Form 10-Q
Table of Contents

 

 

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 September 30, 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 October 31, 2012, there were 26,836,664 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION   
ITEM 1. FINANCIAL STATEMENTS (Unaudited):   

Consolidated Statements of Financial Position as of September 30, 2012 and December 31, 2011

   3

Consolidated Statements of Operations for the three and nine months ended September 30, 2012 and 2011

   4

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2012 and 2011

   5

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2012 and 2011

   5

Consolidated Statements of Cash Flows for the nine months ended September 30, 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    35
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK    56
ITEM 4. CONTROLS AND PROCEDURES    56
  PART II – OTHER INFORMATION   
ITEM 1. LEGAL PROCEEDINGS    57
ITEM 1A. RISK FACTORS    57
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS    57
ITEM 3. DEFAULTS UPON SENIOR SECURITIES    57
ITEM 4. MINE SAFETY DISCLOSURES    57
ITEM 5. OTHER INFORMATION    57
ITEM 6. EXHIBIT INDEX    58

 

2


Table of Contents

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)

 

     September 30,     December 31,  
     2012     2011  
           (As Adjusted)  

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost (Fair Value $10,061,217 and $9,857,691)

   $ 9,187,881      $ 9,251,972   

Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $4,313,577 and $4,135,610)

     4,668,577        4,381,607   

Equity securities, at fair value (Cost $687,488 and $710,679)

     1,094,387        1,006,080   

Mortgage loans on real estate, net of allowance

     3,058,663        2,925,482   

Policy loans

     393,774        393,195   

Investment real estate, net of accumulated depreciation of $218,161 and $202,180

     508,202        470,222   

Short-term investments

     321,512        345,330   

Other invested assets

     129,675        109,514   
  

 

 

   

 

 

 

Total investments

     19,362,671        18,883,402   
  

 

 

   

 

 

 

Cash and cash equivalents

     162,630        102,114   

Investments in unconsolidated affiliates

     240,676        241,625   

Accrued investment income

     217,861        213,984   

Reinsurance recoverables

     388,459        405,033   

Prepaid reinsurance premiums

     61,417        68,785   

Premiums due and other receivables

     308,459        280,031   

Deferred policy acquisition costs

     1,269,867        1,320,693   

Property and equipment, net

     85,335        77,909   

Current tax receivable

     —          17,150   

Other assets

     135,385        131,403   

Separate account assets

     817,057        747,867   
  

 

 

   

 

 

 

Total assets

   $ 23,049,817      $ 22,489,996   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits:

    

Life

   $ 2,641,916      $ 2,599,224   

Annuity

     801,839        748,675   

Accident and health

     71,176        74,829   

Policyholders’ account balances

     11,621,182        11,506,504   

Policy and contract claims

     1,330,715        1,340,651   

Unearned premium reserve

     804,288        797,398   

Other policyholder funds

     287,854        288,910   

Liability for retirement benefits

     248,728        257,602   

Current portion of long-term notes payable

     48,747        46,387   

Long-term notes payable

     112,500        12,507   

Current federal income taxes

     4,706        —     

Deferred tax liabilities, net

     88,217        21,851   

Other liabilities

     332,695        397,353   

Separate account liabilities

     817,057        747,867   
  

 

 

   

 

 

 

Total liabilities

     19,211,620        18,839,758   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value, - Authorized 50,000,000

    

Issued 30,832,449 and 30,832,449,

    

Outstanding 26,836,664 and 26,821,284 shares

     30,832        30,832   

Additional paid-in capital

     5,004        —     

Accumulated other comprehensive income

     279,760        159,403   

Retained earnings

     3,608,459        3,545,546   

Treasury stock, at cost

     (98,286     (98,490
  

 

 

   

 

 

 

Total American National stockholders’ equity

     3,825,769        3,637,291   

Noncontrolling interest

     12,428        12,947   
  

 

 

   

 

 

 

Total stockholders’ equity

     3,838,197        3,650,238   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 23,049,817      $ 22,489,996   
  

 

 

   

 

 

 

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  
           (As Adjusted)           (As Adjusted)  

PREMIUMS AND OTHER REVENUE

        

Premiums

        

