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



	March 31, 2017								September 30, 2016
Assets	Level 1		Level 2		Level 3		Fair Value		Level 1		Level 2		Level 3		Fair Value
Fixed maturity and equity securities included in funds withheld receivables	$	80.5	$	1,413.8	$	49.1	$	1,543.4	$	69.9	$	1,387.1	$	78.1	$	1,535.1
Derivatives:
Call option receivable from FGL included in funds withheld receivables	—		13.3		—		13.3		—		11.3		—		11.3
Call options	—		10.5		—		10.5		—		5.9		—		5.9
Foreign exchange contracts	—		4.6		—		4.6		—		5.8		—		5.8
Commodity contracts	—		4.3		—		4.3		—		2.9		—		2.9
Total financial assets	$	80.5	$	1,446.5	$	49.1	$	1,576.1	$	69.9	$	1,413.0	$	78.1	$	1,561.0
Liabilities
Front Street future policyholder benefit liability	$	—	$	—	$	661.2	$	661.2	$	—	$	—	$	631.8	$	631.8
Derivatives:
Embedded derivatives in Front Street's assumed FIA business	—		—		121.0		121.0		—		—		131.2		131.2
Commodity contracts	—		0.1		—		0.1		—		0.1		—		0.1
Interest rate contracts	—		—		—		—		—		1.1		—		1.1
Foreign exchange contracts	—		2.1		—		2.1		—		2.0		—		2.0
Total financial liabilities	$	—	$	2.2	$	782.2	$	784.4	$	—	$	3.2	$	763.0	$	766.2

Valuation Methodologies

Reinsurance Agreements with FGL

Front Street Cayman has entered into certain reinsurance agreements with FGL on a funds withheld basis. The funds withheld receivables portfolio related to the reinsurance agreements with FGL consists of investments in debt and equity securities that are carried at fair value with unrealized gains and losses included in AOCI, net of associated intangibles “shadow adjustments” and deferred income taxes. The funds withheld receivables portfolio also includes cash, derivatives and accrued income.

The liabilities for contractholder funds for deferred annuities consist of contract account balances that accrue to the benefit of the contractholders, excluding surrender charges and other liabilities. The liabilities for FIA consist of the value of the host contract plus the value of the FIA embedded derivative. The FIA embedded derivative is carried at fair value in the accompanying Condensed Consolidated Balance Sheets with changes in fair value reported in “Benefits and other changes in policy reserves” in the accompanying Condensed Consolidated Statements of Operations. Liabilities for immediate annuities without life contingencies are recorded at the present value of future benefits.

Liabilities for investment-type contracts are calculated by multiplying the benefit ratio by the cumulative assessments recorded from contract inception through the balance sheet date plus interest. If experience or assumption changes result in a new benefit ratio, the reserves are adjusted to reflect the changes.

The liabilities for future policy benefits and claim reserves life contingent immediate annuity policies are computed using assumptions for investment yields, mortality and withdrawals based principally on generally accepted actuarial methods and assumptions at the time of contract issue. The investment yield assumptions for life contingent immediate annuities range from 0.8% to 6.0%.

Reinsurance agreements with third parties

Front Street elected to apply the fair value option to account for its funds withheld receivables, non-funds withheld assets and future policyholder benefits reserve related to its assumed reinsurance with third parties. Front Street measures fair value of the funds withheld receivables based on the fair values of the securities in the underlying funds withheld portfolio held by the cedant. The non-funds withheld assets held by Front Street, backing the future policyholder benefits reserve, are measured at fair value. Policy loans included in the funds withheld receivables with third parties are measured at amortized cost, which approximates fair value.

Front Street uses a discounted cash flows approach to measure the fair value of the future policyholder benefits reserve. The cash flows associated with future policy premiums and benefits are generated using best estimate assumptions (plus a risk margin, where applicable) and are consistent with market prices, where available. Risk margins are typically applied to non-observable, non-hedgeable market inputs such as mortality, morbidity, lapse, discount rate for non-performance risk, discount rate for risk margin, surrenders, etc. Mortality relates to the occurrence of death. Mortality assumptions are based upon the experience of the cedant as well as past and emerging industry experience, when available. Morbidity relates to the occurrence of a claim status and is a key assumption for the long term care business. Morbidity assumptions are based upon the experience of the cedant as well as past and emerging industry experience, when available. Mortality and morbidity assumptions may be different by sex, underwriting class and policy type. Assumptions are also made for future mortality and morbidity improvements.

Front Street determines the discount rate based on the market yields on the underlying assets backing the liabilities plus a risk margin to reflect uncertainty and adjusts the discount rate to reflect the credit risk of Front Street. Policies are terminated through surrenders and maturities, where surrenders represent the voluntary terminations of policies by policyholders and maturities are determined by policy contract terms. Surrender assumptions are based upon cedant experience adjusted for expected future conditions. Front Street discounts the liability cash flows by using the market yields on the underlying assets backing the liabilities plus a risk margin to reflect uncertainty and adjusts the discount rate to reflect the credit risk of Front Street.

