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 March 31, 2013

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 May 1, 2013, there were 26,893,412 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 March 31, 2013 and December 31, 2012      3   
  Consolidated Statements of Operations for the three months ended March 31, 2013 and 2012      4   
  Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2013 and 2012      5   
  Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2013 and 2012      5   
  Consolidated Statements of Cash Flows for the three months ended March 31, 2013 and 2012      6   
  Notes to the Unaudited Consolidated Financial Statements      7   

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      28   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      46   

ITEM 4.

  CONTROLS AND PROCEDURES      46   
  PART II – OTHER INFORMATION   

ITEM 1.

  LEGAL PROCEEDINGS      47   

ITEM 1A.

  RISK FACTORS      47   

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      47   

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      47   

ITEM 4.

  MINE SAFETY DISCLOSURES      47   

ITEM 5.

  OTHER INFORMATION      47   

ITEM 6.

  EXHIBIT INDEX      48   

 

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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)

 

     March 31,
2013
    December 31,
2012
 

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost

    

(Fair Value $9,860,707 and $9,840,751)

   $ 9,061,438      $ 9,009,282   

Fixed maturity, bonds available-for-sale, at fair value

    

(Amortized cost $4,418,001 and $4,316,467)

     4,769,136        4,665,576   

Equity securities, at fair value

    

(Cost $720,022 and $688,579)

     1,208,788        1,075,439   

Mortgage loans on real estate, net of allowance

     3,170,510        3,143,011   

Policy loans

     393,710        395,333   

Investment real estate, net of accumulated depreciation of $224,999 and $223,462

     513,400        511,233   

Short-term investments

     233,101        313,086   

Other invested assets

     147,203        125,104   
  

 

 

   

 

 

 

Total investments

     19,497,286        19,238,064   
  

 

 

   

 

 

 

Cash and cash equivalents

     113,179        303,008   

Investments in unconsolidated affiliates

     264,550        248,425   

Accrued investment income

     208,733        207,314   

Reinsurance recoverables

     407,297        418,743   

Prepaid reinsurance premiums

     53,092        56,826   

Premiums due and other receivables

     287,050        283,446   

Deferred policy acquisition costs

     1,234,235        1,247,675   

Property and equipment, net

     90,349        92,695   

Current tax receivable

     5,248        14,578   

Other assets

     151,170        154,911   

Separate account assets

     888,388        841,389   
  

 

 

   

 

 

 

Total assets

   $ 23,200,577      $ 23,107,074   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,639,925      $ 2,650,822   

Annuity

     827,777        811,192   

Accident and health

     68,112        69,962   

Policyholders’ account balances

     11,453,825        11,555,201   

Policy and contract claims

     1,362,469        1,340,366   

Unearned premium reserve

     752,479        757,532   

Other policyholder funds

     296,337        288,391   

Liability for retirement benefits

     268,110        265,317   

Current portion of long-term notes payable

     52,627        50,884   

Long-term notes payable

     112,500        112,500   

Deferred tax liabilities, net

     135,427        92,150   

Other liabilities

     395,329        432,041   

Separate account liabilities

     888,388        841,389   
  

 

 

   

 

 

 

Total liabilities

     19,253,305        19,267,747   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

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

    

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

    

Outstanding 26,893,412 and 26,836,664 shares

     30,832        30,832   

Additional paid-in capital

     2,702        —     

Accumulated other comprehensive income

     307,754        242,010   

Retained earnings

     3,692,541        3,653,280   

Treasury stock, at cost

     (97,465     (98,286
  

 

 

   

 

 

 

Total American National Insurance Company stockholders’ equity

     3,936,364        3,827,836   

Noncontrolling interest

     10,908        11,491   
  

 

 

   

 

 

 

Total stockholders’ equity

     3,947,272        3,839,327   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 23,200,577      $ 23,107,074   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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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 March 31,  
     2013     2012  

PREMIUMS AND OTHER REVENUE

    

Premiums

    

Life

   $ 68,655      $ 66,451   

Annuity

     32,696        28,412   

Accident and health

     52,729        57,054   

Property and casualty

     265,689        273,169   

Other policy revenues

     49,998        48,047   

Net investment income

     251,366        255,696   

Realized investment gains (losses)

     18,538        9,808   

Other-than-temporary impairments

     (1,587     (2,837

Other income

     6,961        6,875   
  

 

 

