Investments

The Company’s consolidated investments are summarized as follows:



	September 30, 2015
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value
Fixed-maturity securities, available-for sale
Asset-backed securities	$	1,902.6	$	5.0	$	(47.1	)	$	1,860.5	$	1,860.5
Commercial mortgage-backed securities	877.9		13.7		(9.4		)	882.2		882.2
Corporates	9,547.7		351.1		(354.1		)	9,544.7		9,544.7
Hybrids	1,210.8		44.8		(42.3		)	1,213.3		1,213.3
Municipals	1,519.7		103.0		(15.1		)	1,607.6		1,607.6
Residential mortgage-backed securities	2,099.4		89.4		(26.3		)	2,162.5		2,162.5
U.S. Government	233.4		10.6		—			244.0		244.0
Total fixed maturity securities	17,391.5		617.6		(494.3		)	17,514.8		17,514.8
Equity securities
Available-for-sale	593.4		27.2		(4.0		)	616.6		616.6
Held for trading	18.7		14.1		—			32.8		32.8
Total equity securities	612.1		41.3		(4.0		)	649.4		649.4
Derivatives	219.0		12.4		(149.5		)	81.9		81.9
Asset-based loans	335.8		—		—			335.8		335.8
Commercial mortgage loans	489.2		0.4		—			489.6		489.2
Other invested assets	39.6		—		—			39.6		39.6
Total investments	$	19,087.2	$	671.7	$	(647.8	)	$	19,111.1	$	19,110.7



	September 30, 2014
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value
Fixed-maturity securities, available-for-sale
Asset-backed securities	$	1,800.8	$	10.9	$	(18.8	)	$	1,792.9	$	1,792.9
Commercial mortgage-backed securities	617.6		21.3		(2.0		)	636.9		636.9
Corporates	9,345.5		499.2		(48.9		)	9,795.8		9,795.8
Hybrids	1,279.1		52.2		(15.2		)	1,316.1		1,316.1
Municipals	1,149.9		116.2		(6.3		)	1,259.8		1,259.8
Residential mortgage-backed securities	1,984.8		140.3		(11.1		)	2,114.0		2,114.0
U.S. Government	291.0		6.4		(1.4		)	296.0		296.0
Total fixed maturity securities	16,468.7		846.5		(103.7		)	17,211.5		17,211.5
Equity securities
Available-for-sale	645.7		23.0		(5.1		)	663.6		663.6
Held for trading	141.2		8.2		(44.9		)	104.5		104.5
Total equity securities	786.9		31.2		(50.0		)	768.1		768.1
Derivatives	177.7		123.3		(4.7		)	296.3		296.3
Asset-based loans	811.6		—		—			811.6		811.6
Commercial mortgage loans	136.2		—		—			136.2		136.2
Other invested assets	28.7		0.1		—			28.8		28.8
Total investments	$	18,409.8	$	1,001.1	$	(158.4	)	$	19,252.5	$	19,252.5

Included in AOCI were cumulative gross unrealized gains of $0.9 and gross unrealized losses of $1.9 related to the non-credit portion of OTTI on non-agency residential mortgage-backed securities at September 30, 2015 and 2014, respectively. The non-agency residential mortgage-backed securities unrealized gains and losses represent the difference between amortized cost and fair value on securities that were previously impaired.

Securities held on deposit with various state regulatory authorities had a fair value of $16,012.3 and $15,009.3 at September 30, 2015 and 2014, respectively. FGL Insurance is domesticated in Iowa and under Iowa regulations, insurance companies are required to hold securities on deposit in an amount no less than the FGL Insurance’s legal reserve as prescribed by Iowa regulations.

The Company held no material non-income producing investments for a period greater than twelve months during September 30, 2015 and 2014.

Maturities of Fixed-maturity Securities

The amortized cost and fair value of fixed maturity AFS 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.



	September 30, 2015
	Amortized Cost		Fair Value
Corporate, Non-structured Hybrids, Municipal and U.S. Government securities:
Due in one year or less	$	155.9	$	158.1
Due after one year through five years	1,800.7		1,818.2
Due after five years through ten years	2,947.6		2,947.3
Due after ten years	6,909.3		7,006.7
Subtotal	11,813.5		11,930.3
Other securities which provide for periodic payments:
Asset-backed securities	1,902.6		1,860.5
Commercial mortgage-backed securities	877.9		882.2
Structured hybrids	698.1		679.3
Residential mortgage-backed securities	2,099.4		2,162.5
Total fixed maturity available-for-sale securities	$	17,391.5	$	17,514.8

Securities in an Unrealized Loss Position

The Company’s AFS 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. 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 debt 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. The Company has concluded that the fair value of the securities presented in the table below were not OTTI as of September 30, 2015.

