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Section 1: 10-Q (10-Q)

Document
 
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 March 31, 2017
OR
¨
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 58,991,639 shares of the registrant’s common stock outstanding as of May 1, 2017.
 



FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
TABLE OF CONTENTS
 
 
Page
PART I. FINANCIAL INFORMATION & FORWARD LOOKING STATEMENTS
 
 
PART II. OTHER INFORMATION

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Table of Contents

PART I: FINANCIAL INFORMATION
Item 1.
Financial Statements
FIDELITY & GUARANTY LIFE AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 
March 31,
2017
 
September 30,
2016
 
(Unaudited)
 
 
ASSETS
 
 
 
Investments:

 
 
Fixed maturity securities, available-for-sale, at fair value (amortized cost: March 31, 2017 - $19,501; September 30, 2016 - $18,521)
$
20,052

 
$
19,411

Equity securities, available-for-sale, at fair value (amortized cost: March 31, 2017 - $682; September 30, 2016 - $640)
712

 
683

Derivative investments
351

 
276

Commercial mortgage loans
579

 
595

Other invested assets
119

 
60

Total investments
21,813

 
21,025

Related party loans
71

 
71

Cash and cash equivalents
887

 
864

Accrued investment income
225

 
214

Reinsurance recoverable
3,426

 
3,464

Intangibles, net
1,184

 
1,026

Deferred tax assets, net
87

 

Other assets
204

 
371

Total assets
$
27,897

 
$
27,035

 
 
 
 
LIABILITIES AND SHAREHOLDERS' EQUITY
 
 
 
 
 
 
 
Contractholder funds
$
20,052

 
$
19,251

Future policy benefits
3,435

 
3,467

Funds withheld for reinsurance liabilities
1,134

 
1,172

Liability for policy and contract claims
60

 
55

Debt
300

 
300

Revolving credit facility
105

 
100

Deferred tax liability, net

 
10

Other liabilities
903

 
746

Total liabilities
25,989

 
25,101

 
 
 
 
Commitments and contingencies ("Note 12")

 

 
 
 
 
Shareholders' equity:
 
 
 
Preferred stock ($.01 par value, 50,000,000 shares authorized, no shares issued at March 31, 2017 and September 30, 2016)
$

 
$

Common stock ($.01 par value, 500,000,000 shares authorized, 58,991,806 issued and outstanding at March 31, 2017; 58,956,127 shares issued and outstanding at September 30, 2016)
1

 
1

Additional paid-in capital
715

 
714

Retained earnings
914

 
792

Accumulated other comprehensive income
291

 
439

Treasury stock, at cost (568,847 shares at March 31, 2017; 537,613 shares at September 30, 2016)
(13
)
 
(12
)
Total shareholders' equity
1,908

 
1,934

Total liabilities and shareholders' equity
$
27,897

 
$
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
 
Six months ended
 
March 31,
2017
 
March 31,
2016
 
March 31,
2017
 
March 31,
2016
 
(Unaudited)
 
(Unaudited)
Revenues:
 
 
 
 
 
 
 
Premiums
$
3

 
$
16

 
$
14

 
$
31

Net investment income
247

 
227

 
487

 
449

Net investment gains (losses)
81

 
(42
)
 
132

 
21

Insurance and investment product fees and other
44

 
32

 
82

 
61

Total revenues
375

 
233

 
715

 
562

Benefits and expenses:
 
 
 
 
 
 
 
Benefits and other changes in policy reserves
268

 
188

 
288

 
369

Acquisition and operating expenses, net of deferrals
33

 
27

 
61

 
55

Amortization of intangibles
33

 
(3
)
 
156

 
38

        Total benefits and expenses
334

 
212

 
505

 
462

Operating income
41

 
21

 
210

 
100

Interest expense
(6
)
 
(6
)
 
(12
)
 
(12
)
Income before income taxes
35

 
15

 
198

 
88

Income tax expense
(13
)
 
(6
)
 
(68
)
 
(31
)
        Net income
$
22

 
$
9

 
$
130

 
$
57

 
 
 
 
 
 