   

 

 

 

Total premiums and other revenues

     745,045        742,675   
  

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

    

Policyholder benefits

    

Life

     81,502        83,823   

Annuity

     40,695        39,245   

Claims incurred

    

Accident and health

     38,968        44,675   

Property and casualty

     189,594        187,552   

Interest credited to policyholders’ account balances

     111,106        124,864   

Commissions for acquiring and servicing policies

     85,123        95,514   

Other operating expenses

     124,575        101,993   

Change in deferred policy acquisition costs

     11,334        1,638   
  

 

 

   

 

 

 

Total benefits, losses and expenses

     682,897        679,304   
  

 

 

   

 

 

 

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

     62,148        63,371   
  

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

    

Current

     4,964        7,287   

Deferred

     6,353        9,696   
  

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

     11,317        16,983   

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

     8,577        (1,881
  

 

 

   

 

 

 

Net income (loss)

     59,408        44,507   

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

     (563     (709
  

 

 

   

 

 

 

Net income (loss) attributable to American National Insurance Company

   $ 59,971      $ 45,216   
  

 

 

   

 

 

 

Amounts available to American National Insurance Company common stockholders

    

Earnings per share

    

Basic

   $ 2.24      $ 1.70   

Diluted

     2.23        1.69   

Weighted average common shares outstanding

     26,763,896        26,565,164   

Weighted average common shares outstanding and dilutive potential common shares

     26,887,151        26,758,955   

See accompanying notes to the unaudited consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2013     2012  

Net income (loss)

   $ 59,408      $ 44,507   
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    

Change in net unrealized gain (loss) on securities

     62,719        76,531   

Foreign currency transaction and translation adjustments

     149        152   

Defined benefit plan adjustment

     2,876        2,668   
  

 

 

   

 

 

 

Other comprehensive income (loss)

     65,744        79,351   
  

 

 

   

 

 

 

Total comprehensive income (loss)

     125,152        123,858   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (563     (709
  

 

 

   

 

 

 

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

   $ 125,715      $ 124,567   
  

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

     Three months ended March 31,  
     2013     2012  

Common Stock

    

Balance at beginning and end of the period

   $ 30,832      $ 30,832   
  

 

 

   

 

 

 

Additional Paid-In Capital

    

Balance as of January 1,

     —          —     

Reissuance of treasury shares

     2,920        (203

Income tax effect from restricted stock arrangement

     79        (534

Amortization of restricted stock

     (297     2,163   
  

 

 

   

 

 

 

Balance at end of period

     2,702        1,426   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance as of January 1,

     242,010        159,403   

Other comprehensive income (loss)

     65,744        79,351   
  

 

 

   

 

 

 

Balance at end of the period

     307,754        238,754   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     3,653,280        3,545,546   

Net income (loss) attributable to American National Insurance Company

     59,971        45,216   

Cash dividends to common stockholders ($0.77 per share)

     (20,710     (20,667
  

 

 

   

 

 

 

Balance at end of the period

     3,692,541        3,570,095   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (98,286     (98,490

Reissuance of treasury shares

     821        203   
  

 

 

   

 

 

 

Balance at end of the period

     (97,465     (98,287
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     11,491        12,947   

Contributions

     1        45   

Distributions

     (21     (7

Gain (loss) attributable to noncontrolling interest

     (563     (709
  

 

 

   

 

 

 

Balance at end of the period

     10,908        12,276   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 3,947,272      $ 3,755,096   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2013     2012  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 59,408      $ 44,507   

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

    

Realized investment (gains) losses

     (18,538     (9,808

Other-than-temporary impairments

     1,587        2,837   

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

     389        1,890   

Net capitalized interest on policy loans and mortgage loans

     (7,633     (7,358

Depreciation

     8,452        8,854   

Interest credited to policyholders' account balances

     111,106        124,864   

Charges to policyholders’ account balances

     (49,998     (48,047

Deferred federal income tax (benefit) expense

     6,353        9,696   

Deferral of policy acquisition costs

     (91,539     (98,346

Amortization of deferred policy acquisition costs

     102,873        99,984   

Equity in (earnings) losses of unconsolidated affiliates

     (8,577     1,881   

Distributions from equity method investments

     9,760        2,087   

Changes in:

    

