Exhibit 99.4

 

©2015 Great American Insurance Company is an equal opportunity provider. 301 E. Fourth Street, Cincinnati, OH 45202.

 

 

 

CONTINENTAL GENERAL INSURANCE COMPANY

BALANCE SHEET (UNAUDITED)

(Dollars in Thousands, Except Per Share Data)

 

See notes to financial statements.

CONTINENTAL GENERAL INSURANCE COMPANY

STATEMENT OF EARNINGS (UNAUDITED)

(In Thousands)

See notes to financial statements.

CONTINENTAL GENERAL INSURANCE COMPANY

STATEMENT OF COMPREHENSIVE INCOME (UNAUDITED)

(In Thousands)

See notes to financial statements.

CONTINENTAL GENERAL INSURANCE COMPANY

STATEMENT OF CHANGES IN EQUITY (UNAUDITED)

(Dollars in Thousands)

See notes to financial statements.

CONTINENTAL GENERAL INSURANCE COMPANY

STATEMENT OF CASH FLOWS (UNAUDITED)

(In Thousands)

See notes to financial statements.

CONTINENTAL GENERAL INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

A.	Accounting Policies

Basis of Presentation The accompanying interim financial statements are unaudited; however, management believes that all adjustments (consisting of normal recurring accruals unless otherwise indicated) necessary for a fair presentation have been made. The results of operations for interim periods are not necessarily indicative of results expected for the year. The financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP” ) for interim reporting. These unaudited financial statements should be read in conjunction with our audited financial statements for the year ended December 31, 2014. There are no changes to our significant accounting policies described in our audited financial statements.

The financial statements include the accounts of Continental General Insurance Company (“CGI” or the “ Company”). CGI is an indirect wholly-owned subsidiary of Great American Financial Resources, Inc. (“GAFRI”), a financial services holding company wholly-owned by American Financial Group, Inc. (“AFG”). The financial statements also include costs paid on behalf of CGI by GAFRI. These costs are recorded as expense in the period incurred and shown as an increase in capital surplus.

Although the Company does not currently market any life, annuity or long-term care insurance, CGI’s product portfolio includes a diversified mix of closed blocks of life, annuity and long-term care (“LTC”) health insurance products.

The Company accepted new premium sales (Medicare supplement, critical illness and other non-health products), for certain states, through a reinsurance fronting agreement through August 2014, whereby the Company reinsures 100% of these premiums through a coinsurance agreement with Loyal American Life Insurance Company, a Cigna subsidiary.

Fair Value Measurements Accounting standards define fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants on the measurement date. The standards establish a hierarchy of valuation techniques based on whether the assumptions that market participants would use in pricing the asset or liability (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect CGI’s assumptions about the assumptions market participants would use in pricing the asset or liability.

Investments Fixed maturity and equity securities classified as “available for sale” are reported at fair value wi th unrealized gains and losses included in accumulated other comprehensive income (“AOCI”) in CGI’s Balance Sheet. Mortgage and policy loans are carried primarily at the aggregate unpaid balance.

Premiums and discounts on fixed maturity securities are amortized using the interest method. Mortgage-backed securities (“MBS”) are amortized over a period based on estimated future principal payments, including prepayments. Prepayment assumptions are reviewed periodically and adjusted to reflect actual prepayments and changes in expectations.

CONTINENTAL GENERAL INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

Gains or losses on securities are determined on the specific identification basis. When a decline in the value of a specific investment is considered to be other-than-temporary at the balance sheet date, a provision for impairment is charged to earnings (included in realized gains (losses) on securities) and the cost basis of that investment is reduced. If management can assert that it does not intend to sell an impaired fixed maturity security and it is not more likely than not that it will have to sell the security before recovery of its amortized cost basis, then the other-than-temporary impairment is separated into two components: (i) the amount related to credit losses (recorded in earnings) and (ii) the amount related to all other factors (recorded in other comprehensive income). The credit-related portion of an other-than-temporary impairment is measured by comparing a security’s amortized cost to the present value of its current expected cash flows discounted at its effective yield prior to the impairment charge. Both components are shown in the Statement of Earnings. If management intends to sell an impaired security, or it is more likely than not that it will be required to sell the security before recovery, an impairment charge to earnings is recorded to reduce the amortized cost of that security to fair value.