Life

   $ 72,203      $ 71,926      $ 209,353      $ 207,786   

Annuity

     30,140        21,704        93,275        73,304   

Accident and health

     56,199        57,708        167,965        174,736   

Property and casualty

     272,903        289,796        814,503        856,958   

Other policy revenues

     49,343        46,350        146,406        141,860   

Net investment income

     258,190        225,942        754,449        715,186   

Realized investments gains (losses)

     26,905        17,531        46,852        62,488   

Other-than-temporary impairments

     (13,975     (4,851     (22,073     (4,851

Other income

     8,160        6,604        22,975        18,896   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     760,068        732,710        2,233,705        2,246,363   
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

        

Policyholder Benefits

        

Life

     84,615        75,472        245,237        232,013   

Annuity

     37,964        29,960        120,931        102,770   

Claims incurred

        

Accident and health

     38,436        38,691        119,586        119,764   

Property and casualty

     187,944        215,226        620,462        685,168   

Interest credited to policyholders’ account balances

     108,069        82,813        323,952        288,343   

Commissions for acquiring and servicing policies

     92,253        109,346        283,295        337,747   

Other operating expenses

     114,234        111,451        336,378        346,823   

Change in deferred policy acquisition costs

     7,168        (5,466     12,468        (39,624
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     670,683        657,493        2,062,309        2,073,004   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     89,385        75,217        171,396        173,359   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

        

Current

     19,900        12,610        43,384        40,127   

Deferred

     7,754        6,487        (1,131     (253
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

     27,654        19,097        42,253        39,874   

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

     (895     3,077        (2,462     2,839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

     60,836        59,197        126,681        136,324   

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

     1,650        1,547        1,773        1,906   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

   $ 59,186      $ 57,650      $ 124,908      $ 134,418   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National Insurance Company common stockholders

        

Earnings per share:

        

Basic

   $ 2.21      $ 2.17      $ 4.68      $ 5.06   

Diluted

     2.20        2.16        4.65        5.03   

Weighted average common shares outstanding

     26,736,464        26,559,950        26,699,211        26,559,865   

Weighted average common shares outstanding and dilutive potential common shares

     26,870,655        26,718,464        26,859,100        26,706,798   

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012      2011  
           (As Adjusted)            (As Adjusted)  

Net income (loss)

   $ 60,836      $ 59,197      $ 126,681       $ 136,324   
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

         

Change in net unrealized gain (loss) on securities

     53,446        (101,062     113,183         (61,348

Foreign currency transaction and translation adjustments

     (300     (470     30         (277

Defined benefit plan adjustment

     2,351        (120     7,144         (308
  

 

 

   

 

 

   

 

 

    

 

 

 

Other comprehensive income (loss)

     55,497        (101,652     120,357         (61,933
  

 

 

   

 

 

   

 

 

    

 

 

 

Total comprehensive income (loss)

     116,333        (42,455     247,038         74,391   

Less: comprehensive income attributable to noncontrolling interest

     1,650        1,547        1,773         1,906   
  

 

 

   

 

 

   

 

 

    

 

 

 

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

   $ 114,683      $ (44,002   $ 245,265       $ 72,485   
  

 

 

   

 

 

   

 

 

    

 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

     Nine months ended
September 30,
 
     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

     (204     (4

Income tax effect from restricted stock arrangement

     (610     (14

Amortization of restricted stock

     7,710        3,354   

Purchase of ownership interest from noncontrolling interest

     (1,892     —     
  

 

 

   

 

 

 

Balance at end of period

     5,004        18,526   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance as of January 1,

     159,403        225,212   

Other comprehensive income (loss)

     120,357        (61,933

Cumulative effect of accounting change - deferred policy acquisition costs

     —          604   
  

 

 

   

 

 

 

Balance at end of the period

     279,760        163,883   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     3,545,546        3,459,911   

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

     124,908        134,418   

Cash dividends to common stockholders ($2.31 per share)

     (61,995     (61,957

Cumulative effect of accounting change - deferred policy acquisition costs

     —          (19,195
  

 

 

   

 

 

 

Balance at end of the period

     3,608,459        3,513,177   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (98,490     (98,494

Issuance of treasury shares as restricted stock

     204        4   
  

 

 

   

 

 

 