Policyholder liabilities

     23,743        8,686   

Reinsurance recoverables

     11,446        24,836   

Premiums due and other receivables

     (3,604     (8,907

Accrued investment income

     (1,419     (3,078

Current tax receivable/payable

     9,330        12,383   

Liability for retirement benefits

     2,793        372   

Prepaid reinsurance premiums

     3,734        1,437   

Other, net

     (52,038     (52,670
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     117,628        116,100   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Bonds—held-to-maturity

     448,034        402,772   

Bonds—available for sale

     211,884        114,739   

Equity securities

     31,099        20,548   

Investment real estate

     8,597        —     

Mortgage loans

     111,110        43,174   

Policy loans

     16,718        16,788   

Other invested assets

     12,263        10,817   

Disposals of property and equipment

     1,613        —     

Distributions from unconsolidated affiliates

     11,664        4,328   

Payment for the purchase/origination of

    

Bonds—held-to-maturity

     (505,265     (469,511

Bonds—available for sale

     (307,986     (185,775

Equity securities

     (55,442     —     

Investment real estate

     (10,426     (7,188

Mortgage loans

     (136,576     (96,355

Policy loans

     (5,967     (10,336

Other invested assets

     (11,709     (10,524

Additions to property and equipment

     (2,838     (5,876

Contributions to unconsolidated affiliates

     (23,653     (12,334

Change in short-term investments

     79,985        117,117   

Other, net

     903        137   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (125,992     (67,479
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     219,078        290,831   

Policyholders’ account withdrawals

     (381,556     (319,047

Change in notes payable

     1,743        (1,023

Dividends to stockholders

     (20,710     (20,667

Proceeds from (payments to) noncontrolling interest

     (20     38   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (181,465     (49,868
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (189,829     (1,247

Beginning of the year

     303,008        102,114   
  

 

 

   

 

 

 

End of year

   $ 113,179      $ 100,867   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS

American National Insurance Company and its consolidated subsidiaries (collectively “American National”) offer a broad spectrum of insurance products, including individual and group life insurance, health insurance, annuities, and property and casualty insurance. Through non-insurance subsidiaries, American National invests in stocks and real estate. Business is conducted in all 50 states, the District of Columbia, Puerto Rico, Guam and American Samoa. The majority of revenues are generated by the insurance business. 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 are reported in U.S. currency. 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. All material intercompany transactions with consolidated entities have been eliminated. 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 interim consolidated financial statements and notes herein are unaudited and 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, 2012. The consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

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.

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

Adoption of New Accounting Standards—The Financial Accounting Standards Board (“FASB”) issued the following accounting guidance relevant to American National including technical amendments and corrections to make the codification easier to understand and fair value measurement easier to apply. Each became effective for American National on January 1, 2013, and unless stated otherwise did not have a material effect on the consolidated financial statements.

In December 2011, the FASB issued amended guidance for derecognition of an in substance real estate subsidiary. The amendment 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.

In December 2011, the FASB issued guidance that amends the disclosures about offsetting assets and liabilities. The new guidance requires an entity to disclose both gross and net information about offsetting and related arrangements. Subsequently, in January 2013, the FASB issued amendments to clarify the scope of this guidance covering only those derivatives accounted for in accordance with the derivatives and hedging guidance of the Codification that are either offsets in accordance with the right of setoff conditions, the balance sheet netting criteria or subject to an enforceable master netting arrangement or similar agreement.

 

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In February 2013, the FASB issued amended guidance on presentation of accumulated other comprehensive income (“AOCI”). The amendments require an entity to provide information about the amounts reclassified out of AOCI by component. In addition, an entity is required to present, either on the face of the statement of operations or in the notes, significant amounts reclassified out of AOCI by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts.

Future Adoption of New Accounting Standards—The FASB issued the following significant accounting guidance relevant to American National. Each will become effective for American National on January 1, 2014 and unless stated otherwise, is not expected to have a material effect on the consolidated financial statements.

In July 2011, the FASB issued guidance to address questions about how health insurers should recognize and classify fees mandated by the Patient Protection and Affordable Care Act in their income statements. The guidance specifies that the liability for the fee should be 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.

In February 2013, the FASB issued amended guidance for the recognition, measurement, and disclosure of obligations resulting from joint and several liability arrangements for which the total amount of the obligation within the scope of the guidance is fixed at the reporting date, except for obligations addressed within existing guidance under US GAAP.