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.

Funds Withheld Receivables

Through Front Street, the Company measures the fair value of its securities included in the funds withheld receivables portfolio based on assumptions used by market participants in pricing the security. The appropriate valuation methodology is selected based on the specific characteristics of the fixed maturity or equity security, and the Company will then consistently apply the valuation methodology to measure the security’s fair value. The Company’s fair value measurement is based on a market approach, which utilizes prices and other relevant information generated by market transactions involving identical or comparable securities. Sources of inputs to the market approach include a third-party pricing service, independent broker quotations or pricing matrices. The Company uses observable and unobservable inputs in its valuation methodologies. Observable inputs include benchmark yields, reported trades, broker-dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. In addition, market indicators and industry and economic events are monitored and further market data will be acquired when certain thresholds are met. For certain security types, additional inputs may be used, or some of the inputs described above may not be applicable. 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 trends executed at broker-quoted or slightly higher prices. The Company did not adjust prices received from third parties as of March 31, 2017. However, the Company does analyze the third-party valuation methodologies and its related inputs to perform assessments to determine the appropriate level within the fair value hierarchy.

Derivatives

The fair values of the embedded derivatives in Front Street’s assumed FIA business from FGL are derived using market indices, pricing assumptions and historical data. The significant unobservable inputs used in the fair value measurement of the FIA embedded derivatives in Front Street’s assumed FIA business are market value of options, interest swap rates, mortality multiplier, surrender rates, and non-performance spread. The mortality multiplier at March 31, 2017 and September 30, 2016 was applied to the Annuity 2000 mortality tables. Significant increases or decreases in the market value of an option in isolation would result in a higher or lower, respectively, fair value measurement. Significant increases or decreases in interest swap rates, mortality multiplier, surrender rates, or non-performance spread in isolation would result in a lower or higher, respectively, fair value measurement. Generally, a change in any one unobservable input would not result in a change in any other unobservable input.

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

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

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, 2017 and September 30, 2016 were as follows:



	Fair Value at						Range (Weighted average)
Assets	March 31, 2017		September 30, 2016		Valuation Technique	Unobservable Input(s)	March 31, 2017	September 30, 2016
Funds withheld receivables:
Fixed maturity securities	$	33.6	$	35.2	Matrix pricing	Quoted prices	100% - 117% (106%)	98% - 122% (109%)
Fixed maturity securities	5.1		5.4		Loan Recovery Value	Recovery rate	56% - 100% (81%)	56% - 100% (82%)
Fixed maturity securities	10.0		35.7		Broker-quoted	Offered quotes	99% - 105% (100%)	97% - 100% (100%)
Loan participations	0.4		1.8		Loan Recovery Value	Recovery rate	56%	52% - 100% (71%)
Total	$	49.1	$	78.1
Liabilities
Front Street future policyholder benefit liability	$	661.2	$	631.8	Discounted cash flow	Non-performance risk spread	0.35%	0.32%
						Risk margin to reflect uncertainty	0.50%	0.50%
Embedded derivatives in Front Street's assumed FIA business	121.0		131.2		Discounted cash flow	Market value of option	0% - 24% (3%)	0% - 27% (2%)
						SWAP rates (discount rates)	2.0%	1.0%
						Mortality multiplier	80%	80%
						Surrender rates	0.50% - 75% (13%)	0.50% - 75% (10%)
						Non-performance risk spread	0.25%	0.25%
Total	$	782.2	$	763.0

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, 2017 and 2016. 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, 2017
	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
Funds withheld receivables	$	46.4	$	—		$	—	$	6.1	$	(1.0	)	$	—	$	(2.4	)	$	49.1
Total assets at fair value	$	46.4	$	—		$	—	$	6.1	$	(1.0	)	$	—	$	(2.4	)	$	49.1

	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
Front Street future policyholder benefit liability	$	634.5	$	21.1		$	—	$	—	$	—		$	5.6	$	—		$	661.2
Embedded derivatives in Front Street's assumed FIA business	121.2		(0.2		)	—		—		—			—		—			121.0
Total liabilities at fair value	$	755.7	$	20.9		$	—	$	—	$	—		$	5.6	$	—		$	782.2

(a) During the three months ended March 31, 2017, the net transfer out of Level 3 was exclusively to Level 2.



