6,492.0	$	14,148.0	$	20,640.0	$	22,003.1



	September 30, 2014
	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets (a)
Cash and cash equivalents	$	1,319.2	$	—	$	—	$	1,319.2	$	1,319.2
Commercial mortgage loans	—		—		136.2		136.2		136.2
Other invested assets	—		—		15.5		15.5		15.5
Asset-based loans	—		—		811.6		811.6		811.6
Total financial assets	$	1,319.2	$	—	$	963.3	$	2,282.5	$	2,282.5

Liabilities (a)
Total debt (b)	$	—	$	5,308.5	$	—	$	5,308.5	$	5,157.8
Investment contracts, included in contractholder funds	—		—		13,108.8		13,108.8		14,555.4
Total financial liabilities	$	—	$	5,308.5	$	13,108.8	$	18,417.3	$	19,713.2


(a)	The carrying amounts of trade receivables, accounts payable, 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.


(b)	The fair values of debt set forth above are generally based on quoted or observed market prices.

Valuation Methodology

Asset-based loans

The fair value of the asset-based loans originated by Salus approximate their net carrying value. Such loans carry a variable rate that are typically revolving in nature and can be settled at the demand of either party. Nonaccrual loans are considered impaired for reporting purposes and are measured and recorded at fair value on a non-recurring basis. As the loans are collateral dependent, Salus measures such impairment based on the estimated fair value of eligible proceeds. This is generally based on estimated market prices from an independently prepared appraisal. The impaired loan balance represents those nonaccrual loans for which impairment was recognized during the year.

Commercial Mortgage Loans on Real Estate

The fair value of CMLs is established using a discounted cash flow method based on credit rating, maturity and future income. The ratings for CMLs 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 CMLs 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 the CMLs are classified as Level 3 within the fair value hierarchy.

Other Invested Assets - Policy Loans

Also included in other invested assets are policy loans. Fair values for policy loans are estimated using 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.

Other Invested Assets- Limited Partnership Investment

Fair value of the Company’s limited partnership investment, a private equity fund, is based upon estimated net asset value information and is classified as Level 3. For further discussion about the Company’s limited partnership investment see Note 5, Investments, to our Consolidated Financial Statements.

Investment Contracts Included in Contractholder Funds

Investment contracts include deferred annuities, FIAs, IUL and immediate annuities. The fair values of deferred annuity, FIAs, and IUL contracts are based on their cash surrender value (i.e. the cost FGL 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 September 30, 2015 and 2014, this resulted in higher and lower, respectively, 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 disclosure of fair value.