Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2012

or

 

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File No. 001- 34280

 

LOGO

 

 

American National Insurance Company

(Exact name of registrant as specified in its charter)

 

 

 

Texas   74-0484030

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Moody Plaza

Galveston, Texas 77550-7999

(Address of principal executive offices) (Zip Code)

(409) 763-4661

(Registrant’s telephone number, including area code)

 

 

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.    x  Yes    ¨  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 (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  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 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   ¨    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    x  No

As of April 30, 2012, there were 26,836,591 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

  

ITEM 1.

 

FINANCIAL STATEMENTS (Unaudited):

  
  Consolidated Statements of Financial Position as of March 31, 2012 and December 31, 2011      3   
  Consolidated Statements of Operations for the three months ended March 31, 2012 and 2011      4   
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011      5   
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2012 and 2011      5   
  Consolidated Statements of Cash Flows for the three months ended March 31, 2012 and 2011      6   
  Notes to the Unaudited Consolidated Financial Statements      7   

ITEM 2.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION  AND RESULTS
OF OPERATIONS

     37   

ITEM 3.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     58   

ITEM 4.

 

CONTROLS AND PROCEDURES

     58   
 

PART II – OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

     59   

ITEM 1A.

 

RISK FACTORS

     59   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     59   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     59   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     59   

ITEM 5.

 

OTHER INFORMATION

     59   

ITEM 6.

 

EXHIBIT INDEX

     60   

 

2


PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited and in thousands, except for share and per share data)

 

     March 31,     December 31,  
     2012     2011  
           (As Adjusted)  

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost (Fair Value $9,985,192 and $9,857,691)

   $ 9,317,000      $ 9,251,972   

Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $4,215,877 and $4,135,610)

     4,497,509        4,381,607   

Equity securities, at fair value (Cost $694,656 and $710,679)

     1,095,736        1,006,080   

Mortgage loans on real estate, net of allowance

     2,973,035        2,925,482   

Policy loans

     392,633        393,195   

Investment real estate, net of accumulated depreciation of $210,459 and $202,180

     480,516        470,222   

Short-term investments

     228,213        345,330   

Other invested assets

     126,472        109,514   
  

 

 

   

 

 

 

Total investments

     19,111,114        18,883,402   
  

 

 

   

 

 

 

Cash and cash equivalents

     100,867        102,114   

Investments in unconsolidated affiliates

     244,394        241,625   

Accrued investment income

     217,062        213,984   

Reinsurance recoverables

     380,197        405,033   

Prepaid reinsurance premiums

     67,348        68,785   

Premiums due and other receivables

     288,938        280,031   

Deferred policy acquisition costs

     1,301,550        1,320,693   

Property and equipment, net

     80,021        77,909   

Current tax receivable

     4,767        17,150   

Other assets

     134,811        131,403   

Separate account assets

     798,171        747,867   
  

 

 

   

 

 

 

Total assets

   $ 22,729,240      $ 22,489,996   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits:

    

Life

   $ 2,614,387      $ 2,599,224   

Annuity

     766,118        748,675   

Accident and health

     73,333        74,829   

Policyholders’ account balances

     11,555,101        11,506,504   

Policy and contract claims

     1,318,866        1,340,651   

Unearned premium reserve

     809,660        797,398   

Other policyholder funds

     281,861        288,910   

Liability for retirement benefits

     253,869        257,602   

Current portion of long-term notes payable

     45,371        46,387   

Long-term notes payable

     12,500        12,507   

Deferred tax liabilities, net

     76,199        21,851   

Other liabilities

     368,708        397,353   

Separate account liabilities

     798,171        747,867   
  

 

 

   

 

 

 

Total liabilities

     18,974,144        18,839,758   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value, - Authorized 50,000,000 Issued 30,832,449 and 30,832,449, Outstanding 26,836,591 and 26,821,284 shares

     30,832        30,832   

Additional paid-in capital

     1,426        —     

Accumulated other comprehensive income

     238,754        159,403   

Retained earnings

     3,570,095        3,545,546   

Treasury stock, at cost

     (98,287     (98,490
  

 

 

   

 

 

 

Total American National stockholders’ equity

     3,742,820        3,637,291   

Noncontrolling interest

     12,276        12,947   
  

 

 

   

 

 

 

Total stockholders’ equity

     3,755,096        3,650,238   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 22,729,240      $ 22,489,996   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

3


AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except for per share data)

 

     Three months ended March 31,  
     2012     2011  
           (As Adjusted)  

PREMIUMS AND OTHER REVENUE

    

Premiums

    

Life

   $ 66,451      $ 66,386   

Annuity

     28,412        19,490   

Accident and health

     57,054        58,644   

Property and casualty

     273,169        291,314   

Other policy revenues

     48,047        49,131   

Net investment income

     255,696        239,072   

Realized investments gains (losses)

     9,808        22,031   

Other-than-temporary impairments

     (2,837     —     

Other income

     6,875        5,805   
  

 

 

   

 

 

 

Total premiums and other revenues

     742,675        751,873   
  

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

    

Policyholder Benefits

    

Life

     83,823        76,687   

Annuity

     39,245        29,973   

Claims incurred

    

Accident and health

     44,675        41,607   

Property and casualty

     187,552        215,511   

Interest credited to policyholders’ account balances

     124,864        106,391   

Commissions for acquiring and servicing policies

     95,514        109,635   

Other operating expenses

     101,993        122,261   

Change in deferred policy acquisition costs

     1,638        (11,457
  

 

 

   

 

 

 

Total benefits, losses and expenses

     679,304        690,608   
  

 

 

   

 

 

 

Income (loss) before federal income tax and equity in earnings/losses of unconsolidated affiliates

     63,371        61,265   
  

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

    

Current

     7,287        14,318   

Deferred

     9,696        2,067   
  

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

     16,983        16,385   

Equity in earnings (losses) of unconsolidated affiliates, net of tax

     (1,881     1,861   
  

 

 

   

 

 

 

Net income (loss)

     44,507        46,741   

Less: Net income (loss) attributable to noncontrolling interest, net of tax

     (709     (787
  

 

 

   

 

 

 

Net income (loss) attributable to American National Insurance Company and Subsidiaries

   $ 45,216      $ 47,528   
  

 

 

   

 

 

 

Amounts available to American National Insurance Company common stockholders

    

Earnings per share:

    

Basic

   $ 1.70      $ 1.79   

Diluted

     1.69        1.78   

Weighted average common shares outstanding

     26,565,164        26,559,643   

Weighted average common shares outstanding and dilutive potential common shares

     26,758,955        26,690,498   

See accompanying notes to the unaudited consolidated financial statements.

 

4


AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2012      2011  
            (As Adjusted)  

Net income (loss) attributable to American National Insurance Company and Subsidiaries

   $ 45,216       $ 47,528   
  

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     

Change in net unrealized gain (loss) on securities

     76,531         25,877   

Foreign currency transaction and translation adjustments

     152         159   

Defined benefit plan adjustment

     2,668         (65
  

 

 

    

 

 

 

Total other comprehensive income (loss)

     79,351         25,971   
  

 

 

    

 

 

 

Total comprehensive income (loss) attributable to American National Insurance Company and Subsidiaries

   $ 124,567       $ 73,499   
  

 

 

    

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited and in thousands, except for per share data)

 

     Three months ended March 31,  
     2012     2011  
           (As Adjusted)  

Common Stock

    

Balance at beginning and end of the period

   $ 30,832      $ 30,832   
  

 

 

   

 

 

 

Additional Paid-In Capital

    

Balance as of January 1,

     —          15,190   

Issuance of treasury shares as restricted stock

     (203     —     

Income tax effect from restricted stock arrangement

     (534     —     

Amortization of restricted stock

     2,163        953   
  

 

 

   

 

 

 

Balance at end of period

     1,426        16,143   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance as of January 1,

     159,403        225,212   

Other comprehensive income (loss)