4. INVESTMENTS IN SECURITIES

The cost or amortized cost and estimated fair value of investments in securities are shown below (in thousands):

 

     March 31, 2013  
     Cost or
Amortized Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
    Estimated Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

          

U.S. treasury and government

   $ 3,582       $ 50       $ —        $ 3,632   

U.S. states and political subdivisions

     381,081         40,615         (5     421,691   

Foreign governments

     29,078         4,155         —          33,233   

Corporate debt securities

     8,119,293         722,278         (9,096     8,832,475   

Residential mortgage-backed securities

     488,346         38,823         (971     526,198   

Collateralized debt securities

     2,378         294         —          2,672   

Other debt securities

     37,680         3,126         —          40,806   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     9,061,438         809,341         (10,072     9,860,707   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     21,881         1,110         (1     22,990   

U.S. states and political subdivisions

     582,361         43,642         (766     625,237   

Foreign governments

     5,000         2,307         —          7,307   

Corporate debt securities

     3,683,441         297,833         (11,124     3,970,150   

Residential mortgage-backed securities

     77,301         4,464         (192     81,573   

Commercial mortgage-backed securities

     20,934         11,074         —          32,008   

Collateralized debt securities

     17,037         1,431         (18     18,450   

Other debt securities

     10,046         1,375         —          11,421   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,418,001         363,236         (12,101     4,769,136   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     692,332         482,712         (6,553     1,168,491   

Preferred stock

     27,690         12,607         —          40,297   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     720,022         495,319         (6,553     1,208,788   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 14,199,461       $ 1,667,896       $ (28,726   $ 15,838,631   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

8


Table of Contents
     December 31, 2012  
     Cost or
Amortized Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
    Estimated Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

          

U.S. treasury and government

   $ 3,593       $ 69       $ —        $ 3,662   

U.S. states and political subdivisions

     393,541         40,161         (7     433,695   

Foreign governments

     29,071         4,367         —          33,438   

Corporate debt securities

     7,993,167         748,773         (6,782     8,735,158   

Residential mortgage-backed securities

     549,384         42,313         (1,195     590,502   

Collateralized debt securities

     2,500         321         —          2,821   

Other debt securities

     38,026         3,449         —          41,475   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     9,009,282         839,453         (7,984     9,840,751   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     19,649         1,156         —          20,805   

U.S. states and political subdivisions

     570,751         44,792         (105     615,438   

Foreign governments

     5,000         2,344         —          7,344   

Corporate debt securities

     3,582,913         303,908         (14,188     3,872,633   

Residential mortgage-backed securities

     89,486         5,165         (266     94,385   

Commercial mortgage-backed securities

     20,933         3,509         —          24,442   

Collateralized debt securities

     17,676         1,448         (33     19,091   

Other debt securities

     10,059         1,379         —          11,438   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,316,467         363,701         (14,592     4,665,576   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     660,889         383,634         (6,739     1,037,784   

Preferred stock

     27,690         9,995         (30     37,655   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     688,579         393,629         (6,769     1,075,439   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 14,014,328       $ 1,596,783       $ (29,345   $ 15,581,766   
  

 

 

    

 

 

    

 

 

   

 

 

 

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

 

     March 31, 2013  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized
Cost
     Estimated Fair
Value
     Amortized
Cost
     Estimated Fair
Value
 

Due in one year or less

   $ 1,024,759       $ 1,045,015       $ 505,946       $ 519,855   

Due after one year through five years

     2,540,829         2,808,251         1,437,138         1,569,414   

Due after five years through ten years

     4,891,100         5,354,001         2,064,558         2,238,286   

Due after ten years

     598,900         648,428         405,359         436,756   

Without single maturity date

     5,850         5,012         5,000         4,825   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 9,061,438       $ 9,860,707       $ 4,418,001       $ 4,769,136   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

     Three months ended March 31,  
     2013     2012  

Proceeds from sales of available-for-sale securities

   $ 76,857      $ 32,673   

Gross realized gains

     10,738        11,080   

Gross realized losses

     (522     (159

During the three months ended March 31, 2013, bonds with a carrying value of $13,492,000 were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuer’s creditworthiness became evident. An unrealized loss of $263,000 was established at the time of the transfer. There were no transfers during the same period in 2012.

