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:



	March 31, 2014
	Level 1		Level 2		Level 3		Fair Value
Assets (a)
Cash and cash equivalents (b)	$	1,319.8	$	—	$	—	$	1,319.8
Contingent purchase price reduction receivable	—		—		41.5		41.5
Derivatives:
Foreign exchange forward agreements	—		2.1		—		2.1
Commodity swap and option agreements	—		0.4		—		0.4
Foreign exchange embedded derivative included in asset-based loans	—		1.2		—		1.2
Call options and futures contracts	—		273.0		—		273.0
Fixed maturity securities, available-for-sale:
Asset-backed securities	—		1,576.5		10.7		1,587.2
Commercial mortgage-backed securities	—		486.6		—		486.6
Corporates	—		9,865.1		657.0		10,522.1
Hybrids	—		451.6		—		451.6
Municipals	—		1,204.4		35.6		1,240.0
Agency residential mortgage-backed securities	—		99.4		—		99.4
Non-agency residential mortgage-backed securities	—		1,847.1		—		1,847.1
U.S. Government	181.5		211.1		—		392.6
Equity securities:
Available-for-sale	—		353.1		—		353.1
Trading	121.0		—		10.8		131.8
Other invested assets	—		2.1		—		2.1
Funds withheld receivable	19.0		135.5		—		154.5
Total financial assets	$	1,641.3	$	16,509.2	$	755.6	$	18,906.1

Liabilities (a)
Derivatives:
FIA embedded derivatives, included in contractholder funds	$	—	$	—	$	1,718.7	$	1,718.7
Front Street future policyholder benefit liability	—		—		151.0		151.0
Foreign exchange forward agreements	—		7.2		—		7.2
Commodity swap and option agreements	—		5.1		—		5.1
Equity conversion feature of preferred stock	—		—		364.8		364.8
Total financial liabilities	$	—	$	12.3	$	2,234.5	$	2,246.8



	September 30, 2013
	Level 1		Level 2		Level 3		Fair Value
Assets (a)
Cash and cash equivalents (b)	$	1,899.7	$	—	$	—	$	1,899.7
Contingent purchase price reduction receivable	—		—		41.0		41.0
Derivatives:
Foreign exchange forward agreements	—		1.8		—		1.8
Commodity swap and option agreements	—		4.1		—		4.1
Call options and futures contracts	—		221.8		—		221.8
Fixed maturity securities, available-for-sale:
Asset-backed securities	—		1,518.1		5.0		1,523.1
Commercial mortgage-backed securities	—		448.7		5.7		454.4
Corporates	—		8,957.2		461.1		9,418.3
Hybrids	—		428.8				428.8
Municipals	—		1,007.0		—		1,007.0
Agency residential mortgage-backed securities	—		98.6		—		98.6
Non-agency residential mortgage-backed securities	—		1,368.0		—		1,368.0
U.S. Government	790.9		210.9		—		1,001.8
Equity securities:
Available-for-sale	—		271.0		—		271.0
Trading	70.8		—		10.7		81.5
Total financial assets	$	2,761.4	$	14,536.0	$	523.5	$	17,820.9

Liabilities (a)
Derivatives:
FIA embedded derivatives, included in contractholder funds	$	—	$	—	$	1,544.4	$	1,544.4
Futures contracts	—		1.0		—		1.0
Foreign exchange forward agreements	—		10.0		—		10.0
Commodity swap and option agreements	—		2.4		—		2.4
Equity conversion feature of preferred stock	—		—		330.8		330.8
Total financial liabilities	$	—	$	13.4	$	1,875.2	$	1,888.6


(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 cash equivalents and equity investments set forth above are generally based on quoted or observed market prices.

Valuation Methodologies

Fixed Maturity Securities & Equity Securities

FGL measures the fair value of its securities based on assumptions used by market participants in pricing the security. The most appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and FGL will then consistently apply the valuation methodology to measure the security’s fair value. FGL’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. FGL 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. 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.

FGL did not adjust prices received from third parties as of March 31, 2014 and September 30, 2013. However, FGL does analyze the third-party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy.

Front Street Re (Delaware) Ltd. and its subsidiaries ("Front Street") elected to apply the Fair Value Option to account for its Funds Withheld Receivables 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 in trust by the cedant. 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 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.

Derivative Financial Instruments

The fair value of derivative assets and liabilities is based upon valuation pricing models, which represents what 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. The fair value of futures contracts represents the cumulative unsettled variation margin (open trade equity net of cash settlements). Fair values for these instruments are determined externally by an independent actuarial firm using market-observable inputs, including interest rates, yield curve volatilities, and other factors. Credit risk related to the counterparty is considered when estimating the fair values of these derivatives. The fair value of the embedded derivatives in FGL’s FIA products are derived using market indices, pricing assumptions and historical data.