     79,351        25,971   

Cumulative effect of accounting change - deferred policy acquisition costs

     —          604   
  

 

 

   

 

 

 

Balance at end of the period

     238,754        251,787   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     3,545,546        3,459,911   

Net income (loss) attributable to American National Insurance Company and Subsidiaries

     45,216        47,528   

Cash dividends to common stockholders ($0.77 per share)

     (20,667     (20,652

Cumulative effect of accounting change - deferred policy acquisition costs

     —          (19,195
  

 

 

   

 

 

 

Balance at end of the period

     3,570,095        3,467,592   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (98,490     (98,494

Issuance of treasury shares as restricted stock

     203        —     
  

 

 

   

 

 

 

Balance at end of the period

     (98,287     (98,494
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     12,947        4,042   

Contributions

     45        17   

Distributions

     (7     (2

Gain (loss) attributable to noncontrolling interest

     (709     (787
  

 

 

   

 

 

 

Balance at end of the period

     12,276        3,270   
  

 

 

   

 

 

 

Total Stockholders’ Equity

    

Balance at end of the period

   $ 3,755,096      $ 3,671,130   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

5


AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2012     2011  
           (As Adjusted)  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 44,507      $ 46,741   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Realized investments (gains) losses

     (9,808     (22,031

Other-than-temporary impairments

     2,837        —     

Accretion (amortization) of discounts, premiums and loan origination fees

     1,890        2,839   

Net capitalized interest on policy loans and mortgage loans

     (7,358     (6,806

Depreciation

     8,854        10,211   

Interest credited to policyholders’ account balances

     124,864        106,391   

Charges to policyholders’ account balances

     (48,047     (49,131

Deferred federal income tax (benefit) expense

     9,696        2,067   

Deferral of policy acquisition costs

     (98,346     (117,130

Amortization of deferred policy acquisition costs

     99,984        105,673   

Equity in (earnings) losses of unconsolidated affiliates

     1,881        (1,861

Changes in:

    

Policyholder liabilities

     8,686        61,752   

Reinsurance recoverables

     24,836        (14,959

Premiums due and other receivables

     (8,907     (33,701

Accrued investment income

     (3,078     (2,038

Current tax receivable/payable

     12,383        15,622   

Liability for retirement benefits

     372        (359

Prepaid reinsurance premiums

     1,437        (1,489

Other, net

     (52,670     49,729   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     114,013        151,520   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of:

    

Bonds - held-to-maturity

     402,772        263,749   

Bonds - available-for-sale

     114,739        164,472   

Equity securities

     20,548        36,441   

Investment real estate

     —          5,412   

Mortgage loans

     43,174        27,138   

Policy loans

     16,788        11,935   

Other invested assets

     10,817        10,955   

Disposals of property and equipment

     —          260   

Distributions from unconsolidated affiliates

     6,415        3,758   

Payment for the purchase/origination of:

    

Bonds - held-to-maturity

     (469,511     (614,848

Bonds - available for sale

     (185,775     (185,554

Equity securities

     —          (22,785

Investment real estate

     (7,188     (3,350

Mortgage loans

     (96,355     (158,257

Policy loans

     (10,336     (9,308

Other invested assets

     (10,524     (9,605

Additions to property and equipment

     (5,876     (4,707

Contributions to unconsolidated affiliates

     (12,334     (14,881

Change in short-term investments

     117,117        25,137   

Other, net

     137        (3,893
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (65,392     (477,931
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     290,831        657,755   

Policyholders’ account withdrawals

     (319,047     (302,200

Change in notes payable

     (1,023     458   

Dividends to stockholders

     (20,667     (20,652

Proceeds from (payments to) noncontrolling interest

     38        15   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (49,868     335,376   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (1,247     8,965   

Beginning of the year

     102,114        101,449   
  

 

 

   

 

 

 

End of year

   $ 100,867      $ 110,414   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

6


NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

American National Insurance Company and its consolidated subsidiaries (collectively “American National”) operate in the insurance industry. Operating on a multiple product line basis, American National offers a broad line of insurance coverages, including individual and group life insurance, health insurance, annuities, and property and casualty insurance. In addition, through non-insurance subsidiaries, American National invests in stocks and real estate. The majority of revenues are generated by the insurance business. Business is conducted in all states and the District of Columbia, as well as Puerto Rico, Guam and American Samoa. Various distribution systems are utilized, including multiple-line exclusive agents, independent agents, third-party marketing organizations, career agents, and direct sales to the public.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for Form 10-Q. In addition to GAAP, specific SEC requirements applicable to insurance companies are applied to the consolidated financial statements.

The interim consolidated financial statements and notes herein are unaudited. These interim consolidated financial statements reflect all adjustments, which are in the opinion of management, considered necessary for the fair presentation of the consolidated statements of financial position, operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows for the interim periods.

These interim consolidated financial statements and notes should be read in conjunction with the annual consolidated financial statements and notes thereto included in American National’s Annual Report on Form 10-K as of and for the year ended December 31, 2011. The consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

American National consolidates all entities that are wholly-owned and those in which American National owns less than 100% but controls, as well as any variable interest entities in which American National is the primary beneficiary. Investments in unconsolidated affiliates are accounted for using the equity method of accounting.

Certain amounts in prior years have been reclassified to conform to current year presentation.

The preparation of the consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported consolidated financial statement balances. Actual results could differ from those estimates.

Effective January 1, 2012, American National adopted a new accounting standard that modified the accounting for deferred policy acquisition costs (“DAC”) associated with acquiring new and renewal insurance and annuity contracts. Previously, acquisition costs were deferred if the costs varied with and were related primarily to the acquisition of new and renewal insurance and annuity contracts. In accordance with the new standard, DAC is limited to those costs that are related directly to the successful acquisition of insurance and annuity contracts, costs that result directly from and are essential to the contract acquisition and costs that would have not been incurred had the contract acquisition not occurred. In addition, advertising costs are included in DAC only if the capitalization criteria for direct-response advertising are met. Refer to Note 3 for discussion of the effects of this accounting change.

As of March 31, 2012, all other American National significant accounting policies and practices remain materially unchanged from those disclosed in Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to Consolidated Financial Statements included in American National’s 2011 Annual Report on Form 10-K.

 

7


3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards

In October 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. The new standard redefines the term “acquisition cost” and added the term “incremental direct cost of contract acquisition” to the master glossary. These changes limit the deferrable cost to those costs that are related directly to the successful acquisition of insurance contracts and those that result directly from and are essential to the contract acquisition and costs that would have not been incurred had the contract acquisition not occurred. The new guidance also specifies that advertising costs should be deferred only if the capitalization criteria for direct-response advertising are met. ASU 2010-26 is effective for interim and annual periods, commencing after December 15, 2011. American National adopted this standard effective January 1, 2012, and applied the retrospective method of adoption to all prior periods presented in the consolidated financial statements. Accordingly, upon adoption, DAC asset was reduced by approximately $34,260,000 as a result of acquisition costs previously deferred that are no longer eligible for deferral under the new guidance. The after-tax cumulative effect adjustment to the opening balance of stockholders’ equity was approximately $19,745,000.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in the U.S. GAAP and IFRSs. ASU 2011-04 clarifies the intent of the FASB about the application of existing fair value measurement and disclosure requirements such as: (1) the application of the highest and best use and valuation premise concepts; (2) a requirement specific to measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity; and (3) a requirement to disclose unobservable inputs used in the fair value of an instrument categorized within Level 3 of the fair value hierarchy. The new guidance also prohibits the use of block premiums and discounts for all fair value measurement, regardless of hierarchy. In addition, ASU 2011-04 expands the disclosures about fair value measurements. ASU 2011-04 is effective for interim and annual periods, beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on the consolidated financial statements.