 
 
Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.38

 
$
0.16

 
$
2.23

 
$
0.98

Diluted
$
0.38

 
$
0.16

 
$
2.23

 
$
0.98

Weighted average common shares used in computing net income per common share:
 
 
 
 
 
 
 
Basic
58,326,396

 
58,306,784

 
58,303,213

 
58,262,922

Diluted
58,382,130

 
58,610,762

 
58,374,519

 
58,573,472

 
 
 
 
 
 
 
 
Cash dividend per common share
$
0.065

 
$
0.065

 
$
0.130

 
$
0.130

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental disclosures:
 
 
 
 
 
 
 
Total other-than-temporary impairments
$
(21
)
 
$
(1
)
 
$
(22
)
 
$
(11
)
Portion of other-than-temporary impairments included in other comprehensive income

 

 

 

Net other-than-temporary impairments
(21
)
 
(1
)
 
(22
)
 
(11
)
Gains (losses) on derivative and embedded derivatives
99

 
(49
)
 
150

 
21

Other realized investment gains
3

 
8

 
4

 
11

        Total net investment gains (losses)
$
81

 
$
(42
)
 
$
132

 
$
21



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
 
Six months ended
 
March 31,
2017
 
March 31,
2016
 
March 31,
2017
 
March 31,
2016
 
(Unaudited)
 
(Unaudited)
Net income
$
22

 
$
9

 
$
130

 
$
57

 
 
 
 
 
 
 
 
Other comprehensive (loss) income:
 
 
 
 
 
 
 
Unrealized investment gains/(losses):
 
 
 
 
 
 
 
Change in unrealized investment gains/losses before reclassification adjustment
298

 
247

 
(365
)
 
(126
)
Net reclassification adjustment for gains included in net income
18

 
(7
)
 
16

 

Changes in unrealized investment gains/losses after reclassification adjustment
316

 
240

 
(349
)
 
(126
)
Adjustments to intangible assets
(101
)
 
(79
)
 
124

 
56

Changes in deferred income tax asset/liability
(77
)
 
(56
)
 
77

 
25

Net changes to derive comprehensive income (loss) for the period
138

 
105

 
(148
)
 
(45
)
Comprehensive income (loss) net of tax
$
160

 
$
114

 
$
(18
)
 
$
12


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

 

 

 
(8
)
 

 

 
(8
)
Net income

 

 

 
130

 

 

 
130

Unrealized investment losses, net

 

 

 

 
(148
)
 

 
(148
)
Stock compensation

 

 
1

 

 

 

 
1

Balance, March 31, 2017
$

 
$
1

 
$
715

 
$
914

 
$
291

 
$
(13
)
 
$
1,908

 
 
 
 
 
 
 
 
 
 
 
 
 
 

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)
 
Six months ended
 
March 31,
2017
 
March 31,
2016
 
(Unaudited)
Cash flows from operating activities:
 
 
 
Net income
$
130

 
$
57

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Stock based compensation
2

 
5

Amortization
(13
)
 
(24
)
Deferred income taxes
(19
)
 
25

Interest credited/index credit to contractholder account balances and other reserve movements
230

 
291

Net recognized (gains) on investments and derivatives
(132
)
 
(21
)
Charges assessed to contractholders for mortality and administration
(64
)
 
(50
)
Deferred policy acquisition costs, net of related amortization
(34
)
 
(126
)
Changes in operating assets and liabilities:
 
 
 
     Reinsurance recoverable
(12
)
 
5

     Future policy benefits
(32
)
 
(5
)
  Funds withheld from reinsurers
(41
)
 
(49
)
  Collateral posted
57

 
65

     Other assets and other liabilities
60

 
(7
)
Net cash provided by operating activities
132

 
166

Cash flows from investing activities:
 
 
 
Proceeds from available-for-sale investments sold, matured or repaid
1,327

 
1,282

Proceeds from derivatives instruments and other invested assets
209

 
105

Proceeds from commercial mortgage loans
16

 
5

Cost of available-for-sale investments acquired
(2,141
)
 