Derivatives Derivatives included in CGI’s Balance Sheet are recorded at fair value and consist of components of certain fixed maturity securities (primarily interest-only MBS). Changes in fair value of derivatives are included in earnings.

Deferred Policy Acquisition Costs (“DPAC”) Policy acquisition costs (principally commissions and certain underwriting and policy issuance costs) directly related to the successful acquisition or renewal of an insurance contract are deferred.

DPAC related to annuities, universal life and interest-sensitive life policies is deferred to the extent deemed recoverable and amortized, with interest, in relation to the present value of actual and expected gross profits on the policies. Expected gross profits consist principally of estimated future investment margin (estimated future net investment income less interest credited on policyholder funds) and surrender, mortality, and other life and annuity policy charges, less death, annuitization and estimated future policy administration expenses. To the extent that realized gains and losses result in adjustments to the amortization of DPAC related to annuities, universal life and interest-sensitive life policies, such adjustments are reflected as components of realized gains (losses) on securities.

DPAC related to traditional life and health insurance is amortized over the expected premium paying period of the related policies, in proportion to the ratio of annual premium revenues to total anticipated premium revenues. See “Life, Accident and Health Reserves” below for details on the impact of loss recognition on the accounting for traditional life and health insurance contracts.

DPAC includes the present value of future profits on business in force of annuity, life, accident and health insurance companies acquired (“PVFP”). PVFP represents the portion of the costs to acquire companies that is allocated to the value of the right to receive future cash flows from insurance contracts existing at the date of acquisition. PVFP is amortized with interest in relation to expected gross profits of the acquired policies for annuities and universal life products and in relation to the premium paying period for traditional life and health insurance products.

DPAC and certain other balance sheet amounts related to annuity and life businesses are also adjusted, net of tax, for the change in expense that would have been recorded if the unrealized gains (losses) from securities had actually been realized. These adjustments are included in unrealized gains (losses) on marketable securities, a component of AOCI in CGI’s Balance Sheet.

Reinsurance Premium revenue and benefits are reported net of the amounts related to reinsurance ceded to and assumed from other companies. Expense allowances from reinsurers are included in other operating and general expenses. Amounts recoverable from reinsurers are estimated in a manner consistent with the claim liability associated with the reinsured policies. Amounts received from reinsurers that represent recovery of acquisition costs are netted against DPAC, so that the net amount is capitalized. The cost of reinsurance is accounted for over the term of the related treaties using assumptions consistent with those used to account for the underlying reinsured policies.

CONTINENTAL GENERAL INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

Annuity Benefits Accumulated Annuity receipts and benefit payments are recorded as increases or decreases in annuity benefits accumulated rather than as revenue and expense. Increases in this liability (primarily interest credited) are charged to expense and decreases for charges are credited to annuity policy charges revenue. Reserves for traditional fixed annuities are generally recorded at the stated account value.

Life, Accident and Health Reserves Liabilities for future policy benefits under traditional life, accident and health policies are computed using the net level premium method. Computations are based on the original projections of investment yields, mortality, morbidity and surrenders and include provisions for unfavorable deviations unless a loss recognition event (premium deficiency) occurs. Claim reserves and liabilities established for accident and health claims are modified as necessary to reflect actual experience and developing trends. Reserves for interest-sensitive whole life and universal life policies are generally recorded at contract value.