In June 2011, the FASB issued ASU No. 2011-05, Presentation of Comprehensive Income. ASU 2011-05 makes the presentation of other comprehensive income (“OCI”) more prominent by giving reporting entities two presentation options. Reporting entities can present the total net income and total OCI along with their respective components as one continuous statement or as two separate consecutive statements. The new guidance also eliminates the option to present OCI in the statement of changes in stockholders’ equity. In addition, the new guidance requires reporting entities to present reclassification adjustments from OCI to net income on the face of the financial statements. ASU 2011-05 is effective for interim and annual periods, beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on its consolidated financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Testing Goodwill for Impairment. ASU 2011-08 allows an assessment of qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than its carrying value as a basis to determining whether the two-step goodwill impairment test is necessary. ASU 2011-08 is effective for interim and annual periods beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in ASU 2011-05. The guidance defers the application of the reclassification adjustment provisions in ASU 2011-05. ASU 2011-12 is effective for interim and annual periods beginning after December 15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on its consolidated financial statements.

 

8


Future Adoption of New Accounting Standards

In July 2011, the FASB issued ASU No. 2011-06, Fees Paid to the Federal Government by Health Insurers. ASU 2011-06 addresses questions about how health insurers should recognize and classify in their income statements fees mandated by the Patient Protection and Affordable Care Act, which imposes an annual fee on health insurers for each calendar year beginning on or after January 1, 2014. The new guidance specifies that the liability for the fee should be estimated and recorded in full once the entity provides qualifying health insurance in the applicable calendar year. The corresponding deferred cost is then amortized to expense using a straight-line method of allocation unless another method better allocates the fee over the calendar year that it is payable. ASU 2011-06 is effective for calendar years beginning after December 31, 2013. American National’s adoption of this guidance on January 1, 2014 is not expected to have a material effect on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-10, Derecognition of in Substance Real Estate. The new guidance clarifies that when a reporting entity ceases to have a controlling financial interest in a subsidiary that is in substance real estate because of a default on the subsidiary’s nonrecourse debt secured by the real estate, the reporting entity should apply the guidance for real estate sales when evaluating the subsidiary for deconsolidation. ASU 2011-10 is effective for fiscal years, and interim periods within those years, beginning on or after June 15, 2012. American National’s adoption of this guidance on January 1, 2013 is not expected to have a material effect on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. The new guidance requires an entity to disclose both gross and net information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is effective for interim and annual periods beginning on or after January 1, 2013 and the new disclosure requirements should be applied retrospectively for all periods presented. American National’s adoption of this guidance on January 1, 2013 is not expected to have a material effect on its consolidated financial statements.

 

9


4. INVESTMENTS IN SECURITIES

The cost or amortized cost and estimated fair value of investments in held-to-maturity and available-for-sale securities are shown below (in thousands):

 

     Three months ended March 31, 2012  
     Cost or
Amortized Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

          

U.S. treasury and other U.S. government corporations and agencies

   $ 10,571       $ 152       $ —        $ 10,723   

States of the U.S. and political subdivisions of the states

     395,333         31,186         (52     426,467   

Foreign governments

     29,051         4,990         —          34,041   

Corporate debt securities

     8,124,510         610,622         (10,489     8,724,643   

Residential mortgage-backed securities

     680,469         50,460         (2,810     728,119   

Commercial mortgage-backed securities

     31,341         —           (18,688     12,653   

Collateralized debt securities

     5,391         232         (949     4,674   

Other debt securities

     40,334         3,599         (61     43,872   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     9,317,000         701,241         (33,049     9,985,192   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and other U.S. government corporations and agencies

     14,503         1,024         (6     15,521   

States of the U.S. and political subdivisions of the states

     566,103         39,585         (163     605,525   

Foreign governments

     5,000         2,197         —          7,197   

Corporate debt securities

     3,424,497         244,348         (19,250     3,649,595   

Residential mortgage-backed securities

     175,144         12,104         (785     186,463   

Collateralized debt securities

     16,527         1,535         (144     17,918   

Other debt securities

     14,103         1,187         —          15,290   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,215,877         301,980         (20,348     4,497,509   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity securities

     13,532,877         1,003,221         (53,397     14,482,701   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     663,701         397,400         (4,352     1,056,749   

Preferred stock

     30,955         8,050         (18     38,987   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     694,656         405,450         (4,370     1,095,736   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 14,227,533       $ 1,408,671       $ (57,767   $ 15,578,437   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

10


     Year ended December 31, 2011  
     Cost or
Amortized Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
Losses
    Estimated  Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

          

U.S. treasury and other U.S. government corporations and agencies

   $ 13,704       $ 193       $ —        $ 13,897   

States of the U.S. and political subdivisions of the states

     405,526         32,272         (6     437,792   

Foreign governments

     29,044         4,978         —          34,022   

Corporate debt securities

     8,011,901         564,159         (25,316     8,550,744   

Residential mortgage-backed securities

     714,659         50,774         (3,986     761,447   

Commercial mortgage-backed securities

     31,341         —           (20,158     11,183   

Collateralized debt securities

     7,134         —           (1,018     6,116   

Other debt securities

     38,663         3,827         —          42,490   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     9,251,972         656,203         (50,484     9,857,691   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and other U.S. government corporations and agencies

     11,930         1,156         —          13,086   

States of the U.S. and political subdivisions of the states

     579,008         39,930         (90     618,848   

Foreign governments

     5,000         2,435         —          7,435   

Corporate debt securities

     3,316,083         221,079         (32,016     3,505,146   

Residential mortgage-backed securities

     191,832         11,898         (1,009     202,721   

Collateralized debt securities

     17,636         1,611         (170     19,077   

Other debt securities

     14,121         1,173         —          15,294   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,135,610         279,282         (33,285     4,381,607   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity securities

     13,387,582         935,485         (83,769     14,239,298   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     679,724         305,269         (16,086     968,907   

Preferred stock

     30,955         7,688         (1,470     37,173   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     710,679         312,957         (17,556     1,006,080   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 14,098,261       $ 1,248,442       $ (101,325   $ 15,245,378   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

11


Actual maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Residential and commercial mortgage-backed securities, which are not due at a single maturity, have been allocated to their respective categories based on the year of final contractual maturity. The amortized cost and estimated fair value, by contractual maturity of fixed maturity securities, are shown below (in thousands):

 

     March 31, 2012  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized
Cost
     Estimated  Fair
Value
     Amortized
Cost
     Estimated  Fair
Value
 

Due in one year or less

   $ 832,194       $ 852,402       $ 288,005       $ 291,703   

Due after one year through five years

     3,166,320         3,415,096         1,766,202         1,890,158   

Due after five years through ten years

     4,355,998         4,690,074         1,678,987         1,791,626   

Due after ten years

     956,637         1,023,108         477,683         519,718   

Without single maturity date

     5,851         4,512         5,000         4,304   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,317,000       $ 9,985,192       $ 4,215,877       $ 4,497,509   
  

 

 

    

 

 

    

 

 

    

 

 

 

Available-for-sale securities are sold throughout the year for various reasons. All gains and losses were determined using specific identification of the securities sold. Proceeds from the sales of these securities, with the realized gains and losses, are shown below (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Proceeds from sales of available-for-sale securities

   $ 32,673      $ 53,612   

Gross realized gains

     11,080        14,169   

Gross realized losses

     (159     (809

There were no securities transferred from held-to-maturity to available-for-sale during the three months ended March 31, 2012 and 2011.

Net unrealized gains (losses) on securities

Net unrealized gains (losses) on available-for-sale securities, presented in the stockholders’ equity section of the consolidated statements of financial position, are net of deferred tax expense of $199,587,000 and $179,041,000 as of March 31, 2012 and 2011, respectively.

