(8) Funds Withheld Receivables

The Company’s consolidated funds withheld receivables are summarized as follows:



	September 30, 2016
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value
Funds withheld receivables with FGL
Corporates	$	638.5	$	18.2	$	(29.5	)	$	627.2	$	627.2
Asset/Mortgage-backed securities	238.8		0.6		(7.9		)	231.5		231.5
Municipals	12.1		0.7		—			12.8		12.8
Government bonds	1.1		—		—			1.1		1.1
Preferred stock	8.8		0.3		(0.9		)	8.2		8.2
Total funds withheld receivables with FGL	899.3		19.8		(38.3		)	880.8		880.8
Funds withheld receivables with third parties
Corporates	390.0		18.8		(2.7		)	406.1		406.1
Asset/Mortgage-backed securities	118.7		1.9		(1.7		)	118.9		118.9
Municipals	49.5		4.1		—			53.6		53.6
Government bonds	67.7		1.3		(0.2		)	68.8		68.8
Agency bonds	6.6		0.3		—			6.9		6.9
Total funds withheld receivables with third parties	632.5		26.4		(4.6		)	654.3		654.3
Total fixed maturity and equity securities included in funds withheld receivables	1,531.8		46.2		(42.9		)	1,535.1		1,535.1

Call option receivable from FGL included in funds withheld receivables	9.8		1.5		—			11.3		11.3
Accrued interest	17.8		—		—			17.8		17.8
Net receivables	77.7		—		—			77.7		77.7
Policy loans and other	8.5		—		—			8.5		8.5
Total funds withheld receivables	$	1,645.6	$	47.7	$	(42.9	)	$	1,650.4	$	1,650.4



	September 30, 2015
	Cost or Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Carrying Value
Funds withheld receivables with FGL
Corporates	$	740.4	$	4.5	$	(67.9	)	$	677.0	$	677.0
Asset/Mortgage-backed securities	274.6		1.3		(6.6		)	269.3		269.3
Municipals	28.5		0.1		(0.6		)	28.0		28.0
Preferred stock	38.9		1.4		(1.0		)	39.3		39.3
Total funds withheld receivables with FGL	1,082.4		7.3		(76.1		)	1,013.6		1,013.6
Funds withheld receivables with third parties
Corporates	420.8		3.7		(18.5		)	406.0		406.0
Asset/Mortgage-backed securities	125.4		1.3		(1.0		)	125.7		125.7
Municipals	72.9		0.8		(0.7		)	73.0		73.0
Government bonds	8.3		0.1		—			8.4		8.4
Agency bonds	11.5		—		(0.1		)	11.4		11.4
Total funds withheld receivables with third parties	638.9		5.9		(20.3		)	624.5		624.5
Total fixed maturity and equity securities included in funds withheld receivables	1,721.3		13.2		(96.4		)	1,638.1		1,638.1

Call option receivable from FGL included in funds withheld receivables	12.3		—		(6.9		)	5.4		5.4
Accrued interest	20.5		—		—			20.5		20.5
Net receivables	41.1		—		—			41.1		41.1
Policy loans and other	5.0		—		—			5.0		5.0
Total funds withheld receivables	$	1,800.2	$	13.2	$	(103.3	)	$	1,710.1	$	1,710.1

Maturities of Funds Withheld Receivables

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



	September 30, 2016
	Amortized Cost		Fair Value
Corporate, Non-structured Hybrids, Municipal and Preferred stock:
Due in one year or less	$	12.8	$	11.9
Due after one year through five years	231.4		228.2
Due after five years through ten years	420.8		429.3
Due after ten years	487.1		493.3
Subtotal	1,152.1		1,162.7
Other securities which provide for periodic payments:
Asset/Mortgage-backed securities	357.5		350.4
Structured hybrids	22.2		22.0
Total fixed maturity and equity securities included in funds withheld receivables	$	1,531.8	$	1,535.1

Securities in Funds Withheld Receivables with FGL in an Unrealized Loss Position

See Note 2, Significant Accounting Policies and Practices and Recent Accounting Pronouncements, for an explanation of the Company’s process for evaluating securities in the funds withheld receivables with FGL with unrealized losses for potential OTTI. The Company has concluded that the fair value of the securities presented in the table below were not OTTI as of September 30, 2016.

The fair value and gross unrealized losses of securities in the funds withheld receivables with FGL, aggregated by investment category, were as follows:



	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
Funds withheld receivables with FGL
Corporates	$	137.8	$	(12.6	)	$	91.7	$	(16.9	)	$	229.5	$	(29.5	)
Asset/Mortgage-backed securities	73.3		(2.2		)	99.0		(5.7		)	172.3		(7.9		)
Municipals	1.0		—			—		—			1.0		—
Government bonds	0.2		—			—		—			0.2		—
Preferred stock	3.7		(0.9		)	—		—			3.7		(0.9		)
Total funds withheld receivables with FGL	$	216.0	$	(15.7	)	$	190.7	$	(22.6	)	$	406.7	$	(38.3	)
Total number of securities in an unrealized loss position			146					76					222



	September 30, 2015
	Less than 12 months					12 months or longer					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
Funds withheld receivables with FGL
Corporates	$	417.4	$	(46.9	)	$	113.8	$	(21.0	)	$	531.2	$	(67.9	)
Asset/Mortgage-backed securities	120.8		(3.8		)	88.7		(2.8		)	209.5		(6.6		)
Municipals	5.9		(0.4		)	13.4		(0.3		)	19.3		(0.7		)
Preferred stock	5.6		(0.9		)	—		—			5.6		(0.9		)
Total funds withheld receivables with FGL	$	549.7	$	(52.0	)	$	215.9	$	(24.1	)	$	765.6	$	(76.1	)
Total number of securities in an unrealized loss position			423					67					490

At September 30, 2016 and 2015, securities in the funds withheld receivables with FGL in an unrealized loss position were primarily concentrated in investment grade corporate debt instruments.