For long-duration contracts (such as traditional life and long-term care insurance policies), loss recognition occurs when, based on current expectations as of the measurement date, existing contract liabilities plus the present value of future premiums (including reasonably expected rate increases) are not expected to cover the present value of future claims payments and related settlement and maintenance costs (excluding overhead) as well as unamortized acquisition costs. If a block of business is determined to be in loss recognition, a charge is recorded in earnings in an amount equal to the excess of the present value of expected future claims costs and unamortized acquisition costs over existing reserves plus the present value of expected future premiums (with no provision for adverse deviation). The charge is recorded first to reduce unamortized acquisition costs and then as an additional reserve (if unamortized acquisition costs have been reduced to zero).

In addition, reserves for traditional life and long-term care insurance policies are subject to adjustment for loss recognition charges that would have been recorded if the unrealized gains from securities had actually been realized. This adjustment is included in unrealized gains (losses) on marketable securities, a component of AOCI in CGI’s Balance Sheet.

Premium Recognition For traditional life, accident and health products, premiums are recognized as revenue when legally collectible from policyholders. For interest-sensitive life and universal life products, premiums are recorded in a policyholder account, which is reflected as a liability. Revenue is recognized as amounts are assessed against the policyholder account for mortality coverage and contract expenses.

Income Taxes The Company has an intercompany tax allocation agreement with AFG. Pursuant to the agreement, the Company’s tax expense is determined based upon its inclusion in the consolidated tax return of AFG and its includable subsidiaries. Estimated payments are made quarterly during the year. Following year-end, additional settlements are made on the original due date of the return and, when extended, at the time the return is filed. The method of allocation among the companies under the agreement is based upon separate return calculations with current credit for losses to the extent the losses provide a benefit in the consolidated return.

Deferred income taxes are calculated using the liability method. Under this method, deferred income tax assets and liabilities are determined based on differences between financial reporting and tax bases and are measured using enacted tax rates. A valuation allowance is established to reduce total deferred tax assets to an amount that will more likely than not be realized.

CGI recognizes the tax benefits of uncertain tax positions only when the position is more likely than not to be sustained under examination by the appropriate taxing authority. Interest and penalties on CGI’s reserve for uncertain tax positions are recognized as a component of tax expense.

CONTINENTAL GENERAL INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

Benefit Plans CGI provides retirement benefits to qualified employees of participating companies through the AFG 401(k) Retirement and Savings Plan, a defined contribution plan. AFG and its subsidiaries make all contributions to the retirement fund portion of the plan and match a percentage of employee contributions to the savings fund. Company contributions are expensed in the year for which they are declared.

Statement of Cash Flows For cash flow purposes, “investing activities” a re defined as making and collecting loans and acquiring and disposing of debt or equity instruments and property and equipment. “Financing activities” include obtaining resources from owners and providing them with a return on their investments, borrowing money and repaying amounts borrowed. Annuity receipts, surrenders, benefits and withdrawals are also reflected as financing activities. All other activities are considered “operating.” Short-term investments having original maturities of three months or less when purchased are considered to be cash equivalents for purposes of the financial statements.

B.	Fair Value Measurements

Accounting standards for measuring fair value are based on inputs used in estimating fair value. The three levels of the hierarchy are as follows:

Level 1 — Quoted prices for identical assets or liabilities in active markets (markets in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis). CGI’s Level 1 financial instruments consist primarily of publicly traded equity securities and highly liquid government bonds for which quoted market prices in active markets are available.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar assets or liabilities in inactive markets (markets in which there are few transactions, the prices are not current, price quotations vary substantially over time or among market makers, or in which little information is released publicly); and valuations based on other significant inputs that are observable in active markets. CGI’s Level 2 financial instruments include corporate and municipal fixed maturity securities, mortgage-backed securities (“MBS”) and non-affiliated common stocks priced using observable inputs. Level 2 inputs include benchmark yields, reported trades, corroborated broker/dealer quotes, issuer spreads and benchmark securities. When non-binding broker quotes can be corroborated by comparison to similar securities priced using observable inputs, they are classified as Level 2.