The components of the net unrealized gains (losses) on securities during the periods indicated are shown below (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Bonds available-for-sale

   $ 35,635      $ 11,948   

Equity securities

     105,679        36,569   
  

 

 

   

 

 

 

Net unrealized gains (losses) on securities during the year

     141,314        48,517   

Adjustments for:

    

Deferred policy acquisition costs

     (17,505     (5,892

Participating policyholders’ interest

     (5,852     (2,855

Deferred federal income tax benefit (expense)

     (41,426     (13,893
  

 

 

   

 

 

 

Net unrealized gains (losses) on securities, net of tax

   $ 76,531      $ 25,877   
  

 

 

   

 

 

 

 

12


Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are shown below (in thousands):

 

     Three months ended March 31, 2012  
     Less than 12 months      12 Months or more      Total  
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

                 

States of the U.S. and political subdivisions of the states

   $ 47       $ 1,888       $ 5       $ 264       $ 52       $ 2,152   

Corporate debt securities

     6,179         451,089         4,310         24,865         10,489         475,954   

Residential mortgage-backed securities

     33         3,331         2,777         31,493         2,810         34,824   

Commercial mortgage-backed securities

     —           —           18,688         12,652         18,688         12,652   

Collateralized debt securities

     —           —           949         1,931         949         1,931   

Other Debt Securities

     61         1,929         —           —           61         1,929   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     6,320         458,237         26,729         71,205         33,049         529,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

                 

U.S. treasury and other U.S. government corporations and agencies

     6         10,755         —           —           6         10,755   

States of the U.S. and political subdivisions of the states

     127         3,652         36         2,014         163         5,666   

Corporate debt securities

     5,121         286,836         14,129         69,684         19,250         356,520   

Residential mortgage-backed securities

     162         23,648         623         9,358         785         33,006   

Collateralized debt securities

     5         315         139         2,179         144         2,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,421         325,206         14,927         83,235         20,348         408,441   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     11,741         783,443         41,656         154,440         53,397         937,883   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

                 

Common stock

     4,352         46,229         —           —           4,352         46,229   

Preferred stock

     18         5,863         —           —           18         5,863   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     4,370         52,092         —           —           4,370         52,092   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

   $ 16,111       $ 835,535       $ 41,656       $ 154,440       $ 57,767       $ 989,975   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

13


     Year ended December 31, 2011  
     Less than 12 months      12 Months or more      Total  
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

                 

States of the U.S. and political subdivisions of the states

   $ —         $ —         $ 6       $ 264       $ 6       $ 264   

Corporate debt securities

     20,204         680,202         5,112         39,280         25,316         719,482   

Residential mortgage-backed securities

     227         19,398         3,759         32,653         3,986         52,051   

Commercial mortgage-backed securities

     —           —           20,158         11,183         20,158         11,183   

Collateralized debt securities

     8         1,605         1,010         4,511         1,018         6,116   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     20,439         701,205         30,045         87,891         50,484         789,096   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

                 

States of the U.S. and political subdivisions of the states

     10         762         80         1,971         90         2,733   

Corporate debt securities

     12,142         396,761         19,874         85,623         32,016         482,384   

Residential mortgage-backed securities

     202         25,943         807         9,047         1,009         34,990   

Collateralized debt securities

     6         704         164         2,770         170         3,474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     12,360         424,170         20,925         99,411         33,285         523,581   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     32,799         1,125,375         50,970         187,302         83,769         1,312,677   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

                 

Common stock

     16,086         98,731         —           —           16,086         98,731   

Preferred stock

     1,470         6,481         —           —           1,470         6,481   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     17,556         105,212         —           —           17,556         105,212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

   $ 50,355       $ 1,230,587       $ 50,970       $ 187,302       $ 101,325       $ 1,417,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For all investment securities with an unrealized loss, including those in an unrealized loss position for 12 months or more, American National performs a quarterly analysis to determine if an other-than-temporary impairment (“OTTI”) loss should be recorded.

Credit Risk Management

Management believes American National’s bond portfolio is diversified and of investment grade. The bond portfolio distributed by credit quality rating, using both S&P and Moody’s ratings, is shown below:

 

     March 31,
2012
    December 31,
2011
 

AAA

     7.7     8.1

AA

     10.2        10.5   

A

     38.3        38.3   

BBB

     39.6        38.6   

BB and below

     4.2        4.5   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

 

14


American National’s equity securities by market sector distribution are shown below:

 

      March 31,
2012
    December 31,
2011
 

Consumer goods

     21.4     21.5

Information technology

     18.4        16.9   

Financials

     17.9        17.2   

Energy and utilities

     16.1        17.3   

Healthcare

     11.6        11.7   

Industrials

     9.1        9.0   

Communications

     3.3        4.2   

Materials

     2.1        2.1   

Other

     0.1        0.1   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

5. MORTGAGE LOANS

American National makes mortgage loans primarily in the commercial sector in areas that offer the potential for property value appreciation. Generally, mortgage loans are secured by first liens on income-producing real estate. American National attempts to maintain a diversified portfolio of mortgage loans and real estate properties by considering the property-type as well as the geographic distribution of the property, which is the underlying mortgage collateral or investment property. Mortgage loans by property-type distribution are as follows:

 

      March 31,
2012
    December 31,
2011
 

Office buildings

     30.9     30.2

Industrial

     24.6        24.6   

Shopping centers

     18.6        19.1   

Hotels and motels

     13.5        13.4   

Other

     12.4        12.7   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Mortgage loans by geographic distribution are as follows:

 

     March 31,
2012
    December 31,
2011
 

West South Central

     23.0     23.1

South Atlantic

     22.3        22.9   

East North Central

     18.5        18.8   

Pacific

     12.0        11.4   

Mountain

     7.2        6.7   

East South Central

     6.0        5.7   

Middle Atlantic

     5.1        5.4   

West North Central

     2.8        2.9   

New England

     2.5        2.5   

Other

     0.6        0.6   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

15


Credit Losses

The amounts of commercial mortgage loans placed on nonaccrual status are shown in the table below (in thousands):

 

      March 31,
2012
     December 31,
2011
 

Commercial mortgages

     

Office

   $ 493       $ 8,436   

Retail

     21,200         23,997   
  

 

 

    

 

 

 

Total

   $ 21,693       $ 32,433   
  

 

 

    

 

 

 

The age analysis of past due commercial mortgage loans is shown in the table below (in thousands):

 

     March 31, 2012  
      30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total  Past
Due
     Current      Total
Mortgage  Loans
 

Commerical mortgages

                 

Office

   $ 6,803       $ —         $ 493       $ 7,296       $ 917,295       $ 924,591   

Industrial

     —           —           —           —           731,992         731,992   

Retail

     3,372         —           21,200         24,572         531,471         556,043   

Other

     —           —           —           —           770,542         770,542   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,175       $ —         $ 21,693       $ 31,868       $ 2,951,300         2,983,168   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    10,133   
                 

 

 

 

Mortgage loans on real estate, net of allowance

  

               $ 2,973,035   
                 

 

 

 

 

     December 31, 2011  
      30-59 Days
Past Due
     60-89 Days
Past  Due
     Greater Than
90 Days
     Total Past
Due
     Current      Total
Mortgage  Loans
 

Commerical mortgages

                 

Office

   $ —         $ —         $ 8,436       $ 8,436       $ 879,923       $ 888,359   

Industrial

     —           —           —           —           721,704         721,704   

Retail

     13,140         —           10,857         23,997         537,665         561,662   

Other

     —           —           —           —           765,078         765,078   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 13,140       $ —         $ 19,293       $ 32,433       $ 2,904,370         2,936,803   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    11,321   
                 

 

 

 

Mortgage loans on real estate, net of allowance

  

               $ 2,925,482   
                 

 

 

 

The amounts shown above are net of unamortized discounts of $9,445,000 and $10,189,000 and unamortized origination fees of $12,510,000 and $12,683,000 at March 31, 2012 and December 31, 2011, respectively. No other unearned income is included in these amounts.

Allowance for Credit Losses

Loans not evaluated individually for collectibility are segregated by collateral property-type and location and allowance factors are applied. These factors are developed annually, and reviewed quarterly based on our historical loss experience adjusted for the expected trend in the rate of foreclosure losses. Allowance factors are higher for loans of certain property types and in certain regions based on loss experience or a blended historical loss factor.