The fair value and gross unrealized losses of AFS, aggregated by investment category, were as follows:



	September 30, 2015
	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	$	603.8	$	(13.8	)	$	833.1	$	(33.3	)	$	1,436.9	$	(47.1	)
Commercial mortgage-backed securities	262.1		(7.3		)	132.5		(2.1		)	394.6		(9.4		)
Corporates	2,342.4		(200.6		)	1,328.2		(153.5		)	3,670.6		(354.1		)
Equities	36.7		(0.3		)	106.0		(3.7		)	142.7		(4.0		)
Hybrids	87.6		(3.8		)	542.1		(38.5		)	629.7		(42.3		)
Municipals	220.5		(6.1		)	192.4		(9.0		)	412.9		(15.1		)
Residential mortgage-backed securities	423.1		(10.3		)	293.9		(16.0		)	717.0		(26.3		)
Total available-for-sale securities	$	3,976.2	$	(242.2	)	$	3,428.2	$	(256.1	)	$	7,404.4	$	(498.3	)
Total number of available-for-sale securities in an unrealized loss position			707					396					1,103



	September 30, 2014
	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	$	825.8	$	(11.8	)	$	288.2	$	(7.0	)	$	1,114.0	$	(18.8	)
Commercial mortgage-backed securities	160.3		(0.9		)	0.4		(1.1		)	160.7		(2.0		)
Corporates	816.6		(16.3		)	1,127.8		(32.6		)	1,944.4		(48.9		)
Equities	180.4		(2.2		)	54.9		(2.9		)	235.3		(5.1		)
Hybrids	258.2		(2.3		)	290.0		(12.9		)	548.2		(15.2		)
Municipals	—		—			264.9		(6.3		)	264.9		(6.3		)
Residential mortgage-backed securities	298.5		(5.8		)	177.6		(5.3		)	476.1		(11.1		)
U.S Government	37.3		(0.1		)	81.7		(1.3		)	119.0		(1.4		)
Total available-for-sale securities	$	2,577.1	$	(39.4	)	$	2,285.5	$	(69.4	)	$	4,862.6	$	(108.8	)
Total number of available-for-sale securities in an unrealized loss position			319					310					629

At September 30, 2015 and 2014, securities in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments.

At September 30, 2015 and 2014, securities with a fair value of $302.1 and $0.2, 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 2% of the carrying value of all investments.

For Fiscal 2015, the Company recognized OTTI losses in operations totaling $30.1, including credit impairments of $20.1, and change-of-intent impairments of $10.0, related to AFS fixed maturity securities and other invested assets with an amortized cost of $268.0 and a fair value of $237.9 at September 30, 2015. For Fiscal 2014 and 2013, the Company recognized no material OTTI losses on AFS fixed maturity and equity securities.

Details underlying write-downs taken as a result of OTTI that were recognized in Net (loss) income and included in Net investment (losses) gains were as follows:



	Fiscal
	2015		2014		2013
OTTI recognized in net (loss) income:
Corporates	$	5.6	$	—	$	1.2
Municipals	0.3		0.3		—
Residential mortgage-backed securities	7.9		0.1		1.2
Other invested assets	16.3		0.3		0.5
Total	$	30.1	$	0.7	$	2.9

Asset-based Loans

The Company’s portfolio of asset-based loans receivable, originated by Salus and their co-lenders FGL and Front Street, included in “Asset-based loans” in the accompanying Consolidated Balance Sheets as of September 30, 2015 and 2014, consisted of the following:



	September 30,
	2015		2014
Asset-based loans, net of deferred fees, by major industry:
Apparel	$	91.8	$	191.6
Jewelry	79.8		100.1
Electronics	70.8		245.4
Manufacturing	49.0		56.9
Home Furnishings	2.3		71.7
Other	102.2		153.1
Total asset-based loans	395.9		818.8
Less: Allowance for credit losses	60.1		7.2
Total asset-based loans, net	$	335.8	$	811.6

The Company establishes its allowance for credit losses through a provision for credit losses based on Salus’ evaluation of the credit quality of its loan portfolio. The following table presents the activity in its allowance for credit losses for Fiscal 2015, 2014 and 2013:



	Fiscal
	2015			2014		2013
Allowance for credit losses:
Balance at beginning of year	$	7.2		$	5.2	$	1.4
Provision for credit losses	129.5			2.0		3.8
Charge-offs	(76.6		)	—		—
Balance at end of year	$	60.1		$	7.2	$	5.2

Credit Quality Indicators

Salus monitors credit quality as indicated by various factors and utilizes such information in its evaluation of the adequacy of the allowance for credit losses. As of September 30, 2015, there were nine loans with a net carrying value of $106.3 considered delinquent by Salus and placed on non-accrual status. It is Salus’ policy to discontinue accruing interest when there is a reasonable doubt as to collectability in the normal course of business. Nonaccrual loans are considered impaired for reporting purposes and are individually evaluated for impairment.