Level 3 — Valuations derived from market valuation techniques generally consistent with those used to estimate the fair values of Level 2 financial instruments in which one or more significant inputs are unobservable or when the market for a security exhibits significantly less liquidity relative to markets supporting Level 2 fair value measurements. The unobservable inputs may include management’s own assumptions about the assumptions market participants would use based on the best information available in the circumstances. CGI’s Level 3 is comprised of financial instruments whose fair value is estimated based on non-binding broker quotes or internally developed using significant inputs not based on, or corroborated by, observable market information.

CONTINENTAL GENERAL INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

CGI’s management is responsible for the valuation process and uses data from outside sources (including nationally recognized pricing services and broker/dealers) in establishing fair value. The Company's internal investment professionals are a group of approximately 20 analysts whose primary responsibility is to manage AFG’s investment portfolio. These professionals monitor individual investments as well as overall industries and are active in the financial markets on a daily basis. The group is led by AFG’s chief investment officer, who reports directly to one of AFG’s Co-CEOs. Valuation techniques utilized by pricing services and prices obtained from external sources are reviewed by AFG’s internal investment professionals who are familiar with the securities being priced and the markets in which they trade to ensure the fair value determination is representative of an exit price. To validate the appropriateness of the prices obtained, these investment managers consider widely published indices (as benchmarks), recent trades, changes in interest rates, general economic conditions and the credit quality of the specific issuers. In addition, the Company communicates directly with the pricing service regarding the methods and assumptions used in pricing, including verifying, on a test basis, the inputs used by the service to value specific securities.

Assets measured and carried at fair value in the financial statements are summarized below (in thousands):

At June 30, 2015 and December 31, 2014 no liabilities were carried at fair value.

There were no transfers between Level 1 and Level 2 during the six months ended June 30, 2015 or 2014. Approximately 4% of the total assets carried at fair value on June 30, 2015, were Level 3 assets. Approximately 56% ($5 million) of the Level 3 assets were priced using non-binding broker quotes, for which there is a lack of transparency as to the inputs used to determine fair value. Details as to the quantitative inputs are neither provided by the brokers nor otherwise reasonably obtainable by CGI. Since internally developed Level 3 asset fair values represent less than 1% of the total assets measured at fair value and approximately 3% of CGI’s shareholder’s equity, changes in unobservable inputs used to determine internally developed fair values would not have a material impact on CGI’s financial position.

CONTINENTAL GENERAL INSURANCE COMPANY

NOTES TO FINANCIAL STATEMENTS (UNAUDITED) — CONTINUED

Changes in balances of Level 3 financial assets carried at fair value during the six months ended June 30, 2015 and 2014 are presented below (in thousands). The transfers into and out of Level 3 were due to changes in the availability of market observable inputs. All transfers are reflected in the table at fair value as of the end of the reporting period.

CONTINENTAL GENERAL INSURANCE COMPANY

		Carrying				Estimated
		Value				Fair Value				Level 1				Level 2				Level 3
June 30, 2015
Financial assets:
Cash and cash equivalents		$	6,651			$	6,651			$	6,651			$	-			$	-
Mortgage loans			2,113				2,113				-				-				2,113
Policy loans			2,764				2,764				-				-				2,764
Total financial assets not accounted for at fair value		$	11,528			$	11,528			$	6,651			$	-			$	4,877
Financial liabilities:
Annuity benefits accumulated(*)		$	74,562			$	75,105			$	-			$	-			$	75,105
Total financial liabilities not accounted for at fair value		$	74,562			$	75,105			$	-			$	-			$	75,105

		Carrying				Estimated
		Value				Fair Value				Level 1				Level 2				Level 3
December 31, 2014
Financial assets:
Cash and cash equivalents		$	12,305			$	12,305			$	12,305			$	-			$	-
Mortgage loans			2,706				2,706				-				-				2,706
Policy loans			2,810				2,810				-				-				2,810
Total financial assets not accounted for at fair value		$	17,821			$	17,821			$	12,305			$	-			$	5,516
Financial liabilities:
Annuity benefits accumulated(*)		$	76,702			$	78,442			$	-			$	-			$	78,442
Total financial liabilities not accounted for at fair value		$	76,702			$	78,442			$	-			$	-			$	78,442