Balance at end of the period

     (98,286     (98,490
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     12,947        4,042   

Contributions

     —          29   

Distributions

     (2,591     (15,278

Gain (loss) attributable to noncontrolling interest

     1,773        1,906   

Purchase of ownership interest from noncontrolling interest

     299        —     
  

 

 

   

 

 

 

Balance at end of the period

     12,428        (9,301
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 3,838,197      $ 3,618,627   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Nine months ended
September 30,
 
     2012     2011  
           (As Adjusted)  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 126,681      $ 136,324   

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

    

Realized investments (gains) losses

     (46,852     (62,488

Other-than-temporary impairments

     22,073        4,851   

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

     (1,719     6,375   

Net capitalized interest on policy loans and mortgage loans

     (22,635     (21,412

Depreciation

     27,697        30,168   

Interest credited to policyholders’ account balances

     323,952        288,343   

Charges to policyholders’ account balances

     (146,406     (141,860

Deferred federal income tax (benefit) expense

     (1,131     (253

Deferral of policy acquisition costs

     (291,941     (349,262

Amortization of deferred policy acquisition costs

     304,409        309,638   

Equity in (earnings) losses of unconsolidated affiliates

     2,462        (2,839

Changes in:

    

Policyholder liabilities

     79,909        122,514   

Reinsurance recoverables

     16,574        (56,811

Premiums due and other receivables

     (30,021     (15,876

Accrued investment income

     (3,877     (17,148

Current tax receivable/payable

     21,856        6,621   

Liability for retirement benefits

     2,117        (3,897

Prepaid reinsurance premiums

     7,368        2,314   

Other, net

     (85,008     17,178   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     305,508        252,480   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of:

    

Bonds - held-to-maturity

     975,850        479,123   

Bonds - available-for-sale

     384,925        330,839   

Equity securities

     52,340        76,082   

Investment real estate

     —          91,679   

Mortgage loans

     226,527        322,949   

Policy loans

     50,928        39,317   

Other invested assets

     27,492        29,039   

Disposals of property and equipment

     1,323        1,358   

Distributions from unconsolidated affiliates

     30,820        22,612   

Payment for the purchase/origination of:

    

Bonds - held-to-maturity

     (916,538     (1,284,363

Bonds - available-for-sale

     (549,914     (466,316

Equity securities

     (18,266     (53,015

Investment real estate

     (21,948     (9,531

Mortgage loans

     (385,263     (447,627

Policy loans

     (33,423     (31,727

Other invested assets

     (29,862     (29,107

Additions to property and equipment

     (19,733     (13,555

Contributions to unconsolidated affiliates

     (29,099     (58,560

Change in short-term investments

     23,818        135,776   

Other, net

     10,278        48,121   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (219,745     (816,906
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     897,654        1,722,051   

Policyholders’ account withdrawals

     (960,668     (1,064,860

Change in notes payable

     102,353        (1,659

Dividends to stockholders

     (61,995     (61,957

Proceeds from (payments to) noncontrolling interest

     (2,591     (30,498
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (25,247     563,077   
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     60,516        (1,349

Beginning of the year

     102,114        101,449   
  

 

 

   

 

 

 

End of year

   $ 162,630      $ 100,100   
  

 

 

   

 

 

 

 

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Table of Contents

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 coverage, 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 management considers 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 of Accounting Standard Update (“ASU”) No. 2010-26, 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.

 

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Table of Contents

As of September 30, 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 the Consolidated Financial Statements included in American National’s 2011 Annual Report on Form 10-K.

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, the 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.

 

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In December 2011, the FASB issued ASU No. 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 December15, 2011. American National’s adoption of this guidance on January 1, 2012 did not have a material effect on its consolidated financial statements.

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 No. 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 No. 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.

In October 2012, the FASB issued ASU No. 2012-04, Technical Amendments and Corrections. The updates to current guidance make the codification easier to understand and the fair value measurement guidance easier to apply by eliminating inconsistencies and providing needed clarification. ASU 2012-04 is effective for fiscal periods beginning after December 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.