(1,715
)
Costs of derivatives instruments and other invested assets
(181
)
 
(146
)
Costs of commercial mortgage loans

 
(87
)
Related party loans

 
(4
)
Capital expenditures
(6
)
 
(4
)
Net cash (used in) investing activities
(776
)
 
(564
)
Cash flows from financing activities:
 
 
 
Treasury stock
(1
)
 
(1
)
Common stock issued under employee plans

 
2

Draw on revolving credit facility
5

 

Dividends paid
(8
)
 
(8
)
Contractholder account deposits
1,493

 
1,253

Contractholder account withdrawals
(822
)
 
(854
)
Net cash provided by financing activities
667

 
392

Change in cash & cash equivalents
23

 
(6
)
Cash & cash equivalents, beginning of period
864

 
502

Cash & cash equivalents, end of period
$
887

 
$
496

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Interest paid
$
11

 
$
10

Taxes paid
$

 
$
1

Deferred sales inducements
$
5

 
$
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.
As previously disclosed, on April 17, 2017, FGL terminated its Agreement and Plan of Merger (as amended, “Merger Agreement” and the merger contemplated thereby, the "Merger"), by and among FGL, Anbang Insurance Group Co., Ltd. and its affiliates (collectively, “Anbang”). Prior to its termination, the Merger Agreement was amended on November 3, 2016 and on February 9, 2017, each time to extend the outside termination date. As part of the February 9, 2017 amendment, the Merger Agreement was also amended to permit FGL to explore and negotiate strategic alternatives with other parties, but not to enter into a definitive agreement with a third party while the Merger Agreement was in effect. As a result of the termination of the Merger Agreement, FGL has no remaining obligations under the Merger Agreement and may enter into an alternative transaction. In connection with the termination of the Merger Agreement, on April 17, 2017, FGL’s Board of Directors announced that it was continuing to evaluate strategic alternatives to maximize shareholder value and had received interest from a number of parties.
There can be no assurance that FGL’s evaluation of strategic alternatives will result in a transaction, or that any transaction, if pursued, will be consummated. FGL’s evaluation of strategic alternatives may be terminated at any time with or without notice. FGL does not intend to disclose developments with respect to this process until such time that it determines otherwise in its sole discretion or as required by applicable law.
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 six months ended March 31, 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.
(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 beneficiary of the VIE. If we determine we are the primary beneficiary of a VIE, we consolidate the assets and

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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 FASB issued new guidance on Stock Compensation (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 will 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 will 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 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

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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 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.

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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.

(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 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 March 31, 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 $2,654 or 12% and $2,448 or 12%, respectively, of the invested assets portfolio, and an amortized cost of $2,583 and $2,352, respectively. As of March 31, 2017, the Company’s holdings in this industry include

12

Table of Contents

investments in 111 different issuers with the top ten investments accounting for 31% of the total holdings in this industry. As of March 31, 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 March 31, 2017 and September 30, 2016 was Wells Fargo & Company with a total fair value of $154 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”) 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 March 31, 2017. As of March 31, 2017, the net amount recoverable from Wilton Re was $1,540 and the net amount recoverable from FSRCI was $1,067. 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.


13

Table of Contents

(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 March 31, 2017 and September 30, 2016 are summarized as follows:
 
March 31, 2017
 
 Amortized Cost
 
Gross Unrealized Gains
 
Gross Unrealized Losses
 
Fair Value
 
Carrying Value
 
 
 
 
 
 
 
 
 
 
Available-for sale securities
 
 
 
 
 
 
 
 
 
Asset-backed securities
$
2,650

 
$
33

 
$
(14
)
 
$
2,669

 
$
2,669

Commercial mortgage-backed securities
961

 
9

 
(19
)
 
951

 
951

Corporates
11,621

 
521

 
(164
)
 
11,978

 
11,978

Equities
682

 
35

 
(5
)
 
712

 
712

Hybrids
1,349

 
61

 
(35
)
 
1,375

 
1,375

Municipals
1,582

 
119

 
(21
)
 
1,680

 
1,680

Residential mortgage-backed securities
1,253

 
75

 
(16
)
 
1,312

 
1,312

U.S. Government
85

 
2

 

 
87

 
87

Total available-for-sale securities
20,183

 
855

 
(274
)
 
20,764

 
20,764

Derivative investments
218

 
139

 
(6
)
 
351

 
351

Commercial mortgage loans
579

 

 

 
576

 
579

Other invested assets
119

 

 

 
115

 
119

Total investments
$
21,099

 
$
994

 
$
(280
)
 
$
21,806

 
$
21,813


 
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 March 31, 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 $18,816 and $18,075 at March 31, 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.