	Six months ended March 31, 2017
	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
Funds withheld receivables	$	78.1	$	(1.3	)	$	—	$	9.1	$	(7.3	)	$	—	$	(29.5	)	$	49.1
Total assets at fair value	$	78.1	$	(1.3	)	$	—	$	9.1	$	(7.3	)	$	—	$	(29.5	)	$	49.1

	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
Front Street future policyholder benefit liability	$	631.8	$	8.5		$	—	$	—	$	—		$	20.9	$	—		$	661.2
Embedded derivatives in Front Street's assumed FIA business	131.2		(10.2		)	—		—		—			—		—			121.0
Total liabilities at fair value	$	763.0	$	(1.7	)	$	—	$	—	$	—		$	20.9	$	—		$	782.2

(a) During the six months ended March 31, 2017, the net transfer out of Level 3 was exclusively to Level 2.



	Three months ended March 31, 2016
	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
Assets
Funds withheld receivables	$	65.1	$	(0.3	)	$	—	$	3.1	$	(3.4	)	$	—	$	—	$	64.5
Total assets at fair value	$	65.1	$	(0.3	)	$	—	$	3.1	$	(3.4	)	$	—	$	—	$	64.5

	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
Front Street future policyholder benefit liability	$	629.0	$	23.9		$	—	$	—	$	—		$	1.1	$	—	$	654.0
Embedded derivatives in Front Street's assumed FIA business	139.9		(3.4		)	—		—		—			—		—		136.5
Total liabilities at fair value	$	768.9	$	20.5		$	—	$	—	$	—		$	1.1	$	—	$	790.5



	Six months ended March 31, 2016
	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
Assets
Corporate fixed maturity securities AFS	$	14.1	$	(0.5	)	$	—	$	—	$	(13.6	)	$	—		$	—	$	—
Other invested assets	2.8		2.7			—		—		—			(5.5		)	—		—
Funds withheld receivables	74.7		(1.9		)	—		8.1		(16.4		)	—			—		64.5
Total assets at fair value	$	91.6	$	0.3		$	—	$	8.1	$	(30.0	)	$	(5.5	)	$	—	$	64.5

	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
Front Street future policyholder benefit liability	$	629.2	$	20.2		$	—	$	—	$	—		$	4.6		$	—	$	654.0
Embedded derivatives in Front Street's assumed FIA business	142.3		(5.8		)	—		—		—			—			—		136.5
Total liabilities at fair value	$	771.5	$	14.4		$	—	$	—	$	—		$	4.6		$	—	$	790.5

The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as transfers in and out of Level 3, or between other levels, at the beginning fair value for the reporting period in which the changes occur. There were no transfers between Level 1 and Level 2 for the three and six months ended March 31, 2017 and 2016 and there were no transfers in or out of Level 3 for the three and six months ended March 31, 2016. For the three and six months ended March 31, 2017, the transfers out of Level 3 were related to changes in the primary pricing source and changes in the observability of external information used in determining fair value.

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 in the accompanying Condensed Consolidated Balance Sheets are summarized as follows:



	March 31, 2017
	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets (a)
Asset-based loans, included in other assets	$	—	$	—	$	6.3	$	6.3	$	6.3
Policy loans, included in funds withheld receivables	—		—		8.3		8.3		8.3
Total financial assets	$	—	$	—	$	14.6	$	14.6	$	14.6

Liabilities (a)
Investment contracts, included in contractholder funds and other insurance reserves	$	—	$	—	$	882.6	$	882.6	$	946.0
Total debt (b)	—		5,867.8		10.1		5,877.9		5,623.9
Total financial liabilities	$	—	$	5,867.8	$	892.7	$	6,760.5	$	6,569.9



	September 30, 2016
	Level 1		Level 2		Level 3		Fair Value		Carrying Amount
Assets (a)
Asset-based loans, included in other assets	$	—	$	—	$	35.0	$	35.0	$	35.0
Policy loans, included in funds withheld receivables	—		—		8.5		8.5		8.5
Total financial assets	$	—	$	—	$	43.5	$	43.5	$	43.5

Liabilities (a)
Investment contracts, included in contractholder funds and other insurance reserves	$	—	$	—	$	922.9	$	922.9	$	988.3
Total debt (b)	—		5,700.1		29.1		5,729.2		5,430.9
Total financial liabilities	$	—	$	5,700.1	$	952.0	$	6,652.1	$	6,419.2

(a) The carrying value of cash and cash equivalents, trade receivables, accounts payable and accrued investment income approximate fair value due to their short duration and, accordingly, they are not presented in the tables above.

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

Valuation Methodology

Investment Contracts and Other Insurance Reserves

Investment contracts assumed from FGL by Front Street include deferred annuities, FIAs and immediate annuities. The fair value of deferred annuity and FIAs is based on their cash surrender value (which is the cost the Company would incur to extinguish the liability) as these contracts are generally issued without an annuitization date. See “Reinsurance Agreements with FGL” section above for discussion of the calculation of the fair value of the insurance reserves.

Asset-based loans

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