 

16


The allowance for credit losses and unpaid principal balance in commercial mortgage loans are shown in the table below (in thousands):

 

     Collectively
Evaluated
for Impairment
    Individually
Evaluated
for Impairment
     Total  

Allowance for credit losses

       

December 31, 2011

   $ 10,828        493       $ 11,321   

Write down

     —          —           —     

Change in allowance

     (1,188     —           (1,188
  

 

 

   

 

 

    

 

 

 

March 31, 2012

   $ 9,640      $ 493       $ 10,133   
  

 

 

   

 

 

    

 

 

 

Unpaid principal balance

       

March 31, 2012

   $ 2,892,744      $ 112,379       $ 3,005,123   
  

 

 

   

 

 

    

 

 

 

December 31, 2011

   $ 2,725,930      $ 233,745       $ 2,959,675   
  

 

 

   

 

 

    

 

 

 

The detail of loans individually evaluated for impairment with and without an allowance recorded by collateral property-type is shown in the tables below (in thousands):

 

     Three months ended March 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With an allowance recorded

              

Retail

   $ —         $ 493       $ 493       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

              

Office

   $ 6,769       $ 6,769       $ —         $ 6,769       $ 105   

Industrial

     1,779         1,779         —           1,792         29   

Retail

     29,297         29,297         —           30,468         639   

Other

     74,041         74,041         —           74,090         1,217   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total without an allowance recorded

   $ 111,886       $ 111,886       $ —         $ 113,119       $ 1,990   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Year ended December 31, 2011  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With an allowance recorded

              

Retail

   $ —         $ 493       $ 493       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

              

Office

   $ 48,833       $ 48,833       $ —         $ 49,088       $ 3,506   

Industrial

     57,261         57,261         —           57,514         3,628   

Retail

     15,477         15,477         —           15,535         1,514   

Other

     111,681         111,681         —           111,407         7,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total without an allowance recorded

   $ 233,252       $ 233,252       $ —         $ 233,544       $ 16,194   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Credit Quality Indicators

The credit quality of the mortgage loan portfolio is assessed monthly to determine the credit risk of each borrower. A loan is classified as performing or non-performing based on whether all of the contractual terms of the loan have been met. Office loans classified as non-performing amounted to $493,000 and $8,436,000 at March 31, 2012 and December 31, 2011, respectively. Retail loans classified as non-performing amounted to $21,200,000 and $23,997,000 as of March 31, 2012 and December 31, 2011, respectively. All other loans were classified as performing.

During the three months ended March 31, 2012 American National sold no loans. During the year ended December 31, 2011, American National sold one industrial loan with a recorded investment of $27,532,000 and realized a gain of $4,968,000.

 

17


Troubled Debt Restructurings

American National has a high quality, well performing, mortgage loan portfolio. For a very small portion of the portfolio, classified as troubled debt restructurings, American National has granted concessions related to the borrowers’ ability to pay the loan. The types of concessions granted are generally a delay in payment of principal and/or interest, and could involve a reduction of the contractual interest rate and/or an extension of the maturity date. American National considers the amount, timing and extent of the concession granted in determining any impairment or changes in the specific allowance for loan losses recorded in connection with a troubled debt restructuring. The carrying value after specific allowance, before and after modification in a troubled debt restructuring, may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

At March 31, 2012 and December 31, 2011, three loans which were part of the mortgage loan portfolio have been modified in troubled debt restructurings. The pre-modification outstanding recorded investment was $45,366,000 and the post-modification outstanding recorded investment was $45,366,000. American National does not have any commitments to lend additional funds to debtors, whose loans have been modified in troubled debt restructurings, and there have been no defaults on modified loans during the preceding twelve months.

6. INVESTMENT REAL ESTATE

Investment real estate by property-type distribution is as follows:

 

     March 31,
2012
    December 31,
2011
 

Shopping centers

     41.0     41.1

Office buildings

     23.3        22.0   

Industrial

     15.8        16.3   

Hotels and motels

     2.0        2.1   

Other

     17.9        18.5   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Investment real estate by geographic distribution is as follows:

 

     March 31,
2012
    December 31,
2011
 

West South Central

     64.8     66.1

South Atlantic

     11.8        11.6   

East North Central

     6.8        5.2   

Mountain

     6.7        6.9   

East South Central

     5.0        5.2   

Pacific

     2.3        2.3   

West North Central

     2.6        2.7   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

In the normal course of investment activities, American National and its wholly-owned subsidiaries enter into various real estate partnership and joint venture agreements. Generally, real estate partnership and joint venture opportunities are presented to American National by a sponsor, with the significant activities being conducted on behalf of the sponsor. American National participates in the design of these entities, but in most cases, American National’s involvement is limited to financing. Through analysis performed by American National, some of these partnerships and joint ventures have been determined to be variable interest entities (“VIEs”). In certain instances, in addition to an economic interest in the entity, American National holds the power to direct the most significant activities of the entity and is deemed the primary beneficiary or consolidator of the entity. The assets of the consolidated VIEs are restricted and must be used first to settle the liabilities of the VIE. Creditors or beneficial interest holders of these VIEs have no recourse to the general credit of American National, as American National’s obligation is limited to the amount of its committed investment.

 

18


The total assets and liabilities relating to VIEs in which American National is the primary beneficiary and which are consolidated in its financial statements for the periods indicated are as follows (in thousands):

 

     March 31,
2012
     December 31,
2011
 

Investment real estate

   $ 109,411       $ 154,878   

Short-term investments

     1,398         3,364   

Cash and cash equivalents

     2,014         5,777   

Accrued investment income

     1,556         2,299   

Other receivables

     570         11,816   

Other assets

     2,781         3,870   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 117,730       $ 182,004   
  

 

 

    

 

 

 

Notes payable

   $ 57,871       $ 58,894   

Other liabilities

     2,180         5,354   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 60,051       $ 64,248   
  

 

 

    

 

 

 

For other real estate partnerships and joint ventures in which American National is a partner, the major decisions that most significantly impact the economic activities of the partnership and joint venture require unanimous consent of all partners. American National is not the primary beneficiary and these entities were not consolidated. The following table presents the carrying amount and maximum exposure to loss relating to VIEs for which American National holds significant variable interests but is not the primary beneficiary and which have not been consolidated (in thousands):

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 80,063       $ 80,063       $ 85,509       $ 85,509   

Financial or other support was not provided to investees designated as VIEs in the form of liquidity arrangements, guarantees, or other commitments by third parties that may affect the fair value or risk of American National’s variable interest in the investees designated as VIEs as of March 31, 2012 and December 31, 2011.

 

19


7. DERIVATIVE INSTRUMENTS

American National purchases derivative contracts (equity-indexed options) that serve as economic hedges against fluctuations in the equity markets to which equity-indexed annuity products are exposed. Equity-indexed annuities include a fixed host annuity contract and an equity-indexed embedded derivative. These derivative instruments are not designated as accounting hedges. The following tables detail the volume, estimated fair value and the gains or losses on derivative instruments (in thousands):

 

Derivatives Not Designated

as Hedging Instruments

  

Location of Asset (Liability) Reported in

the Consolidated Statements of Financial
Position

   March 31, 2012     December 31, 2011  
      Number of
Instruments
     Notional
Amounts
     Estimated
Fair Value
    Number of
Instruments
     Notional
Amounts
     Estimated
Fair Value
 

Equity-indexed options

   Other invested assets      342       $ 812,400       $ 84,706        332       $ 791,900       $ 65,188   

Equity-indexed annuity embedded derivative

   Future policy benefits - Annuity      17,373         667,000         (78,654     16,727         661,300         (63,275

 

Derivatives Not Designated

as Hedging Instruments

  

Location of Gains (Losses)