		June 30, 2015																December 31, 2014
		Amortized				Fair				Gross Unrealized								Amortized				Fair				Gross Unrealized
		Cost				Value				Gains				Losses				Cost				Value				Gains				Losses
Fixed Maturities:
U.S. Government and government agencies		$	6,586			$	6,810			$	224			$	-			$	7,902			$	8,259			$	357			$	-
States, municipalities and political subdivisions			50,992				53,676				3,348				(664	)			46,093				50,237				4,256				(112	)
Foreign government			1,493				1,769				276				-				1,493				1,761				268				-
Residential MBS			37,488				41,342				3,904				(50	)			40,718				44,955				4,324				(87	)
Commercial MBS			18,946				20,275				1,329				-				19,102				20,767				1,665				-
Asset-backed securities			5,516				5,750				236				(2	)			5,841				6,137				320				(24	)
Corporate and other			90,963				101,865				11,400				(498	)			82,958				97,000				14,215				(173	)
Total fixed maturities		$	211,984			$	231,487			$	20,717			$	(1,214	)		$	204,107			$	229,116			$	25,405			$	(396	)
Common stocks		$	6,644			$	6,770			$	335			$	(209	)		$	5,878			$	5,700			$	116			$	(294	)
Perpetual preferred stocks		$	5,000			$	4,987			$	14			$	(27	)		$	4,500			$	4,485			$	37			$	(52	)

		Less Than Twelve Months												Twelve Months or More
		Unrealized				Fair				Fair Value as				Unrealized				Fair				Fair Value as
June 30, 2015		Loss				Value				% of Cost				Loss				Value				% of Cost
Fixed Maturities:
U.S. Government and government agencies		$	-			$	-				-	%		$	-			$	-				-	%
States, municipalities and political subdivisions			(455	)			8,369				95	%			(209	)			731				78	%
Residential MBS			(12	)			3,391				100	%			(38	)			1,325				97	%
Commercial MBS			-				-				-	%			-				-				-	%
Asset-backed securities			(2	)			488				100	%			-				-				-	%
Corporate and other			(498	)			11,955				96	%			-				-				-	%
Total fixed maturities		$	(967	)		$	24,203				96	%		$	(247	)		$	2,056				89	%
Common stocks		$	(122	)		$	2,353				95	%		$	(87	)		$	309				78	%
Perpetual preferred stocks		$	(27	)		$	1,472				98	%		$	-			$	-				-	%

		Less Than Twelve Months												Twelve Months or More
		Unrealized				Fair				Fair Value as				Unrealized				Fair				Fair Value as
December 31, 2014		Loss				Value				% of Cost				Loss				Value				% of Cost
Fixed Maturities:
U.S. Government and government agencies		$	-			$	-				-	%		$	-			$	-				-	%
States, municipalities and political subdivisions			-				-				-	%			(112	)			3,414				97	%
Residential MBS			(71	)			5,186				99	%			(16	)			2,010				99	%
Commercial MBS			-				-				-	%			-				-				-	%
Asset-backed securities			(24	)			465				95	%			-				-				-	%
Corporate and other			(173	)			1,332				89	%			-				-				-	%
Total fixed maturities		$	(268	)		$	6,983				96	%		$	(128	)		$	5,424				98	%
Common stocks		$	(129	)		$	2,079				94	%		$	(165	)		$	1,352				89	%
Perpetual preferred stocks		$	(52	)		$	1,449				97	%		$	-			$	-				-	%

		2015				2014
Balance at January 1		$	119			$	225
Additional credit impairments on:
Securities without prior impairments			9				-
Balance at June 30		$	128			$	225