The EXCO/HGI JV evaluates derivative assets and liabilities in accordance with master netting agreements with the derivative counterparties, but reports them on a gross basis on the Condensed Consolidated Balance Sheets. Net derivative asset values are determined primarily by quoted futures prices and utilization of the counterparties’ credit-adjusted risk-free rate curves and net derivative liabilities are determined by utilization of a credit-adjusted risk-free rate curve. The credit-adjusted risk-free rates of the EXCO/HGI JV’s counterparties are based on an independent market-quoted credit default swap rate curve for the counterparties’ debt plus the London Interbank Offered Rate (“LIBOR”) curve as of the end of the reporting period. The EXCO/HGI JV’s credit-adjusted risk-free rate is based on its cost of debt plus the LIBOR curve as of the end of the reporting period.

The EXCO/HGI JV’s 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 estimated credit-adjusted risk-free rate curve, as described above.

The EXCO/HGI JV’s natural gas derivatives are swap contracts for notional Mmbtus of natural gas at posted price indexes, including NYMEX Henry Hub (“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, and (iii) the applicable credit-adjusted risk-free rate curve, as described above.

Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value as of March 31, 2014 and September 30, 2013 are as follows:



			Fair Value at				Range (Weighted average)
Assets	Valuation Technique	Unobservable Input(s)	March 31, 2014		September 30, 2013		March 31, 2014	September 30, 2013
Contingent purchase price reduction receivable	Discounted cash flow	Probability of collection	$	41.5	$	41.0	88% - 96% (92%)	88% - 96% (92%)
		Expected term					6 months	9 months
		Discount rate					1%	1%
		Credit insurance risk premium					12%	11%
Asset-backed securities	Broker-quoted	Offered quotes	10.7		5.0		96% - 101% (99%)	100% - 107% (101%)
Commercial mortgage-backed securities	Broker-quoted	Offered quotes	—		5.7		—%	96%
Corporates	Broker-quoted	Quoted prices	591.2		404.5		0% - 120% (94%)	0% - 113% (90%)
Corporates	Market Pricing	Offered quotes	65.8		56.6		94% - 138% (99%)	90% - 131% (97%)
Municipal	Broker-quoted	Offered quotes	35.6		—		102%	—%
Equity	Market Pricing	Revenue multiple	10.8				0.3x - 0.4x
		Probably of transaction closing					90%
	Option Pricing	Risk-adjusted rate			10.7			25.0%
		Risk-free discount factor						0.999
		Risk-adjusted discount factor						0.995
		Upward movement factor (Mu)						1.1
		Downward movement factor (Md)						0.9
		Probability of upward movement (Pu)						48.6%
		Probability of downward movement (Pd)						51.4%
Total			$	755.6	$	523.5

Liabilities
FIA embedded derivatives, included in contractholder funds	Discounted cash flow	Market value of option	$	1,718.7	$	1,544.4	0% - 44% (4%)	0% - 38% (4%)
		SWAP rates					2% - 3% (2%)	2% - 3% (2%)
		Mortality multiplier					80%	80%
		Surrender rates					0.50% - 75% (7%)	0.50% - 75% (7%)
		Non-performance spread					0.25%	0.25% - 0.25% (0.25%)
Front Street future policyholder benefit liability	Discounted cash flow	Non-performance risk spread	151.0		—		0.6% - 1.5%	—%
		Risk margin to reflect uncertainty					0.25-0.50%	—%



			Fair Value at				Range (Weighted average)
Assets	Valuation Technique	Unobservable Input(s)	March 31, 2014		September 30, 2013		March 31, 2014	September 30, 2013
Equity conversion feature of preferred stock	Monte Carlo simulation / Option model	Annualized volatility of equity	364.8		330.8		41%	42%
		Discount yield					10.5%	11.0%
		Non-cash accretion rate					0%	0%
		Calibration adjustment					0%	0% - 1.0% (0.3%)
Total			$	2,234.5	$	1,875.2

The significant unobservable inputs used in the fair value measurement of the contingent purchase price reduction receivable are the probability of collection depending on the outcomes of litigation and regulatory action, the expected term until payment, discount rate and the credit insurance risk premium. Generally, an increase in the assumptions for the expected term, discount rate and credit insurance risk premium would decrease the fair value of the contingent purchase price receivable. An increase in the probability of collection would increase the fair value of the contingent purchase price reduction receivable.