Net unrealized gains (losses) on securities

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

 

     Three months ended
March 31,
 
     2013     2012  

Bonds available-for-sale

   $ 2,026      $ 35,635   

Equity securities

     101,906        105,679   
  

 

 

   

 

 

 

Net unrealized gains (losses) on securities during the year

     103,932        141,314   

Adjustments for:

    

Deferred policy acquisition costs

     (2,106     (17,505

Participating policyholders’ interest

     (5,091     (5,852

Deferred federal income tax benefit (expense)

     (34,016     (41,426
  

 

 

   

 

 

 

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

   $ 62,719      $ 76,531   
  

 

 

   

 

 

 

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):

 

     March 31, 2013  
     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

              

U.S. states and political subdivisions

   $ (5   $ 3,193       $ —        $ 80       $ (5   $ 3,273   

Corporate debt securities

     (6,985     566,983         (2,111     46,872         (9,096     613,855   

Residential mortgage-backed securities

     (296     21,744         (675     23,957         (971     45,701   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (7,286     591,920         (2,786     70,909         (10,072     662,829   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

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

     (1     5,624         —          —           (1     5,624   

U.S. states and political subdivisions

     (766     47,655         —          —           (766     47,655   

Corporate debt securities

     (2,083     228,313         (9,041     70,342         (11,124     298,655   

Residential mortgage-backed securities

     (1     110         (191     7,787         (192     7,897   

Collateralized debt securities

     (3     286         (15     723         (18     1,009   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (2,854     281,988         (9,247     78,852         (12,101     360,840   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (6,553     46,918         —          —           (6,553     46,918   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (6,553     46,918         —          —           (6,553     46,918   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ (16,693   $ 920,826       $ (12,033   $ 149,761       $ (28,726   $ 1,070,587   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

10


Table of Contents
     December 31, 2012  
     Less than 12 months      12 Months or more      Total  
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

              

U.S. states and political subdivisions

   $ (6   $ 914       $ (1   $ 80       $ (7   $ 994   

Corporate debt securities

     (4,394     319,434         (2,388     39,632         (6,782     359,066   

Residential mortgage-backed securities

     (147     13,824         (1,048     24,666         (1,195     38,490   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (4,547     334,172         (3,437     64,378         (7,984     398,550   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. states and political subdivisions

     (105     6,523         —          —           (105     6,523   

Corporate debt securities

     (2,077     242,261         (12,111     70,187         (14,188     312,448   

Residential mortgage-backed securities

     (34     1,527         (232     8,029         (266     9,556   

Collateralized debt securities

     (8     527         (25     911         (33     1,438   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (2,224     250,838         (12,368     79,127         (14,592     329,965   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (6,739     64,003         —          —           (6,739     64,003   

Preferred stock

     (30     30         —          —           (30     30   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (6,769     64,033         —          —           (6,769     64,033   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ (13,540   $ 649,043       $ (15,805   $ 143,505       $ (29,345   $ 792,548   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

As of March 31, 2013, the securities with unrealized losses were not deemed to be other-than-temporarily impaired, including those with the duration of the unrealized losses exceeding one year. American National has the ability and intent to hold those securities until a market price recovery or maturity. Further, it is not more-likely-than-not that American National will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time. It is possible the investee’s financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.

Credit Risk Management

The bond portfolio distributed by credit quality rating, using both S&P and Moody’s ratings, is shown below:

 

     March 31, 2013     December 31, 2012  

AAA

     5.1     5.5

AA

     10.9        10.6   

A

     40.3        38.2   

BBB

     39.6        41.4   

BB and below

     4.1        4.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

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

 

     March 31, 2013     December 31, 2012  

Consumer goods

     20.3     20.3

Financials

     18.4        18.9   

Information technology

     15.1        16.9   

Energy and utilities

     16.6        15.8   

Healthcare

     13.1        12.7   

Industrials

     8.8        9.1   

Other

     7.7        6.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

11


Table of Contents

5. MORTGAGE LOANS

Generally, commercial mortgage loans are secured by first liens on income-producing real estate. American National attempts to maintain a diversified portfolio by considering the property-type and property location of the underlying mortgage collateral. Mortgage loans by property-type and geographic distribution are as follows:

 

     March 31,
2013
    December 31,
2012
 

Office

     31.5     34.9

Industrial

     25.9        24.0   

Retail

     18.4        17.7   

Hotel and motel

     13.3        13.9   

Other

     10.9        9.5   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     March 31,
2013
    December 31,
2012
 

West South Central

     23.2     23.2

South Atlantic

     22.3        23.0   

East North Central

     18.3        18.2   

Pacific

     13.8        13.3   

East South Central

     6.9        7.1   

Mountain

     6.7        7.0   

Other

     8.8        8.2   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

There were no loans sold or foreclosed and no significant non-cash transactions occurred during the three months ended March 31, 2013 or 2012.