Recognized in the Consolidated

Statements of Operations

   Gains (Losses)  Recognized
in Income on Derivatives
 
      Three months ended March 31,  
      2012     2011  

Equity-indexed options

   Net investment income    $ 19,647      $ 7,117   

Equity-indexed annuity embedded derivative

   Interest credited to policyholders’ account balances      (18,485     (6,604

8. NET INVESTMENT INCOME AND REALIZED INVESTMENT GAINS (LOSSES)

Net investment income, before federal income taxes, is shown below (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Bonds

   $ 173,863      $ 170,020   

Equity securities

     6,360        5,916   

Mortgage loans

     50,790        47,731   

Real estate

     17,217        22,725   

Options

     19,647        7,117   

Other invested assets

     9,065        10,272   
  

 

 

   

 

 

 
     276,942        263,781   

Investment expenses

     (21,246     (24,709
  

 

 

   

 

 

 

Total

   $ 255,696      $ 239,072   
  

 

 

   

 

 

 

Realized investments gains (losses), before federal income taxes, are shown below (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Bonds

   $ 3,810      $ 10,323   

Equity securities

     7,355        12,536   

Mortgage loans

     (1,089     (1,450

Real estate

     (252     622   

Other invested assets

     (16     —     
  

 

 

   

 

 

 

Total

   $ 9,808      $ 22,031   
  

 

 

   

 

 

 

 

20


The OTTI, which are not included in the realized investments gains (losses) above, are shown below (in thousands):

 

     Three months ended March 31,  
     2012     2011  

Equity securities

   $ (2,837   $ —     
  

 

 

   

 

 

 

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

The carrying amount and estimated fair value of financial instruments are shown below (in thousands):

 

     March 31, 2012      December 31, 2011  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

           

U.S. treasury and other U.S. government corporations and agencies

   $ 10,571       $ 10,723       $ 13,704       $ 13,897   

States of the U.S. and political subdivisions of the states

     395,333         426,467         405,526         437,792   

Foreign governments

     29,051         34,041         29,044         34,022   

Corporate debt securities

     8,124,510         8,724,643         8,011,901         8,550,744   

Residential mortgage-backed securities

     680,469         728,119         714,659         761,447   

Commercial mortgage-backed securities

     31,341         12,653         31,341         11,183   

Collateralized debt securities

     5,391         4,674         7,134         6,116   

Other debt securities

     40,334         43,872         38,663         42,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     9,317,000         9,985,192         9,251,972         9,857,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and other U.S. government corporations and agencies

     15,521         15,521         13,086         13,086   

States of the U.S. and political subdivisions of the states

     605,525         605,525         618,848         618,848   

Foreign governments

     7,197         7,197         7,435         7,435   

Corporate debt securities

     3,649,595         3,649,595         3,505,146         3,505,146   

Residential mortgage-backed securities

     186,463         186,463         202,721         202,721   

Collateralized debt securities

     17,918         17,918         19,077         19,077   

Other debt securities

     15,290         15,290         15,294         15,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,497,509         4,497,509         4,381,607         4,381,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     13,814,509         14,482,701         13,633,579         14,239,298   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,056,749         1,056,749         968,907         968,907   

Preferred stock

     38,987         38,987         37,173         37,173   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,095,736         1,095,736         1,006,080         1,006,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     84,706         84,706         65,188         65,188   

Mortgage loans on real estate, net of allowance

     2,973,035         3,222,248         2,925,482         3,178,205   

Policy loans

     392,633         392,633         393,195         393,195   

Short-term investments

     228,213         228,213         345,330         345,330   

Separate account assets

     798,171         798,171         747,867         747,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,387,003       $ 20,304,408       $ 19,116,721       $ 19,975,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,984,491       $ 9,984,491       $ 9,993,804       $ 9,993,804   

Embedded derivative liability for equity-indexed annuities

     78,654         78,654         63,275         63,275   

Notes payable

     57,871         57,871         58,894         58,894   

Separate account liabilities

     798,171         798,171         747,867         747,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,919,187       $ 10,919,187       $ 10,863,840       $ 10,863,840   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Summary

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability. A fair value hierarchy is used to determine fair value based on a hypothetical transaction at the measurement date from the perspective of a market participant. An asset or liability’s classification within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:

 

    Level 1   Unadjusted quoted prices in active markets for identical assets or liabilities. American National defines active
markets based on average trading volume for equity securities. The size of the bid/ask spread is used as an
indicator of market activity for fixed maturity securities.
  Level 2   Quoted prices in markets that are not active or inputs that are observable directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
  Level 3   Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect American National’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models and third-party evaluation, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

American National has evaluated the types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, each financial instrument was classified into Level 1, 2, or 3 measurements.

Fixed Maturity Securities and Equity Options

American National utilizes a pricing service to estimate fair value measurements for approximately 99.0% of fixed maturity securities. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturity securities generally do not trade on a daily basis, the pricing service prepares estimates of fair value measurements for these securities using its proprietary pricing applications, which include available relevant market information, benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Additionally, the pricing service uses an option adjusted spread model to develop prepayment and interest rate scenarios.

The pricing service evaluates each asset class based on relevant market information, relevant credit information, perceived market movements and sector news. The market inputs utilized in the pricing evaluation, listed in the approximate order of priority, include: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and economic events. The extent of the use of each market input depends on the asset class and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

American National has reviewed the inputs and methodology used by the pricing service and the techniques applied by the pricing service to produce quotes that represent the fair value of a specific security. The review of the pricing services methodology confirms the service is utilizing information from organized transactions or a technique that represents a market participant’s assumptions. American National does not adjust quotes received by the pricing service. The pricing service utilized by American National has indicated that they will only produce an estimate of fair value if there is objectively verifiable information available.

 

22


The fair value estimates of most fixed maturity investments including municipal bonds are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturity securities provided by the pricing service are disclosed as Level 2 measurements.

Additionally, American National holds a small amount of fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these fixed maturity securities, a quote from an independent broker (typically a market maker) is obtained. Due to the disclaimers on the quotes that indicate that the price is indicative only, American National includes these fair value estimates in Level 3. The pricing of certain private placement debt also includes significant non-observable inputs, the internally determined credit rating of the security, and an externally provided credit spread, and these securities are classified as Level 3 measurements.

For securities priced using a quote from an independent broker, such as the equity options and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received from an independent broker. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is generally performed on a weekly basis, but no less frequently than on a monthly basis.

Equity Securities

For publicly-traded equity securities, American National receives prices from a nationally recognized pricing service that are based on observable market transactions and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, American National receives an estimate of fair value from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. These estimates for equity securities are disclosed as Level 2 measurements.

Mortgage Loans

The fair value of mortgage loans is estimated using discounted cash flow analyses. Fair value is calculated on a loan by loan basis by applying a discount rate to expected cash flows from future installment and balloon payments. The discount rate takes into account general market trends and specific credit risk trends for the individual loan. Factors used to arrive at the discount rate include inputs from spreads based on U.S. Treasury notes and the loan’s credit rating, region, property type, lien number, payment type and current status.

Embedded Derivative

The embedded derivative liability for equity-indexed annuities is measured at fair value. The embedded derivative liability is recalculated each reporting period using equity option pricing models. To validate the assumptions used to price the embedded derivative, American National measures and compares embedded derivative returns against the returns of equity options held to hedge the liability cash flows.

The significant unobservable input used to calculate the fair value of the embedded derivatives is equity option implied volatility. This volatility assumption is the range of implied volatilities that American National has determined market participants would use to price equity options that match the current derivative characteristics of our in-force equity-indexed annuities. Implied volatility can vary by term and strike price. An increase in implied volatility will result in an increase in the value of the equity-indexed annuity embedded derivatives, all other things being equal. At March 31, 2012, the implied volatility used to estimate embedded derivative value ranges from 13.2% to 30.9%.

 

23


Other Financial Instruments

For other financial instruments discussed below, American National believes that their carrying value approximates fair value. This assumption is supported by the qualitative information discussed below. These financial instruments are classified as level 3 measurements.