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 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 March 31, 2014 and September 30, 2013, is based on the 2000 and 1983 annuity tables, respectively and assumes the contractholder population is 50% female and 50% male. Significant increases (decreases) in the market value of option in isolation would result in a higher (lower) fair value measurement. Significant increases (decreases) in interest swap rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower (higher) fair value measurement. Generally, a change in any one unobservable input would not result in a change in any other unobservable input.

The significant unobservable inputs used in the fair value measurement of the equity conversion feature of the Company’s Preferred Stock are annualized volatility of the market value of the Company’s listed shares of common stock, the discount yield as of the valuation date, a calibration factor to the issued date fair value of the Preferred Stock and the forecasted non-cash accretion rate. Significant increases (decreases) in any of the inputs in isolation would result in a significantly higher (lower) fair value measurement. Generally, an increase in the assumptions used for the volatility and discount yield assumptions would increase the fair value of the equity conversion feature of Preferred Stock, and maintaining a higher forecasted non-cash accretion rate, would also increase the fair value of the equity conversion feature of Preferred Stock. A decrease in the calibration factor would result in an increase in the fair value of the equity conversion feature of Preferred Stock.

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 the three and six months ended March 31, 2014 and March 31, 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.



	Three months ended March 31, 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	$	41.5	$	—	$	—		$	—	$	—	$	—		$	—		$	41.5
Fixed maturity securities available-for-sale:
Asset-backed securities	9.8		—		(0.1		)	—		—		—			1.0			10.7
Commercial mortgage-backed securities	6.0		—		—			—		—		—			(6.0		)	—
Corporates	607.1		—		10.1			41.7		—		(1.9		)	—			657.0
Municipals	34.3		—		1.3			—		—		—			—			35.6
Equity securities - trading	10.8		—		—			—		—		—			—			10.8
Total assets at fair value	$	709.5	$	—	$	11.3		$	41.7	$	—	$	(1.9	)	$	(5.0	)	$	755.6

	Balance at Beginning of Period		Total (Gains) Losses												Net transfer In (Out) of Level 3			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			Balance at End of Period
Liabilities
FIA embedded derivatives, included in contractholder funds	$	1,644.7	$	74.0	$	—		$	—	$	—	$	—		$	—		$	1,718.7
Front Street future policyholder benefit liability	149.9		3.7		—			—		—		(2.6		)	—			151.0
Equity conversion feature of preferred stock	378.0		3.5		—			—		—		(16.7		)	—			364.8
Total liabilities at fair value	$	2,172.6	$	81.2	$	—		$	—	$	—	$	(19.3	)	$	—		$	2,234.5


(a)	This includes a $6.0 transfer to asset-backed securities from commercial mortgage-backed securities, the remaining transfers were from level 3 to level 2.



	Six months ended March 31, 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		)	5.0		—		—			1.0			10.7
Commercial mortgage-backed securities	5.7		—		0.3			—		—		—			(6.0		)	—
Corporates	461.1		—		4.0			194.3		—		(2.4		)	—			657.0
Municipals	—		—		0.6			35.0		—		—			—			35.6
Equity securities - trading	10.7		0.1		—			—		—		—			—			10.8
Total assets at fair value	$	523.5	$	0.6	$	4.6		$	234.3	$	—	$	(2.4	)	$	(5.0	)	$	755.6

	Balance at Beginning of Period		Total (Gains) Losses												Net transfer In (Out) of Level 3			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			Balance at End of Period
Liabilities
FIA embedded derivatives, included in contractholder funds	$	1,544.4	$	174.3	$	—		$	—	$	—	$	—		$	—		$	1,718.7
Front Street future policyholder benefit liability	—		3.0		—			150.6		—		(2.6		)	—			151.0
Equity conversion feature of preferred stock	330.8		50.7		—			—		—		(16.7		)	—			364.8
Total liabilities at fair value	$	1,875.2	$	228.0	$	—		$	150.6	$	—	$	(19.3	)	$	—		$	2,234.5


(a)	This includes a $6.0 transfer to asset-backed securities from commercial mortgage-backed securities, the remaining transfers were from level 3 to level 2.