14

Table of Contents

At March 31, 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 $759 and $649 at March 31, 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.
 
March 31, 2017
 
Amortized Cost
 
 Fair Value
Corporates, Non-structured Hybrids, Municipal and U.S. Government securities:
 
 
 
Due in one year or less
$
342

 
$
346

Due after one year through five years
1,786

 
1,835

Due after five years through ten years
3,162

 
3,257

Due after ten years
8,607

 
8,947

Subtotal
13,897

 
14,385

Other securities which provide for periodic payments:
 
 
 
Asset-backed securities
2,650

 
2,669

Commercial mortgage-backed securities
961

 
951

Structured hybrids
740

 
735

Residential mortgage-backed securities
1,253

 
1,312

Subtotal
5,604

 
5,667

Total fixed maturity available-for-sale securities
$
19,501

 
$
20,052

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 March 31, 2017 increased due to upward movement in the U.S. Treasury rates. Bond prices in most sectors moved lower based on these higher Treasury yields. 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 March 31, 2017.

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Table of Contents

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:
 
March 31, 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
$
314

 
$
(2
)
 
$
766

 
$
(12
)
 
$
1,080

 
$
(14
)
Commercial mortgage-backed securities
355

 
(7
)
 
183

 
(12
)
 
538

 
(19
)
Corporates
2,004

 
(59
)
 
1,006

 
(105
)
 
3,010

 
(164
)
Equities
130

 
(3
)
 
30

 
(2
)
 
160

 
(5
)
Hybrids
85

 
(5
)
 
363

 
(30
)
 
448

 
(35
)
Municipals
427

 
(17
)
 
39

 
(4
)
 
466

 
(21
)
Residential mortgage-backed securities
58

 

 
357

 
(16
)
 
415

 
(16
)
U.S. Government
6

 

 

 

 
6

 

Total available-for-sale securities
$
3,379

 
$
(93
)
 
$
2,744

 
$
(181
)
 
$
6,123

 
$
(274
)
Total number of available-for-sale securities in an unrealized loss position less than twelve months
 
 
 
 
 
 
 
 
 
 
494

Total number of available-for-sale securities in an unrealized loss position twelve months or longer
 
 
 
 
 
 
 
 
 
 
437

Total number of available-for-sale securities in an unrealized loss position
 
 
 
 
 
 
 
 
 
 
931


 
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 March 31, 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 March 31, 2017 and September 30, 2016, securities with a fair value of $71 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.

16

Table of Contents

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 six months ended March 31, 2017 and 2016, for which a portion of the OTTI was recognized in AOCI:
 
Three months ended
 
Six months ended
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 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 $21 and $22 of credit impairment losses in operations during the three and six months ended March 31, 2017 and $0 and $0 of change of intent impairment losses in operations during the three and six months ended March 31, 2017, related to fixed maturity securities with an amortized cost of $170 and a fair value of $148 at March 31, 2017. During the three and six months ended March 31, 2016, the Company recognized $1 and $11 of credit impairment losses in operations related to fixed maturity securities with an amortized cost of $89 and a fair value of $78 at March 31, 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
 
Six months ended
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
OTTI Recognized in Net Income:
 
 
 
 
 
 
 
Asset-backed securities
$

 
$
1

 
$
1

 
$
5

Corporates
20

 

 
20

 
6

Other invested assets
1

 

 
1

 

Total
$
21

 
$
1

 
$
22

 
$
11

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 quarter ended March 31, 2017 as the events are reflective of conditions that existed at the balance sheet date. 