Credit Quality

Commercial mortgage loan balances placed on nonaccrual status are shown below (in thousands):

 

     March 31,
2013
     December 31,
2012
 

Commercial mortgages-Retail

   $ 13,354       $ 13,354   

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 below (in thousands):

 

     March 31, 2013  
     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past
Due
     Current      Total
Mortgage Loans
 

Commercial mortgages

                 

Office

   $ —         $ 6,438       $ —         $ 6,438       $ 996,432       $ 1,002,870   

Industrial

     —           —           —           —           823,459         823,459   

Retail

     1,054         —           13,354         14,408         573,835         588,243   

Other

     —           —           —           —           767,662         767,662   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,054       $ 6,438       $ 13,354       $ 20,846       $ 3,161,388         3,182,234   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    11,724   
                 

 

 

 

Mortgage loans on real estate, net of allowance

                  $ 3,170,510   
                 

 

 

 

 

12


Table of Contents
     December 31, 2012  
     30-59 Days
Past Due
     60-89 Days
Past Due
     Greater Than
90 Days
     Total Past
Due
     Current      Total
Mortgage Loans
 

Commercial mortgages

                 

Office

   $ —         $ —         $ —         $ —         $ 1,100,407       $ 1,100,407   

Industrial

     —           —           —           —           755,198         755,198   

Retail

     —           —           13,354         13,354         547,472         560,826   

Other

     —           —           —           —           738,592         738,592   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 13,354       $ 13,354       $ 3,141,669         3,155,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    12,012   
                 

 

 

 

Mortgage loans on real estate, net of allowance

                  $ 3,143,011   
                 

 

 

 

Total mortgage loans are net of unamortized discounts of $3,872,000 and $4,346,000 and unamortized origination fees of $13,568,000 and $14,076,000 at March 31, 2013 and December 31, 2012, respectively. No 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 below (in thousands):

 

     Collectively
Evaluated
for Impairment
    Individually
Evaluated
for Impairment
     Total  

Allowance for credit losses

       

December 31, 2012

   $ 11,519      $ 493       $ 12,012   

Change in allowance

     (288     —           (288
  

 

 

   

 

 

    

 

 

 

March 31, 2013

   $ 11,231      $ 493       $ 11,724   
  

 

 

   

 

 

    

 

 

 

Recorded Investment

       

March 31, 2013

   $ 3,090,343      $ 109,331       $ 3,199,674   
  

 

 

   

 

 

    

 

 

 

December 31, 2012

   $ 3,063,908      $ 109,537       $ 3,173,445   
  

 

 

   

 

 

    

 

 

 

Loans individually evaluated for impairment with and without an allowance are shown below (in thousands):

 

     Three months ended March 31, 2013  
     Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With an allowance recorded

           

Retail (related allowance of $493)

   $ 493       $ 493       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 36,433       $ 36,433       $ 36,489       $ 613   

Retail

     17,180         17,180         17,180         283   

Other

     55,225         55,225         55,272         924   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total without an allowance recorded

   $ 108,838       $ 108,838       $ 108,941       $ 1,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

13


Table of Contents
     Year ended December 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With an allowance recorded

           

Retail (related allowance of $493)

   $ 493       $ 493       $ —         $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 36,544       $ 36,544       $ 36,710       $ 2,452   

Retail

     17,180         17,180         17,329         1,129   

Other

     55,320         55,320         55,551         3,758   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total without an allowance recorded

   $ 109,044       $ 109,044       $ 109,590       $ 7,339   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

A small portion of the mortgage loan portfolio for which American National has granted concessions related to the borrowers’ ability to pay the loans is classified as troubled debt restructurings. Concessions 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 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. There were no mortgage loans that have been modified in troubled debt restructurings during the three months ended March 31, 2013 and 2012.