 

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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):

 

     September 30, 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

   $ 8,503       $ 92       $ —        $ 8,595   

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

     401,608         41,574         (1     443,181   

Foreign governments

     29,064         4,871         —          33,935   

Corporate debt securities

     8,105,733         780,685         (4,645     8,881,773   

Residential mortgage-backed securities

     602,449         48,272         (1,276     649,445   

Collateralized debt securities

     2,504         342         —          2,846   

Other debt securities

     38,020         3,422         —          41,442   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     9,187,881         879,258         (5,922     10,061,217   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

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

     16,293         1,214         —          17,507   

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

     578,800         47,140         (26     625,914   

Foreign governments

     5,000         2,409         —          7,409   

Corporate debt securities

     3,551,547         321,373         (16,160     3,856,760   

Residential mortgage-backed securities

     112,773         6,001         (388     118,386   

Commercial mortgage-backed securities

     20,934         376         (9,969     11,341   

Collateralized debt securities

     18,158         1,595         (30     19,723   

Other debt securities

     10,072         1,465         —          11,537   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,313,577         381,573         (26,573     4,668,577   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     660,798         405,750         (7,386     1,059,162   

Preferred stock

     26,690         8,609         (74     35,225   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     687,488         414,359         (7,460     1,094,387   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 14,188,946       $ 1,675,190       $ (39,955   $ 15,824,181   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     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   
  

 

 

    

 

 

    

 

 

   

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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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):

 

     September 30, 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

   $ 1,147,452       $ 1,173,170       $ 366,867       $ 373,976   

Due after one year through five years

     2,779,703         3,043,367         1,690,520         1,820,346   

Due after five years through ten years

     4,471,977         4,989,079         1,827,871         2,006,695   

Due after ten years

     782,899         851,026         423,319         462,961   

Without single maturity date

     5,850         4,575         5,000         4,599   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,187,881       $ 10,061,217       $ 4,313,577       $ 4,668,577   
  

 

 

    

 

 

    

 

 

    

 

 

 

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
September 30,
     Nine months ended
September 30,
 
     2012     2011      2012     2011  

Proceeds from sales of available-for-sale securities

   $ 85,400      $ 23,224       $ 123,705      $ 122,574   

Gross realized gains

     15,742        11,702         27,769        32,679   

Gross realized losses

     (204     —           (374     (840

During the nine months ended September 30, 2012 bonds with a carrying value of $34,227,000 were transferred from held-to-maturity to available-for-sale due to evidence of a significant deterioration in the issuers’ creditworthiness. An other-than-temporary impairment of $11,358,000 was recorded following the transfers at fair value.

Net unrealized gains (losses) on securities

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

 

     Nine months ended
September 30,
 
     2012     2011  

Bonds available-for-sale

   $ 109,003      $ 51,205   

Equity securities

     111,498        (140,014
  

 

 

   

 

 

 

Net unrealized gains (losses) on securities during the year

     220,501        (88,809

Adjustments for:

    

Deferred policy acquisition costs

     (38,358     (7,240

Participating policyholders’ interest

     (8,192     1,718   

Deferred federal income tax benefit (expense)

     (60,768     32,983   
  

 

 

   

 

 

 

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

   $ 113,183      $ (61,348
  

 

 

   

 

 

 

 

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Table of Contents

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):

 

     September 30, 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

   $ —        $ —         $ (1   $ 80       $ (1   $ 80   

Corporate debt securities

     (1,102     103,810         (3,543     43,768         (4,645     147,578   

Residential mortgage-backed securities

     (162     16,290         (1,114     25,752         (1,276     42,042   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (1,264     120,100         (4,658     69,600         (5,922     189,700   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

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

     (26     1,978         —          —           (26     1,978   

Corporate debt securities

     (746     123,044         (15,414     76,570         (16,160     199,614   

Residential mortgage-backed securities

     (88     6,381         (300     10,317         (388     16,698   

Commercial mortgage-backed securities

     —          —           (9,969     5,768         (9,969     5,768   

Collateralized debt securities

     (1     224         (29     940         (30     1,164   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (861     131,627         (25,712     93,595         (26,573     225,222   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (7,386     56,165         —          —           (7,386     56,165   

Preferred stock

     (74     5,780         —          —           (74     5,780   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (7,460     61,945         —          —           (7,460     61,945   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ (9,585   $ 313,672       $ (30,370   $ 163,195       $ (39,955   $ 476,867   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     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   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

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   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

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. As of September 30, 2012, the investment securities with unrealized losses were not deemed to be other-than-temporarily impaired. Even though the duration of the unrealized losses on some of the securities exceeds one year, American National has no intent to sell. Further, it is not more-likely-than-not that American National will be required to sell these securities prior to recovery, and recovery is expected in a reasonable period of time.