During Fiscal 2015, the Company recognized charge-offs of $76.6. For Fiscal 2015, the Company recorded additional net increases in the allowance for credit losses of $52.9 for a total provision for credit losses of $129.5. The internal risk rating of nine delinquent loans was categorized as doubtful during Fiscal 2015. Salus has assessed the adequacy of its allowance for credit losses and believes the level of allowance for credit losses to be adequate to mitigate inherent losses in the portfolio. As of September 30, 2014, there were no outstanding loans that had been individually considered impaired.

During Fiscal 2015, the bankruptcy court overseeing the Chapter 11 proceedings of RadioShack Corp. (“RadioShack”) approved the sale of 1,743 of the company’s stores to General Wireless Inc., an affiliate of Standard General LP. Salus was the lender under RadioShack’s $250.0 term loan placed in December 2013 with a net exposure to our Insurance and Asset Management segments of $57.0 and $93.0, respectively, after giving effect to a non-qualifying participation of $100.0 held by a third party. During Fiscal 2015, the $100.0 held by a third party was repaid in full because this third party had the right of first out in the case of a bankruptcy under an intercreditor agreement with Salus. During Fiscal 2015, the Company recognized charge-offs of $76.6 and an additional net increase in the provision of credit losses of $24.8 related to the loan with RadioShack. The extent to which Salus will be able to recover amounts owed to it by RadioShack is dependent on a number of factors, including the results of asset sales and ongoing litigation.



	Internal Risk Rating
	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2015	$	131.9	$	40.7	$	97.8	$	125.5	$	395.9
September 30, 2014	$	195.3	$	372.7	$	250.8	$	—	$	818.8

Commercial Mortgage Loans on Real Estate

Included on the Consolidated Balance Sheets were commercial mortgage loans ("CMLs") of $489.2 and $136.2, or approximately 2.6% and 0.7% of the Company's total investments as of September 30, 2015 and 2014, respectively. All of the CMLs are investments of FGL Insurance. The Company primarily makes mortgage loans on income producing properties including hotels, industrial properties, retail buildings, multifamily properties and office buildings. FGL Insurance diversifies its CML portfolio by geographic region and property type to reduce concentration risk. Subsequent to origination, FGL Insurance 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:



	September 30, 2015					September 30, 2014
	Gross Carrying Value			% of Total		Gross Carrying Value		% of Total
Property Type:
Retail	$	162.7		33.2	%	$	5.8	4.3	%
Office	137.5			28.1	%	44.6		32.7	%
Industrial - Warehouse	75.5			15.4	%	48.0		35.2	%
Multifamily	64.3			13.1	%	37.8		27.8	%
Industrial - General	36.9			7.5	%	—		—	%
Hotel	12.4			2.5	%	—		—	%
Funeral Home	0.7			0.2	%	—		—	%
Total commercial mortgage loans, gross of valuation allowance	490.0			100.0	%	136.2		100.0	%
Valuation allowance	(0.8		)			—
Total commercial mortgage loans	$	489.2				$	136.2

U.S. Region:
East North Central	$	120.5		24.6	%	$	27.8	20.4	%
Pacific	113.1			23.1	%	61.5		45.1	%
Middle Atlantic	87.2			17.8	%	10.9		8.0	%
South Atlantic	68.3			13.9	%	—		—	%
Mountain	41.6			8.5	%	—		—	%
West South Central	24.7			5.0	%	30.2		22.2	%
West North Central	13.9			2.8	%	5.8		4.3	%
East South Central	11.8			2.4	%	—		—	%
New England	8.9			1.9	%	—		—	%
Total commercial mortgage loans, gross of valuation allowance	490.0			100.0	%	136.2		100.0	%
Valuation allowance	(0.8		)			—
Total commercial mortgage loans	$	489.2				$	136.2

At September 30, 2015 and 2014, FGL Insurance had a CML portfolio with 100% of all CMLs having a LTV ratio of less than 75%. As of September 30, 2015, all CMLs were current and had not experienced credit or other events which would require the recording of an OTTI loss.

LTV and 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 1.0 indicates that a property’s operations do not generate sufficient income to cover debt payments.