6. INVESTMENT REAL ESTATE

Investment real estate by property-type and geographic distribution are as follows:

 

     March 31, 2013     December 31, 2012  

Shopping centers

     41.1     41.0

Office buildings

     22.0        21.9   

Industrial

     17.4        18.1   

Other

     19.5        19.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     March 31, 2013     December 31, 2012  

West South Central

     60.3     60.8

South Atlantic

     11.2        11.2   

East North Central

     10.7        10.3   

Mountain

     6.0        6.2   

East South Central

     5.3        5.3   

Other

     6.5        6.2   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

American National and its wholly-owned subsidiaries regularly invest in real estate partnerships and joint ventures. American National participates in the design of these entities with the sponsor, 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. American National has not provided financial or other support to the VIEs in the form of liquidity arrangements, guarantees, or other commitments to third parties that may affect the fair value or risk of its variable interest in the VIEs in 2013 or 2012.

 

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Table of Contents

The assets and liabilities relating to VIEs which are consolidated in American National’s financial statements are as follows (in thousands):

 

     March 31, 2013      December 31, 2012  

Investment real estate

   $ 162,818       $ 162,502   

Short-term investments

     674         969   

Cash and cash equivalents

     3,936         3,671   

Accrued investment income

     2,035         2,641   

Other receivables

     12,509         11,709   

Other assets

     6,744         6,487   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 188,716       $ 187,979   
  

 

 

    

 

 

 

Notes payable

   $ 165,127       $ 163,384   

Other liabilities

     8,475         6,647   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 173,602       $ 170,031   
  

 

 

    

 

 

 

The total notes payable in the consolidated statements of financial position pertain to the borrowings of American National Insurance Company’s consolidated VIEs. The liability of American National Insurance Company on notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $17,991,000 and $18,063,000 at March 31, 2013 and December 31, 2012, respectively. The average interest rate on the current portion of the notes payable was 4.0% during 2013. The total long-term portion of notes payable consists of three notes with the following interest rates: 4.0%, adjusted LIBOR plus 1.0% and adjusted LIBOR plus 2.5%. Of the long-term notes payable, $12,500,000 will mature in 2016, with the remainder maturing beyond 5 years.

For other VIEs in which American National is a partner, it is not the primary beneficiary and these entities were not consolidated, as the major decisions that most significantly impact the economic activities of the VIE require unanimous consent of all partners. The following table presents the carrying amount and maximum exposure to loss relating to unconsolidated VIEs (in thousands):

 

     March 31, 2013      December 31, 2012  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 103,053       $ 103,053       $ 81,548       $ 81,548   

 

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7. DERIVATIVE INSTRUMENTS

American National purchases over-the-counter equity-indexed options as economic hedges against fluctuations in the equity markets to which equity-indexed products are exposed. Equity-indexed contracts include a fixed host universal-life or annuity contract and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands):

 

Derivatives Not Designated

as Hedging Instruments

 

Location in the

Consolidated Statements of Financial Position

  March 31, 2013     December 31, 2012  
        Number of
Instruments
    Notional
Amounts
    Estimated
Fair Value
    Number of
Instruments
    Notional
Amounts
    Estimated
Fair Value
 

Equity-indexed options

  Other invested assets     355      $ 851,300      $ 105,254        356      $ 846,900      $ 82,625   

Equity-indexed embedded derivative

  Future policy benefits     25,481        734,400        (93,988     22,941        722,500        (75,032

 

         Gains (Losses) Recognized in Income on Derivatives  
Derivatives Not Designated   Location in the   Three months ended March 31,  

as Hedging Instruments

 

Consolidated Statements of Operations

  2013     2012  

Equity-indexed options

  Net investment income   $ 24,340      $ 19,647   

Equity-indexed embedded derivative

  Interest credited to policyholders’ account balances     (20,647     (18,457

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

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

 

     Three months ended March 31,  
     2013     2012  

Bonds

   $ 163,433      $ 172,279   

Equity securities

     6,815        6,245   

Mortgage loans

     51,785        49,758   

Real estate

     (1,421     (215

Options

     24,340        19,647   

Other invested assets

     6,414        7,982   
  

 

 

   

 

 

 

Total

   $ 251,366      $ 255,696   
  

 

 

   

 

 

 

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

 

     Three months ended March 31,  
     2013     2012  

Bonds

   $ 3,223      $ 3,810   

Equity securities

     8,683        7,355   

Mortgage loans

     288        (1,089

Real estate

     6,383        (252

Other invested assets

     (39     (16
  

 

 

   

 

 

 