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:

 

     September 30,
2012
    December 31,
2011
 

AAA

     6.2     8.1

AA

     10.8        10.5   

A

     38.0        38.3   

BBB

     40.6        38.6   

BB and below

     4.4        4.5   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

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

 

     September 30,
2012
    December 31,
2011
 

Consumer goods

     20.8     21.5

Financials

     18.0        17.2   

Information technology

     17.8        16.9   

Energy and utilities

     16.3        17.3   

Healthcare

     12.3        11.7   

Industrials

     8.7        9.0   

Communications

     3.5        4.2   

Materials

     2.5        2.1   

Other

     0.1        0.1   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

5. MORTGAGE LOANS

American National makes commercial mortgage loans 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 by considering the property-type as well as the geographic distribution of the property, which is the underlying mortgage collateral. Mortgage loans by property-type distribution are as follows:

 

     September 30,
2012
    December 31,
2011
 

Office

     31.5     30.2

Industrial

     24.8        24.6   

Retail

     19.7        19.1   

Hotel and motel

     14.4        13.4   

Other

     9.6        12.7   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

14


Table of Contents

Mortgage loans by geographic distribution are as follows:

 

     September 30,
2012
    December 31,
2011
 

South Atlantic

     23.6     22.9

West South Central

     22.7        23.1   

East North Central

     18.1        18.8   

Pacific

     12.1        11.4   

Mountain

     7.1        6.7   

East South Central

     7.0        5.7   

Middle Atlantic

     4.0        5.4   

West North Central

     2.7        2.9   

New England

     2.1        2.5   

Other

     0.6        0.6   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

During the nine months ended September 30, 2012, American National sold one commercial loan with a recorded investment of $19,665,000 and a realized gain of $2,607,000. During the year ended December 31, 2011, American National sold one industrial loan with a recorded investment of $27,532,000 and a realized gain of $4,968,000. During the nine months ended September 30, 2012, American National foreclosed on four loans with a recorded investment of $34,562,000. There were no foreclosures during the year ended December 31, 2011.

Credit Quality

The amounts of commercial mortgage loans placed on nonaccrual status and classified as non-performing are shown in the table below (in thousands):

 

     September 30,
2012
     December 31,
2011
 

Commercial mortgages

     

Office

   $ —         $ 8,436   

Retail

     493         23,997   
  

 

 

    

 

 

 

Total

   $ 493       $ 32,433   
  

 

 

    

 

 

 

The credit quality of the mortgage loan portfolio is assessed by evaluating 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.

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

 

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

Commerical mortgages

                 

Office

   $ 6,220       $ —         $ —         $ 6,220       $ 961,586       $ 967,806   

Industrial

     —           —           —           —           760,480         760,480   

Retail

     13,950         —           493         14,443         590,795         605,238   

Other

     10,299         —           —           10,299         727,681         737,980   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,469       $ —         $ 493       $ 30,962       $ 3,040,542         3,071,504   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    12,841   
                 

 

 

 

Mortgage loans on real estate, net of allowance

                  $ 3,058,663   
                 

 

 

 

 

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

 

 

 

 

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The amounts shown above are net of unamortized discounts of $4,872,000 and $10,189,000 and unamortized origination fees of $12,801,000 and $12,683,000 at September 30, 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.