At September 30, 2016 and 2015, securities with a fair value of $39.6 and $84.4, respectively, had an unrealized loss greater than 20% of amortized cost, which represented less than 5% of the carrying value of all funds withheld receivables.

For Fiscal 2016, 2015 and 2014, the Company recognized other-than-temporary credit impairment losses in operations totaling $7.4, $2.3 and $3.0, respectively, related to funds withheld receivables with an amortized cost of $15.5, $4.8 and $13.1 and a fair value of $8.1, $2.5 and $10.1 at September 30, 2016, 2015 and 2014, respectively.

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



	Fiscal
	2016		2015		2014
OTTI recognized in net (loss) income:
Corporates	$	7.4	$	2.2	$	3.0
Asset/Mortgage-backed securities	—		0.1		—
Total	$	7.4	$	2.3	$	3.0

Net Investment Income

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



	Fiscal
	2016		2015		2014
Fixed maturity securities included in funds withheld receivables with FGL	$	56.0	$	58.6	$	55.7
Equity securities included in funds withheld receivables with FGL	2.1		2.6		4.1
Asset-based loans	3.5		16.1		28.4
Other investments	5.4		7.0		1.9
Net investment income	$	67.0	$	84.3	$	90.1

Net investment gains (losses)

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



	Fiscal
	2016			2015			2014
Net realized (losses) gains on fixed maturity securities included in funds withheld receivables with FGL	$	(4.8	)	$	3.4		$	(2.5	)
Realized gains (losses) on equity securities included in funds withheld receivables with FGL	3.0			(4.9		)	14.6
Realized gains (losses) on certain derivative instruments	3.8			(7.6		)	25.7
Change in fair value of embedded derivatives in funds withheld receivables with FGL (a)	49.4			(91.1		)	41.6
Realized gains (losses) on funds withheld receivables with third parties and other	49.7			(13.8		)	9.9
Net investment gains (losses)	$	101.1		$	(114.0	)	$	89.3

(a) The modified coinsurance arrangement between FGL Insurance and Front Street created an obligation for the parties to settle a payable or receivable at a later date, which resulted in an embedded derivative. This embedded derivative is considered a total return swap with contractual returns that are attributable to the assets and liabilities associated with this reinsurance arrangement. The fair value of the total return swap is based on the change in fair value of the underlying assets held in the funds withheld portfolio. Investment results for the assets that support the coinsurance with funds withheld reinsurance arrangement, including gains and losses from sales, are passed directly to the reinsurer pursuant to contractual terms of the reinsurance arrangement. The reinsurance related embedded derivative is expected to continue to exist after the disposal of FGL and is therefore not eliminated to appropriately reflect the continuing operations and balances held for sale. It is embedded in the funds withheld receivables with a corresponding asset in business held for sale on the Consolidated Balance Sheets and the related gains or losses are reported in net investment gains with corresponding income (loss) from discontinued operations on the Consolidated Statements of Operations.

Concentration of Securities Included in Funds Withheld Receivables

As of September 30, 2016 and 2015, Front Street’s most significant exposure related to the securities underlying the funds withheld receivables was to the financial sector and the energy, mining and metals industries.

As of September 30, 2016 and 2015, the carrying value of the fixed maturity securities in the financial sector was $232.8, or 14.1%, and $269.7, or 15.8%, respectively, of Front Street’s funds withheld receivables. At September 30, 2016 and 2015, the holdings in this sector included investments in 81 and 107 different issuers, respectively, with the top ten investments accounting for 48.0% and 41.0%, respectively, of the total holdings in this sector.

As of September 30, 2016 and 2015, the carrying value of the fixed maturity securities in the energy, mining and metals industries was $188.6, or 11.4%, and $236.6, or 13.8%, respectively, of Front Street’s funds withheld receivables. At September 30, 2016 and 2015, the holdings in these industries included investments in 74 and 98 different issuers, respectively, with the top ten investments accounting for 43.4% and 39.7%, respectively, of the total holdings in these industries.

There were no holdings in a single issuer included in the funds withheld receivables that exceeded 10% of the Company’s stockholders’ equity as of September 30, 2016 and 2015.

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’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 increase the net unrealized loss position of Front Street’s fund withheld receivables and, if long-term interest rates rise dramatically within a six to twelve month time period, certain of the Front Street’s reinsured 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 Front Street to liquidate assets in an unrealized loss position. This risk is mitigated to some extent by surrender charge protection provided by the products reinsured by Front Street.

Insurance Counterparty Risk

Through Front Street, the Company is exposed to insurance counterparty risk, which is the potential for Front Street to incur losses due to a client, retrocessionaire, or partner becoming distressed or insolvent. This includes run-on-the-bank risk and collection risk. The run-on-the-bank risk is that a client’s in force block incurs substantial surrenders and/or lapses due to credit impairment, reputation damage or other market changes affecting the counterparty. Substantially higher than expected surrenders and/or lapses could result in inadequate in force business to recover cash paid out for acquisition costs. The collection risk for clients and retrocessionaires includes their inability to satisfy a reinsurance agreement because the right of offset is disallowed by the receivership court; the reinsurance contract is rejected by the receiver, resulting in a premature termination of the contract; and/or the security supporting the transaction becomes unavailable to Front Street. Front Street has never experienced a material default in connection with retrocession arrangements, nor has it experienced any material difficulty in collecting claims recoverable from retrocessionaires; however, no assurance can be given as to the future performance of such retrocessionaires or as to the recoverability of any such claims.