17

Table of Contents

Commercial Mortgage Loans
Commercial mortgage loans ("CMLs") represented approximately 3% of the Company’s total investments as of March 31, 2017 and September 30, 2016. 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:
 
March 31, 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
65

 
11
%
 
64

 
11
%
Multifamily
69

 
12
%
 
70

 
11
%
Office
158

 
27
%
 
160

 
27
%
Retail
218

 
38
%
 
220

 
37
%
Total commercial mortgage loans, gross of valuation allowance
$
580

 
100
%
 
$
596

 
100
%
Allowance for loan loss
(1
)
 
 
 
(1
)
 
 
Total commercial mortgage loans
$
579

 
 
 
$
595

 
 
 
 
 
 
 
 
 
 
U.S. Region:
 
 
 
 
 
 
 
East North Central
$
135

 
23
%
 
$
137

 
23
%
East South Central
20

 
4
%
 
21

 
4
%
Middle Atlantic
86

 
15
%
 
97

 
16
%
Mountain
68

 
12
%
 
67

 
12
%
New England
14

 
2
%
 
14

 
2
%
Pacific
135

 
23
%
 
136

 
23
%
South Atlantic
66

 
12
%
 
67

 
11
%
West North Central
14

 
2
%
 
14

 
2
%
West South Central
42

 
7
%
 
43

 
7
%
Total commercial mortgage loans, gross of valuation allowance
$
580

 
100
%
 
$
596

 
100
%
Allowance for loan loss
(1
)
 
 
 
(1
)
 
 
Total commercial mortgage loans
$
579

 
 
 
$
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 March 31, 2017 and September 30, 2016. As of March 31, 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.

18

Table of Contents

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 March 31, 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)
 
 
 
 
March 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LTV Ratios:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 50%
$
184

 
$

 
$
18

 
$
1

 
$
203

 
35
%
 
$
201

 
35
%
50% to 60%
242

 

 

 

 
242

 
42
%
 
241

 
42
%
60% to 75%
112

 
7

 
16

 

 
135

 
23
%
 
134

 
23
%
Commercial mortgage loans
$
538

 
$
7

 
$
34

 
$
1

 
$
580

 
100
%
 
$
576

 
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.
 
March 31, 2017
 
September 30, 2016
Gross balance commercial mortgage loans
$
580

 
$
596

Allowance for loan loss
(1
)
 
(1
)
Net balance commercial mortgage loans
$
579

 
$
595

The Company recognizes a mortgage loan as delinquent when payments on the loan are greater than 30 days past due. At March 31, 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:
 
March 31, 2017
 
September 30, 2016
Current to 30 days
$
580

 
$
596

Past due

 

Total carrying value
$
580

 
$
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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Table of Contents

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 March 31, 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
 
Six months ended
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
Fixed maturity securities, available-for-sale
$
236

 
$
211

 
$
464

 
$
421

Equity securities, available-for-sale
10

 
8

 
20

 
16

Commercial mortgage loans
6

 
6

 
12

 
12

Related party loans

 
1

 

 
2

Invested cash and short-term investments

 
2

 

 
2

Other investments
1

 
4

 
2

 
5

Gross investment income
253

 
232

 
498

 
458

Investment expense
(6
)
 
(5
)
 
(11
)
 
(9
)
Net investment income
$
247

 
$
227

 
$
487

 
$
449

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 is expected to be paid in the third fiscal quarter of 2017. 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”.

20

Table of Contents

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
 
Six months ended
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
Net realized gains (losses) on fixed maturity available-for-sale securities
$
(17
)
 
$
7

 
$
(15
)
 
$
2

Realized gains (losses) on equity securities

 
1

 

 
1

Change in fair value of other derivatives and embedded derivatives
1

 
(1
)
 
1

 
1

Realized losses on other invested assets
(1
)
 
(1
)
 
(3
)
 
(3
)
Net realized (losses) gains on available-for-sale securities
(17
)
 
6

 
(17
)
 
1

Realized gains (losses) on certain derivative instruments
75

 
(42
)
 