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

 

     Collectively      Individually        
     Evaluated      Evaluated        
     for Impairment      for Impairment     Total  

Allowance for credit losses

       

December 31, 2011

   $ 10,828       $ 493      $ 11,321   

Write down

     —           (2,277     (2,277

Change in allowance

     1,520         2,277        3,797   
  

 

 

    

 

 

   

 

 

 

September 30, 2012

   $ 12,348       $ 493      $ 12,841   
  

 

 

    

 

 

   

 

 

 

Unpaid principal balance

       

September 30, 2012

   $ 3,016,837       $ 72,340      $ 3,089,177   
  

 

 

    

 

 

   

 

 

 

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):

 

     Nine months ended September 30, 2012  
            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

With an allowance recorded

              

Retail

   $ —         $ 493       $ 493       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

              

Office

   $ 13,022       $ 13,022       $ —         $ 13,050       $ 635   

Retail

     13,626         13,626         —           13,992         604   

Other

     45,199         45,199         —           45,283         2,276   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total without an allowance recorded

   $ 71,847       $ 71,847       $ —         $ 72,325       $ 3,515   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Troubled Debt Restructurings

American National has a high quality mortgage loan portfolio that management believes is well performing. 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 loans. The types of concessions granted are generally one of, or a combination of, a delay in payment of principal or interest, a reduction of the contractual interest rate or an extension of the maturity date. American National considers the amount, timing and extent of concessions 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.

Six loans as of September 30, 2012 and three loans as of December 31, 2011, which were part of the mortgage loan portfolio had been modified in troubled debt restructurings. The outstanding recorded investment was $80,081,000 and $45,366,000 for 2012 and 2011, respectively, both before and after the modifications. There are no 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 period.

6. INVESTMENT REAL ESTATE

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

 

     September 30,
2012
    December 31,
2011
 

Shopping centers

     40.9     41.1

Office buildings

     22.0        22.0   

Industrial

     18.2        16.3   

Hotels and motels

     1.9        2.1   

Other

     17.0        18.5   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Investment real estate by geographic distribution is as follows:

 

     September 30,
2012
    December 31,
2011
 

West South Central

     60.9     66.1

South Atlantic

     11.3        11.6   

East North Central

     10.3        5.2   

Mountain

     6.3        6.9   

East South Central

     5.4        5.2   

West North Central

     3.2        2.7   

Pacific

     2.6        2.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

In the normal course of investment activities, American National and its wholly-owned subsidiaries enter into real estate partnership and joint venture agreements. Generally, opportunities are presented 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, its 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. Financial or other support was not provided to investees designated as VIEs in the form of liquidity arrangements, guarantees, or other commitments to third parties that may affect the fair value or risk of American National’s variable interest in the investees designated as VIEs as of September 30, 2012 and December 31, 2011.

 

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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):

 

     September 30,
2012
     December 31,
2011
 

Investment real estate

   $ 160,288       $ 154,878   

Short-term investments

     1,260         3,364   

Cash and cash equivalents

     3,515         5,777   

Accrued investment income

     2,346         2,299   

Other receivables

     11,599         11,816   

Other assets

     5,647         3,870   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 184,655       $ 182,004   
  

 

 

    

 

 

 

Notes payable

   $ 161,247       $ 58,894   

Other liabilities

     5,593         5,354   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 166,840       $ 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):

 

     September 30, 2012      December 31, 2011  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 73,871       $ 73,871       $ 85,509       $ 85,509   

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 in the Consolidated
Statements of Financial Position

   September 30, 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      355       $ 839,100       $ 88,476        332       $ 791,900       $ 65,188   

Equity-indexed annuity embedded derivative

   Future policy benefits - Annuity      19,760         702,000         (80,324     16,727         661,300         (63,275

 

Derivatives Not Designated
as Hedging Instruments

  

Location Reported in the Consolidated
Statements of Operations

   Gains (Losses) Recognized in Income on Derivatives  
      Three months ended
September 30,
    Nine months ended
September 30,
 
      2012     2011     2012    2011  

Equity-indexed options

   Net investment income    $ 10,448      $ (23,492   $21,947    $ (18,195

Equity-indexed annuity embedded derivative

   Interest credited to policyholders’ account balances      (7,711     25,193      (16,779)      21,585   

 

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

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012      2011     2012      2011  

Bonds

   $ 171,515       $ 173,737      $ 514,237       $ 514,856   

Equity securities

     6,965         6,230        20,718         19,392   

Mortgage loans

     52,501         48,521        153,008         149,329   

Real estate

     8,173         9,838        16,456         20,154   

Options

     10,448         (23,492     21,947         (18,195

Other invested assets

     8,588         11,108        28,083         29,650   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 258,190       $ 225,942      $ 754,449       $ 715,186   
  