	Three months ended March 31, 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	5.3		—			—		—		—		—			—			5.3
Commercial mortgage-backed securities	6.1		—			0.1		—		—		—			—			6.2
Corporates	256.1		(0.1		)	3.2		144.2		—		(13.0		)	(33.9		)	356.5
Hybrids	5.0		—			—		—		—		—			(5.0		)	—
Equity securities available-for-sale	—		—			—		10.0		—		—			—			10.0
Total assets at fair value	$	313.5	$	(0.1	)	$	3.3	$	154.2	$	—	$	(13.0	)	$	(38.9	)	$	419.0

	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	$	1,517.0	$	122.6		$	—	$	—	$	—	$	—		$	—		$	1,639.6
Equity conversion feature of preferred stock	163.1		39.6			—		—		—		—			—			202.7
Total liabilities at fair value	$	1,680.1	$	162.2		$	—	$	—	$	—	$	—		$	—		$	1,842.3


(a)	The net transfers in and out of Level 3 during the three months ended March 31, 2013 were exclusively to or from Level 2.



	Six months ended March 31, 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		—			(0.1		)	—		—			—			(10.5		)	5.3
Commercial mortgage-backed securities	5.0		—			0.2			1.0		—			—			—			6.2
Corporates	135.3		(0.3		)	1.2			277.4		(9.6		)	(13.7		)	(33.8		)	356.5
Hybrids	8.8		—			(0.1		)	—		—			—			(8.7		)	—
Equity securities available-for-sale	—		—			—			10.0		—			—			—			10.0
Total assets at fair value	$	206.0	$	(0.3	)	$	1.2		$	288.4	$	(9.6	)	$	(13.7	)	$	(53.0	)	$	419.0

	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	$	1,550.8	$	88.8		$	—		$	—	$	—		$	—		$	—		$	1,639.6
Equity conversion feature of preferred stock	232.0		(29.3		)	—			—		—			—			—			202.7
Total liabilities at fair value	$	1,782.8	$	59.5		$	—		$	—	$	—		$	—		$	—		$	1,842.3


(a)	The net transfers in and out of Level 3 during the six months ended March 31, 2013 were exclusively to or from Level 2.

FGL 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 the three and six months ended March 31, 2014. FGL transferred $79.3 U.S. Government securities from Level 1 into Level 2 for the three and six months ended March 31, 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 the three and six months ended March 31, 2014 and March 31, 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 FGL concluding that there is sufficient trading activity in similar instruments to support classifying these securities as Level 2 as of March 31, 2014 and March 31, 2013. Accordingly, FGL’s assessment resulted in net transfers out of Level 3 of $5.0 related to asset-backed securities during the three and six months ended March 31, 2014 and of $38.9 and $53.0 related to asset-backed, corporate and hybrid securities during during the three and six months ended March 31, 2013, respectively.

Non-Recurring Fair Value Measurements

Goodwill, intangible assets and other long-lived assets are tested annually or if an event occurs that indicates an impairment loss may have been incurred using fair value measurements with unobservable inputs (Level 3).

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:



	March 31, 2014
	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets (a)
Other invested assets	$	—	$	—	$	130.5	$	130.5	$	130.5
Asset-based loans	—		—		795.7		795.7		795.7
Total financial assets	$	—	$	—	$	926.2	$	926.2	$	926.2

Liabilities (a)
Total debt (b)	$	—	$	5,488.1	$	—	$	5,488.1	$	5,396.3
Redeemable preferred stock, excluding equity conversion feature	—		—		319.3		319.3		319.3
Investment contracts, included in contractholder funds	—		—		12,872.3		12,872.3		14,279.6
Total financial liabilities	$	—	$	5,488.1	$	13,191.6	$	18,679.7	$	19,995.2



	September 30, 2013
	Level 1		Level 2		Level 3		Estimated Fair Value		Carrying Amount
Assets (a)
Other invested assets	$	—	$	—	$	31.2	$	31.2	$	31.2
Asset-based loans	—		—		560.4		560.4		560.4
Total financial assets	$	—	$	—	$	591.6	$	591.6	$	591.6

Liabilities (a)
Total debt (b)	$	—	$	4,773.2	$	—	$	4,773.2	$	4,896.1
Redeemable preferred stock, excluding equity conversion feature	—		—		377.1		377.1		329.4
Investment contracts, included in contractholder funds	—		—		12,378.6		12,378.6		13,703.8
Total financial liabilities	$	—	$	4,773.2	$	12,755.7	$	17,528.9	$	18,929.3


(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

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 March 31, 2014 and September 30, 2013, this resulted in lower fair value reserves relative to the carrying value. FGL 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.

The fair value of redeemable preferred stock, excluding the equity conversion feature, is derived under the same model and using the same inputs and assumptions, as is used to determine the fair value of the equity conversion feature of said redeemable preferred stock, as is discussed in the disclosures pertaining to financial instruments measured at fair value above.

The fair value of the asset-based loans originated by Salus approximate their carrying value, as those loans carry a variable rate, are revolving in nature, and can be settled at the demand of either party.