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 September 30, 2015 and 2014:



	Debt-Service Coverage Ratios						Total Amount		% of Total		Estimated Fair Value		% of Total
	>1.25		1.00 - 1.25		N/A (a)		Total Amount		% of Total		Estimated Fair Value		% of Total
September 30, 2015
LTV Ratios:
Less than 50%	$	114.3	$	—	$	11.0	$	125.3	25.6	%	$	125.3	25.6	%
50% to 60%	161.0		19.3		—		180.3		36.8	%	179.4		36.6	%
60% to 75%	184.4		—		—		184.4		37.6	%	184.9		37.8	%
Total mortgage loans on real estate	$	459.7	$	19.3	$	11.0	$	490.0	100.0	%	$	489.6	100.0	%
September 30, 2014
LTV Ratios:
Less than 50%	$	44.6	$	—	$	0.8	$	45.4	33.3	%	$	45.4	33.3	%
50% to 60%	19.9		—		—		19.9		14.6	%	19.9		14.6	%
60% to 75%	70.9		—		—		70.9		52.1	%	70.9		52.1	%
Total mortgage loans on real estate	$	135.4	$	—	$	0.8	$	136.2	100.0	%	$	136.2	100.0	%

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

FGL Insurance establishes 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. FGL Insurance believes that the DSC ratio is an indicator of default risk on loans. FGL Insurance believes that the LTV ratio is an indicator of the principal recovery risk for loans that do default.



	September 30, 2015			September 30, 2014
Gross balance commercial mortgage loans	$	490.0		$	136.2
Allowance for loan loss	(0.8		)	—
Net balance commercial mortgage loans	$	489.2		$	136.2

FGL Insurance recognizes a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At September 30, 2015, FGL Insurance had no CMLs that were delinquent in principal or interest payments. The following provides the current and past due composition of FGL Insurance's CMLs on real estate:



	September 30, 2015		September 30, 2014
Current to 30 days	$	490.0	$	136.2
Total carrying value	$	490.0	$	136.2

As of September 30, 2015, FGL Insurance's CML portfolio had no impairments, modifications or troubled debt restructuring.

Net Investment Income

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



	Fiscal
	2015			2014			2013
Fixed maturity available-for-sale securities	$	846.6		$	767.8		$	679.0
Equity available-for-sale securities	35.7			22.8			14.8
Asset-based loans	42.9			61.1			42.6
Commercial mortgage loans	11.4			3.5			1.4
Other investments	9.8			4.6			13.7
Gross investment income	946.4			859.8			751.5
External investment expense	(19.2		)	(17.6		)	(16.8		)
Net investment income	$	927.2		$	842.2		$	734.7

Net investment (losses) gains

“Net investment (losses) gains” reported in the accompanying Consolidated Statements of Operations were as follows:



	Fiscal
	2015			2014			2013
Net realized gains on fixed maturity available-for-sale securities	$	48.6		$	101.3		$	330.0
Realized (losses) gains on equity securities	(4.0		)	13.5			12.6
Net realized gains on securities	44.6			114.8			342.6
Realized gains on certain derivative instruments	118.6			233.8			148.6
Unrealized (losses) gains on certain derivative instruments	(231.9		)	37.7			20.5
Change in fair value of other embedded derivatives	(1.0		)	(0.1		)	—
Change in fair value of derivatives	(114.3		)	271.4			169.1
Realized (losses) gains on other invested assets and funds withheld receivables	(35.0		)	9.1			(0.1		)
Net investment (losses) gains	$	(104.7	)	$	395.3		$	511.6

For Fiscal 2015, principal repayments, tenders, and proceeds from the sale of fixed maturity AFS totaled $4,776.6, gross gains on such sales totaled $83.3 and gross losses totaled $72.5. For Fiscal 2014, principal repayments, tenders, and proceeds from the sale of fixed maturity AFS totaled $5,033.4, gross gains on such sales totaled $108.5 and gross losses totaled $4.9. For Fiscal 2013, principal repayments, tenders, and proceeds from the sale of fixed maturity AFS totaled $8,986.9, gross gains on such sales totaled $351.2 and gross losses totaled $18.3. The proceeds from the sale of fixed maturity AFS exclude maturities and repayments for Fiscal 2015, 2014 and 2013.

Cash flows from consolidated investing activities by security classification were as follows:



	Fiscal
	2015			2014			2013
Proceeds from investments sold, matured or repaid:
Available-for-sale	$	4,939.3		$	5,084.1		$	8,986.9
Trading (acquired for holding)	70.8			54.9			92.9
Derivatives and other	443.6			470.2			352.4
	$	5,453.7		$	5,609.2		$	9,432.2
Cost of investments acquired:
Available-for-sale	$	(5,685.2	)	$	(6,741.2	)	$	(8,757.5	)
Trading (acquired for holding)	—			(99.7		)	(20.8		)
Derivatives and other	(713.1		)	(380.5		)	(162.5		)
	$	(6,398.3	)	$	(7,221.4	)	$	(8,940.8	)