 

 

    

 

 

   

 

 

    

 

 

 

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012      2011     2012     2011  

Bonds

   $ 8,393       $ 788      $ 21,813      $ 13,895   

Equity securities

     12,172         11,975        22,386        30,789   

Mortgage loans

     2,132         5,518        (1,190     5,518   

Real estate

     3,386         (338     3,134        12,775   

Other invested assets

     822         (412     709        (489
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 26,905       $ 17,531      $ 46,852      $ 62,488   
  

 

 

    

 

 

   

 

 

   

 

 

 

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

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2012     2011     2012     2011  

Bonds

   $ (12,659   $ —        $ (12,659   $ —     

Equity securities

     (1,316     (4,851     (9,414     (4,851
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (13,975   $ (4,851   $ (22,073   $ (4,851
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

     September 30, 2012      December 31, 2011  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

           

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

   $ 8,503       $ 8,595       $ 13,704       $ 13,897   

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

     401,608         443,181         405,526         437,792   

Foreign governments

     29,064         33,935         29,044         34,022   

Corporate debt securities

     8,105,733         8,881,773         8,011,901         8,550,744   

Residential mortgage-backed securities

     602,449         649,445         714,659         761,447   

Commercial mortgage-backed securities

     —           —           31,341         11,183   

Collateralized debt securities

     2,504         2,846         7,134         6,116   

Other debt securities

     38,020         41,442         38,663         42,490   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     9,187,881         10,061,217         9,251,972         9,857,691   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

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

     17,507         17,507         13,086         13,086   

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

     625,914         625,914         618,848         618,848   

Foreign governments

     7,409         7,409         7,435         7,435   

Corporate debt securities

     3,856,760         3,856,760         3,505,146         3,505,146   

Residential mortgage-backed securities

     118,386         118,386         202,721         202,721   

Commercial mortgage-backed securities

     11,341         11,341         —           —     

Collateralized debt securities

     19,723         19,723         19,077         19,077   

Other debt securities

     11,537         11,537         15,294         15,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,668,577         4,668,577         4,381,607         4,381,607   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,059,162         1,059,162         968,907         968,907   

Preferred stock

     35,225         35,225         37,173         37,173   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,094,387         1,094,387         1,006,080         1,006,080   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     88,476         88,476         65,188         65,188   

Mortgage loans on real estate, net of allowance

     3,058,663         3,297,046         2,925,482         3,178,205   

Policy loans

     393,774         393,774         393,195         393,195   

Short-term investments

     321,512         321,512         345,330         345,330   

Separate account assets

     817,057         817,057         747,867         747,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,630,327       $ 20,742,046       $ 19,116,721       $ 19,975,163   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 10,066,103       $ 10,066,103       $ 9,993,804       $ 9,993,804   

Embedded derivative liability for equity-indexed annuities

     80,324         80,324         63,275         63,275   

Notes payable

     161,247         161,247         58,894         58,894   

Separate account liabilities

     817,057         817,057         747,867         747,867   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 11,124,731       $ 11,124,731       $ 10,863,840       $ 10,863,840   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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. The classification of assets or liabilities 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 from 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.

 

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Table of Contents

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 September 30, 2012, the implied volatility used to estimate embedded derivative value ranges from 13.0% to 30.5%.

 

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Table of Contents

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. 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 approximate market rates at the balance sheet date.

 

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Quantitative Disclosures

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

 

     Fair Value Measurement as of September 30, 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

   $ 8,595       $ —         $ 8,595       $ —     

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

     443,181         —           443,181         —     

Foreign governments

     33,935         —           33,935         —     

Corporate debt securities

     8,881,773         —           8,811,273         70,500   

Residential mortgage-backed securities

     649,445         —           649,443         2   

Collateralized debt securities

     2,846         —           1         2,845   

Other debt securities

     41,442         —           34,961         6,481   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     10,061,217         —           9,981,389         79,828   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

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

     17,507         —           17,507         —     

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

     625,914         —           623,389         2,525   

Foreign governments

     7,409         —           7,409         —     

Corporate debt securities

     3,856,760         —           3,811,608         45,152   

Residential mortgage-backed securities

     118,386         —           118,382         4   

Commercial mortgage-backed securities

     11,341         —           —           11,341   

Collateralized debt securities

     19,723         —           17,788         1,935   

Other debt securities

     11,537         —           11,537         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,668,577         —           4,607,620         60,957   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,059,162         1,059,162         —           —     