76

 
(54
)
Unrealized gains (losses) on certain derivative instruments
34

 
11

 
72

 
64

Change in fair value of reinsurance related embedded derivative
(11
)
 
(17
)
 
1

 
10

Realized (losses) gains on hedging derivatives and reinsurance-related embedded derivatives
98

 
(48
)
 
149

 
20

Net investment gains (losses)
$
81

 
$
(42
)
 
$
132

 
$
21

For the three and six months ended March 31, 2017, proceeds from the sale of fixed maturity available-for-sale securities totaled $263 and $360, gross gains on such sales totaled $8 and $10, and gross losses totaled $2 and $4, respectively.
For the three and six months ended March 31, 2016, proceeds from the sale of fixed maturity available-for-sale securities, totaled $185 and $749, gross gains on such sales totaled $5 and $18, and gross losses totaled $3 and $12, 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 $8 and $22 as of March 31, 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 March 31, 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 March 31, 2017, the Company's maximum exposure to loss was $90 in recorded carrying value and $151 in unfunded commitments.


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Table of Contents

(5) Derivative Financial Instruments
The carrying amounts of derivative instruments, including derivative instruments embedded in fixed indexed annuity (“FIA”) contracts, is as follows:
 
March 31, 2017
 
September 30, 2016
Assets:
 
 
 
Derivative investments:
 
 
 
Call options
$
351

 
$
276

Futures contracts

 

Other invested assets:
 
 
 
Other derivatives and embedded derivatives
14

 
13

Other assets:
 
 
 
Reinsurance related embedded derivative
120

 
119

 
$
485

 
$
408

Liabilities:
 
 
 
Contractholder funds:
 
 
 
FIA embedded derivative
$
2,362

 
$
2,383

Funds withheld for reinsurance liabilities:
 
 
 
Call options payable to FSRCI
13

 
11

 
$
2,375

 
$
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
 
Six months ended
 
March 31, 2017
 
March 31, 2016
 
March 31, 2017
 
March 31, 2016
Revenues:
 
 
 
 
 
 
 
Net investment gains (losses):
 
 
 
 
 
 
 
Call options
$
105

 
$
(29
)
 
$
144

 
$
7

Futures contracts
4

 
(2
)
 
4

 
3

Other derivatives and embedded derivatives
1

 
(1
)
 
1

 
1

Reinsurance related embedded derivative
(11
)
 
(17
)
 
1

 
10

 
$
99

 
$
(49
)
 
$
150

 
$
21

Benefits and other changes in policy reserves
 
 
 
 
 
 
 
FIA embedded derivatives
$
112

 
$
48

 
$
(21
)
 
$
99

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 March 31, 2017 the fair value of the fund-linked note and embedded derivative were $24 and $14, 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 both March 31, 2017 and September 30, 2016 only one loan denominated in CAD currency remains.
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. The other loan participation remains outstanding at March 31, 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 March 31, 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 six months ended March 31, 2017; and $(2) and $0 realized losses for the three and six months ended March 31, 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 has entered into several CAD currency forward contracts since August 2016 to economically hedge against unfavorable movements in CAD on the one CAD-denominated loan participation which remains outstanding at March 31, 2017. 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 March 31, 2017 was $0. The Company had realized gains of $0 and $0 for the three and six months ended March 31, 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.

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Table of Contents

Information regarding the Company’s exposure to credit loss on the call options it holds is presented in the following table:
 
 
 
 
March 31, 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+
 
$
4,092

 
$
135

 
$
100

 
$
35

 
$
2,302

 
$
55

 
$
10

 
$
45

Deutsche Bank
 
 A/A3/A-
 
86

 
9

 

 
9

 
1,620

 
46

 
12

 
34

Morgan Stanley
 
 */A1/A+
 
2,125

 
81

 
90

 
(9
)
 
2,952

 
87

 
58

 
29

Barclay's Bank
 
 A/A1/A-
 
1,436

 
48

 
7

 
41

 
1,389

 
39

 

 
39

Canadian Imperial Bank of Commerce
 
 AA-/Aa3/A+
 
2,479