		Amortized				Fair Value
Maturity		Cost				Amount				%
One year or less		$	4,893			$	5,034				2	%
After one year through five years			24,404				27,063				12	%
After five years through ten years			43,161				46,193				20	%
After ten years			77,576				85,830				37	%
Subtotal			150,034				164,120				71	%
MBS (average life of approximately 5 years)			56,434				61,617				27	%
ABS (average life of approximately 4 1/2 years)			5,516				5,750				2	%
Total		$	211,984			$	231,487				100	%

						June 30, 2015
		Pretax				Deferred Tax				Net
Unrealized gain on:
Fixed maturity securities		$	19,503			$	(6,826	)		$	12,677
Equity securities			113				(40	)			73
Deferred policy acquisition costs			(230	)			81				(149	)
Life, accident and health reserves			(12,194	)			4,268				(7,926	)
		$	7,192			$	(2,517	)		$	4,675

						December 31, 2014
		Pretax				Deferred Tax				Net
Unrealized gain on:
Fixed maturity securities		$	25,009			$	(8,753	)		$	16,256
Equity securities			(193	)			68				(125	)
Deferred policy acquisition costs			(221	)			77				(144	)
Life, accident and health reserves			(17,472	)			6,115				(11,357	)
		$	7,123			$	(2,493	)		$	4,630

		2015				2014
Investment income
Fixed maturities		$	6,542			$	7,508
Equity securities			409				629
Policy loans			85				89
Other			91				86
Gross investment income			7,127				8,312
Investment expenses			(46	)			(20	)
Net investment income		$	7,081			$	8,292

										Mortgage
										Loans
		Fixed				Equity				and Other
		Maturities				Securities				Investments				Other (a)				Tax Effects				Total
Six Months ended June 30, 2015
Realized before impairments		$	(406	)		$	(82	)		$	111			$	5			$	130			$	(242	)
Realized - impairments			(10	)			(351	)			(111	)			-				165				(307	)
Change in unrealized			(5,506	)			306				-				5,269				(24	)			45
Six Months ended June 30, 2014
Realized before impairments		$	228			$	-			$	-			$	(1	)		$	(79	)		$	148
Realized - impairments			-				-				-				-				-				-
Change in unrealized			6,650				(211	)			-				(8,522	)			730				(1,353	)

		2015				2014
Fixed maturities:
Gross gains		$	180			$	-
Gross losses			-				(26	)
Equity securities:
Gross gains			29				-
Gross losses			-				-

						Other Comprehensive Income
		AOCI												Net				AOCI
		Beginning												of				Ending
		Balance				Pretax				Tax				Tax				Balance
Six Months Ended June 30, 2015
Net unrealized gains on securities:
Unrealized holding gains (losses) on securities arising during the period		$	(775	)		$	271			$	(504	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)			844				(295	)			549
Total net unrealized gains on securities (b)		$	4,630				69				(24	)			45			$	4,675
Six Months Ended June 30, 2014
Net unrealized gains on securities:
Unrealized holding gains (losses) on securities arising during the period		$	(1,856	)		$	651			$	(1,205	)
Reclassification adjustment for realized (gains) losses included in net earnings (a)			(227	)			79				(148	)
Total net unrealized gains on securities (b)		$	9,903				(2,083	)			730				(1,353	)		$	8,550

OCI component		Affected line in the Consolidated Statement of Earnings
Pretax		Realized gains on securities
Tax		Provision for income taxes

		2015								2014
		Amount				% of EBT				Amount				% of EBT
Earnings (loss) before income taxes ("EBT")		$	(750	)						$	71
Income taxes (benefit) at statutory rate		$	(263	)			35	%		$	25				35	%
Effect of:
Tax-exempt interest			(10	)			1	%			(8	)			(11	%)
Other			(4	)			1	%			1				1	%
Provision (benefit) for income taxes as shown on the Statement of Earnings		$	(277	)			37	%		$	18				25	%