Preferred stock

     35,225         35,197         —           28   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,094,387         1,094,359         —           28   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     88,476         —           —           88,476   

Mortgage loans on real estate

     3,297,046         —           3,297,046         —     

Policy loans

     393,774         —           —           393,774   

Short-term investments

     321,512         —           321,512         —     

Separate account assets

     817,057         —           817,057         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,742,046       $ 1,094,359       $ 19,024,624       $ 623,063   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 10,066,103       $ —         $ —         $ 10,066,103   

Embedded derivative liability for equity-indexed annuities

     80,324         —           —           80,324   

Notes payable

     161,247         —           —           161,247   

Separate account liabilities

     817,057         —           817,057         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 11,124,731       $ —         $ 817,057       $ 10,307,674   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     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   
  

 

 

    

 

 

    

 

 

    

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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):

 

     Three months ended September 30,     Nine months ended September 30,  
           Equity-     Embedded                 Equity-     Embedded        
     Investment     Indexed     Derivative           Investment     Indexed     Derivative        
     Securities     Options     Liability     Total     Securities     Options     Liability     Total  

Beginning balance, 2011

   $ 76,886      $ 71,525      $ (65,025   $ 83,386      $ 90,477      $ 66,716      $ (59,644   $ 97,549   

Total realized and unrealized investment gains/losses

                

Included in other comprehensive income

     1,606        —          —          1,606        1,348        —          —          1,348   

Net fair value change included in realized gains/losses

     —          —          —          —          168        —          —          168   

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

     —          (23,449     —          (23,449     —          (18,152     —          (18,152

Net change included in interest credited

     —          —          25,193        25,193        —          —          21,585        21,585   

Purchases, sales and settlements or maturities

                

Purchases

     1        5,350        —          5,351        13        14,226        —          14,239   

Sales

     (257     —          —          (257     (10,438     —          —          (10,438

Settlements or maturities

     (123     (3,719     —          (3,842     (3,455     (13,083     —          (16,538

Premiums less benefits

     —          —          (3,066     (3,066     —          —          (4,839     (4,839

Gross transfers into Level 3

     —          —          —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, 2011

   $ 78,113      $ 49,707      $ (42,898   $ 84,922      $ 78,113      $ 49,707      $ (42,898   $ 84,922   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2012

   $ 141,026      $ 77,136      $ (72,194   $ 145,968      $ 99,918      $ 65,188      $ (63,275   $ 101,831   

Total realized and unrealized investment gains/losses

                

Included in other comprehensive income

     11,811        —          —          11,811        13,909        —          —          13,909   

Net fair value change included in realized gains/losses

     (11,431     —          —          (11,431     (11,449     —          —          (11,449

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

     —          9,708        —          9,708        —          17,878        —          17,878   

Net change included in interest credited

     —          —          (7,711     (7,711     —          —          (16,779     (16,779

Purchases, sales and settlements or maturities

                

Purchases

     (19     2,991        —          2,972        504        11,472        —          11,976   

Sales

     (192     (6,062     —          (6,254     (3,073     (6,062     —          (9,135

Settlements or maturities

     (382     4,703        —          4,321        (725     —          —          (725

Premiums less benefits

     —          —          (419     (419     —          —          (270     (270

Gross transfers into Level 3

     —          —          —          —          41,729        —          —          41,729   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, 2012

   $ 140,813      $ 88,476      $ (80,324   $ 148,965      $ 140,813      $ 88,476      $ (80,324   $ 148,965   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were an unrealized gain of $16,334,000 and an unrealized loss of $12,613,000 relating to assets still held at September 30, 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’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. 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.

 

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Table of Contents

10. DEFERRED POLICY ACQUISITION COSTS

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

 

                 Accident     Property &        
     Life     Annuity     & Health     Casualty     Total  

Balance at December 31, 2011 (As Adjusted)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     62,162        54,015        8,311        167,453        291,941   

Amortization

     (56,276     (64,333     (12,958     (170,842