Policy loans – The carrying value of policy loans is equivalent to outstanding balance plus any accrued interest. Policy loans have negligible default risk as the loan is fully collateralized by the cash surrender value of the policy. Policy loans do not have stated maturities, and the outstanding balances along with accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans, unpredictable timing of repayments and the fact that it cannot be separated from the policy contract, American National believes that the carrying value of policy loans approximates fair value.

Investment contracts liability – The carrying value of investment contracts liability is equivalent to the accrued account balance. The accrued account balance consists of deposits, net of withdrawals, plus or minus interest credited, fees and charges assessed and other adjustments. American National believes that the carrying value of investment contracts liability approximates fair value because the majority of these contracts’ interest rates reset to current rates offered at anniversary.

Notes payable – Notes payable are carried at outstanding principal balance. The carrying value of the notes payable approximates fair value because the underlying interest rates approximates market rates at the balance sheet date.

 

24


Quantitative Disclosures

The quantitative disclosures regarding fair value hierarchy measurements of the financial instruments are shown below (in thousands):

 

     Fair Value Measurement as of March 31, 2012 Using:  
     Total Estimated
Fair Value
     Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

           

U.S. treasury and other U.S. government corporations and agencies

   $ 10,723       $ —         $ 10,723       $ —     

States of the U.S. and political subdivisions of the states

     426,467         —           426,467         —     

Foreign governments

     34,041         —           34,041         —     

Corporate debt securities

     8,724,643         —           8,665,218         59,425   

Residential mortgage-backed securities

     728,119         —           726,644         1,475   

Commercial mortgage-backed securities

     12,653         —           —           12,653   

Collateralized debt securities

     4,674         —           —           4,674   

Other debt securities

     43,872         —           36,918         6,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     9,985,192         —           9,900,011         85,181   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and other U.S. government corporations and agencies

     15,521         —           15,521         —     

States of the U.S. and political subdivisions of the states

     605,525         —           603,000         2,525   

Foreign governments

     7,197         —           7,197         —     

Corporate debt securities

     3,649,595         —           3,636,390         13,205   

Residential mortgage-backed securities

     186,463         —           186,457         6   

Collateralized debt securities

     17,918         —           17,918      

Other debt securities

     15,290         —           15,290         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,497,509         —           4,481,773         15,736   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     14,482,701         —           14,381,784         100,917   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,056,749         1,056,749         —           —     

Preferred stock

     38,987         38,987         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,095,736         1,095,736         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     84,706         —           —           84,706   

Mortgage loans on real estate

     3,222,248         —           3,222,248         —     

Policy Loans

     392,633         —           —           392,633   

Short-term investments

     228,213         —           228,213         —     

Separate account assets

     798,171         —           798,171         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,304,408       $ 1,095,736       $ 18,630,416       $ 578,256   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment Contracts

   $ 9,984,491       $ —         $ —         $ 9,984,491   

Embedded derivative liability for equity-indexed annuities

     78,654         —           —           78,654   

Notes payable

     57,871         —           —           57,871   

Separate account liabilities

     798,171         —           798,171         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,919,187       $ —         $ 798,171       $ 10,121,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


     Fair Value Measurement as of December 31, 2011 Using:  
     Total Estimated
Fair Value
     Quoted Prices in
Active  Markets for
Identical Assets
(Level 1)
     Significant Other
Observable Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

           

U.S. treasury and other U.S. government corporations and agencies

   $ 13,897       $ —         $ 13,897       $ —     

States of the U.S. and political subdivisions of the states

     437,792         —           437,792         —     

Foreign governments

     34,022         —           34,022         —     

Corporate debt securities

     8,550,744         —           8,492,957         57,787   

Residential mortgage-backed securities

     761,447         —           759,773         1,674   

Commercial mortgage-backed securities

     11,183         —           —           11,183   

Collateralized debt securities

     6,116         —           —           6,116   

Other debt securities

     42,490         —           35,147         7,343   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     9,857,691         —           9,773,588         84,103   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and other U.S. government corporations and agencies

     13,086         —           13,086         —     

States of the U.S. and political subdivisions of the states

     618,848         —           616,323         2,525   

Foreign governments

     7,435         —           7,435         —     

Corporate debt securities

     3,505,146         —           3,492,113         13,033   

Residential mortgage-backed securities

     202,721         —           202,715         6   

Collateralized debt securities

     19,077         —           18,826         251   

Other debt securities

     15,294         —           15,294         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,381,607         —           4,365,792         15,815   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

     14,239,298         —           14,139,380         99,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     968,907         968,907         —           —     

Preferred stock

     37,173         37,173         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,006,080         1,006,080         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     65,188         —           —           65,188   

Mortgage loans on real estate

     3,178,205         —           3,178,205         —     

Policy Loans

     393,195         —           —           393,195   

Short-term investments

     345,330         —           345,330         —     

Separate account assets

     747,867         —           747,867         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,975,163       $ 1,006,080       $ 18,410,782       $ 558,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment Contracts

   $ 9,993,804       $ —         $ —         $ 9,993,804   

Embedded derivative liability for equity-indexed annuities

     63,275         —           —           63,275   

Notes Payable

     58,894         —           —           58,894   

Separate account liabilities

     747,867         —           747,867         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,863,840       $ —         $ 747,867       $ 10,115,973   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

26


For financial instruments measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, a reconciliation of the beginning and ending balances is shown below at estimated fair value (in thousands):

 

     Investment
Securities
    Equity-
Indexed
Options
    Embedded
Derivative
Liability
    Total  

Balance at December 31, 2010

   $ 90,477      $  66,716      $ (59,644   $ 97,549   

Total realized and unrealized investment gains/losses

        

Included in other comprehensive income

     (686     —          —          (686

Net fair value change included in realized gains/losses

     151        —          —          151   

Net gain (loss) for derivatives included in net investment income

     —          7,115        —          7,115   

Net change included in interest credited

     —          —          (6,604     (6,604

Purchases, sales and settlements or maturities

        

Purchases

     13        3,660        —          3,673   

Sales

     (10,181     —          —          (10,181

Settlements or maturities

     (2,070     (4,522     —          (6,592

Premiums less benefits

     —          —          68        68   

Gross transfers into Level 3

     5        —          —          5   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2011

   $ 77,709      $ 72,969      $ (66,180   $ 84,498   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2011

   $ 99,918      $ 65,188      $ (63,275   $ 101,831   

Total realized and unrealized investment gains/losses

        

Included in other comprehensive income

     3,678        —          —          3,678   

Net fair value change included in realized gains/losses

     (17     —          —          (17

Net gain (loss) for derivatives included in net investment income

     —          17,798        —          17,798   

Net change included in interest credited

     —          —          (18,485     (18,485

Purchases, sales and settlements or maturities

        

Purchases

     18        4,341        —          4,359   

Sales

     (2,502     —          —          (2,502

Settlements or maturities

     (178     (2,621     —          (2,799

Premiums less benefits

     —          —          3,106        3,106   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 100,917      $ 84,706      $ (78,654   $ 106,969   
  

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were an unrealized gain of $17,399,000 and an unrealized loss of $12,613,000 relating to assets still held at March 31, 2012 and December 31, 2011, respectively.

The transfers into Level 3 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. American National utilizes quotes from independent brokers to price these securities.

The transfers out of Level 3 were securities being priced by a third-party service at the end of the period, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2. There were no transfers between Level 1 and Level 2 fair value hierarchies.

 

27


10. DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs are shown below (in thousands):

 

     Life     Annuity     Accident
& Health
    Property &
Casualty
    Total  

Balance at December 31, 2011 (As Adjusted)

   $ 651,579      $ 463,030      $ 55,100      $ 150,984      $ 1,320,693   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     17,676        17,570        2,532        60,568        98,346   

Amortization

     (16,452     (21,087     (5,086     (57,359     (99,984

Effect of change in unrealized gains on available-for-sale securities

     (14,907     (2,598     —          —          (17,505
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     (13,683     (6,115     (2,554     3,209        (19,143
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at March 31, 2012

   $ 637,896      $ 456,915      $ 52,546      $ 154,193      $ 1,301,550   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commissions comprise the majority of the additions to DAC for each year. Effective January 1, 2012, American National retrospectively adopted a new accounting standard that modified the accounting for DAC. Refer to Notes 2 and 3 for additional discussion. All amounts for the value of business acquired resulting from the acquisition of life insurance portfolios have been accounted for in accordance with the relevant accounting literature and are immaterial in all periods presented.

11. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES

The liability for unpaid claims and claim adjustment expenses (“CAE”) for accident and health, and property and casualty insurance is included in the liability for policy and contract claims in the consolidated statements of financial position and represents the amount estimated for claims that have been reported but not settled and claims incurred but not reported. Liability for unpaid claims and CAE are estimated based upon American National’s historical experience and other actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, reduced for anticipated salvage and subrogation. The effects of changes in such estimated liability are included in the consolidated results of operations in the period in which the changes occur.

Activities in the liability for unpaid claims and CAE (“claims”) are shown below (in thousands):

 

     2012     2011  

Balance at January 1

   $ 1,180,259      $ 1,210,126   

Less reinsurance recoverables

     235,174        222,635   
  

 

 

   

 

 

 

Net beginning balance

     945,085        987,491   
  

 

 

   

 

 

 

Incurred related to:

    

Current

     258,886        303,805   

Prior years

     (25,720     (43,832
  

 

 

   

 

 

 

Total incurred claims

     233,166        259,973   
  

 

 

   

 

 

 

Paid claims related to:

    

Current

     100,383        127,668   

Prior years

     138,587        137,226   
  

 

 

   

 

 

 

Total paid claims

     238,970        264,894   
  

 

 

   

 

 

 

Net balance

     939,281        982,570   

Plus reinsurance recoverables

     232,251        230,243   
  

 

 

   

 

 

 

Unpaid claims balance at March 31

   $ 1,171,532      $ 1,212,813   
  

 

 

   

 

 

 

The balances at March 31, 2012 and December 31, 2011 are included in policy and contract claims in the consolidated statements of financial position.

The potential uncertainty caused by volatility in loss development profiles is adjusted through the selection of loss development factor patterns for each line of insurance. The net and gross reserve calculations have shown favorable development for the last several years as a result of favorable loss emergence compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred claims and CAE attributable to insured events of prior years decreased by approximately $25,720,000 during the first three months of 2012 and $43,832,000 during the same period in 2011.

 

28


12. NOTES PAYABLE

American National’s real estate holding subsidiaries are partners in certain joint ventures determined to be VIEs that are consolidated in American National’s consolidated financial statements. The real estate owned through the respective ventures secures notes payable, and American National’s liability for these notes is limited to the amount of its investment in the respective ventures, which totaled $17,848,000 and $17,959,000 at March 31, 2012 and December 31, 2011, respectively. At March 31, 2012, the current portion and the long-term portion of the notes payable to third-party lenders associated with these consolidated VIEs were $45,371,000 and $12,500,000, respectively. At December 31, 2011, the current portion and long-term portion of the notes payable to third-party lenders associated with these consolidated VIEs were $46,387,000 and $12,507,000, respectively. The average interest rate on the current portion of the notes payable was 4.25% and 2.75% during the three months ended March 31, 2012 and 2011, respectively. The long-term portion of the notes payable have interest rates equivalent to adjusted LIBOR plus 1.00% and 2.50% margins. The average interest rate on the long-term portion of the notes payable was 4.63% during the three months ended March 31, 2012 and 2011, and will mature in 2016 and 2049.

13. FEDERAL INCOME TAXES

The federal income tax provisions vary from the amounts computed when applying the statutory federal income tax rate. A reconciliation of the effective tax rate to the statutory federal income tax rate is shown below (in thousands, except percentages):

 

     Three months ended March 31,  
     2012     2011  
     Amount     Rate     Amount     Rate  
                 (As Adjusted)  

Income tax expense on pre-tax income

   $ 22,180        35.0    $ 21,443        35.0 

Tax-exempt investment income

     (1,905     (3.0     (2,043     (3.3

Dividend exclusion

     (1,469     (2.3     (1,264     (2.1

Miscellaneous tax credits, net

     (2,111     (3.3     (2,000     (3.3

Other items, net

     288        0.4        249        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 16,983        26.8    $ 16,385        26.7 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

29


The tax effects of temporary differences that gave rise to the deferred tax assets and liabilities are shown below (in thousands):

 

     March 31,
2012
    December 31,
2011
 
           (As Adjusted)  

DEFERRED TAX ASSETS:

    

Investments, principally due to impairment losses

   $ 84,029      $ 87,518   

Investment in real estate and other invested assets principally due to investment valuation allowances

     8,997        8,620   

Policyholder funds, principally due to policy reserve discount

     236,027        235,827   

Policyholder funds, principally due to unearned premium reserve

     31,123        31,230   

Non-qualified pension

     28,330        28,503   

Participating policyholders’ surplus

     33,673        33,677   

Pension

     62,477        63,597   

Commissions and other expenses

     7,736        8,165   

Tax carryforwards

     31,918        32,220   

Other assets

     981        7,089   
  

 

 

   

 

 

 

Gross deferred tax assets

     525,291        536,446   
  

 

 

   

 

 

 

DEFERRED TAX LIABILITIES:

    

Available-for-sale securities, principally due to net unrealized gains

     (238,569     (189,194

Investment in bonds, principally due to accrual of discount on bonds

     (12,394     (11,774

Deferred policy acquisition costs, due to difference between GAAP and tax amortization methods

     (344,161     (350,319

Property, plant and equipment, principally due to difference between GAAP and tax depreciation methods

     (6,366     (7,010
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (601,490     (558,297
  

 

 

   

 

 

 

Total net deferred tax liability

   $ (76,199   $ (21,851
  

 

 

   

 

 

 

Management believes that a sufficient level of taxable income will be achieved to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of March 31, 2012 and December 31, 2011. However, if not utilized beforehand, approximately $31,918,000 in ordinary loss tax carryforwards will expire at the end of tax year 2032.

American National recognizes interest and penalties related to uncertain tax positions. Interest and penalties are included in the “Other operating expenses” line in the consolidated statements of operations. However, no interest expense was incurred for the three months ended March 31, 2012 and for the year ended December 31, 2011. In addition, no provision for penalties was established for uncertain tax positions. Management does not believe that there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

The statute of limitations for the examination of federal income tax returns by the Internal Revenue Service (“IRS”) for years 2006 to 2010 either has been extended or has not expired. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld.

A total of $6,425,000 was refunded by the IRS during the three months ended March 31, 2012. No federal income taxes were paid to or refunded by the IRS during the three months ended March 31, 2011.

 

30


14. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The changes in the accumulated balances of each component of other comprehensive income (loss), and the related tax effects thereon, are shown below (in thousands):

 

     Net  Unrealized
Gains/(Losses)

on Securities
    Defined Benefit
Pension Plan
Adjustments
    Foreign Currency
Transaction and
Translation
Adjustments
     Accumulated Other
Comprehensive
Income
 

Balance at December 31, 2010

   $ 290,489      $ (65,533   $ 256       $ 225,212   
  

 

 

   

 

 

   

 

 

    

 

 

 

Unrealized holding gains (losses) arising during the period (net of tax $21,707)

     40,314             40,314   

Reclassification adjustment for (gains) losses realized in net income/loss (net of tax $4,750)

     (8,754          (8,754

Unrealized adjustment to deferred policy acquisition costs (net of tax benefit $2,065)

     (3,827          (3,827

Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax $999)

     (1,856          (1,856

Cumulative effect of accounting change - deferred policy acquisition costs (net of tax $325)

     604             604   

Amortization of prior service cost and actuarial (gain) loss included in net periodic pension cost (net of tax $35)