Total

   $ 18,538      $ 9,808   
  

 

 

   

 

 

 

The OTTI losses are shown below (in thousands):

 

     Three months ended March 31,  
     2013     2012  

Equity securities

   $ (1,587   $ (2,837

 

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9. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

     March 31, 2013      December 31, 2012  
     Carrying
Amount
     Estimated
Fair Value
     Carrying
Amount
     Estimated
Fair Value
 

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 9,061,438       $ 9,860,707       $ 9,009,282       $ 9,840,751   

Fixed maturity securities, bonds available-for-sale

     4,769,136         4,769,136         4,665,576         4,665,576   

Equity securities

     1,208,788         1,208,788         1,075,439         1,075,439   

Equity-indexed options

     105,254         105,254         82,625         82,625   

Mortgage loans on real estate, net of allowance

     3,170,510         3,426,043         3,143,011         3,441,645   

Policy loans

     393,710         393,710         395,333         395,333   

Short-term investments

     233,101         233,101         313,086         313,086   

Separate account assets

     888,388         888,388         841,389         841,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,830,325       $ 20,885,127       $ 19,525,741       $ 20,655,844   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,782,653       $ 9,782,653       $ 9,987,431       $ 9,987,431   

Embedded derivative liability for equity-indexed contracts

     93,988         93,988         75,032         75,032   

Notes payable

     165,127         165,127         163,384         163,384   

Separate account liabilities

     888,388         888,388         841,389         841,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,930,156       $ 10,930,156       $ 11,067,236       $ 11,067,236   
  

 

 

    

 

 

    

 

 

    

 

 

 

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. American National has evaluated the types of securities in its investment portfolio to determine an appropriate hierarchy level based upon trading activity and the observability of market inputs. 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.

 

  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.

Fixed Maturity Securities and Equity Options—American National utilizes a pricing service to estimate fair value measurements. The estimates of fair value for most fixed maturity securities, including municipal bonds, provided by the pricing service are disclosed as Level 2 measurements as the estimates are based on observable market information rather than market quotes.

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, an option adjusted spread model is used to develop prepayment and interest rate scenarios.

 

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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 and the techniques applied by the pricing service to produce quotes that represent the fair value of a specific security. The review confirms the service is utilizing information from observable 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.

American National holds a small amount of private placement debt and fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these 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 commercial mortgage-backed securities use discounted cash flow models and these securities are classified as Level 3 measurements. These models include significant non-observable inputs including an internally determined credit rating of the security and an externally provided credit spread. At March 31, 2013 and December 31, 2012, the modeled discount rate ranges from 5.9% to 6.0%.

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, prices are received 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, an estimate of fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. These estimates are disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services regularly.

Mortgage Loans—The fair value of mortgage loans is estimated using discounted cash flow analyses 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 contracts is measured at fair value and is recalculated each reporting period using equity option pricing models. To validate the assumptions used to price the embedded derivative liability, 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 contracts. 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 embedded derivatives, all other things being equal. At March 31, 2013 and December 31, 2012, the implied volatility used to estimate embedded derivative value ranges from 10.8% to 29.6% and 15.9% to 30.1%, respectively.

 

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Table of Contents

Other Financial Instruments—Other financial instruments classified as level 3 measurements, as there is little or no market activity, are as follows:

Policy loans—The carrying value of policy loans is the 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 and it is settled at outstanding value, 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.

Quantitative Disclosures

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

 

    Fair Value Measurement as of March 31, 2013  
    Total Estimated
Fair Value
    Level 1     Level 2     Level 3  

Financial assets

       

Fixed maturity securities, bonds held-to-maturity

       

U.S. treasury and government

  $ 3,632      $ —        $ 3,632      $ —     

U.S. states and political subdivisions

    421,691        —          421,691        —     

Foreign governments

    33,233        —          33,233        —     

Corporate debt securities

    8,832,475        —          8,754,161        78,314   

Residential mortgage-backed securities

    526,198        —          525,143        1,055   

Collateralized debt securities

    2,672        —          —          2,672   

Other debt securities

    40,806        —          40,806        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total bonds held-to-maturity

    9,860,707        —          9,778,666        82,041   
 

 

 

   

 

 

   

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

       

U.S. treasury and government

    22,990        —          22,990        —     

U.S. states and political subdivisions

    625,237        —          622,712        2,525   

Foreign governments

    7,307        —          7,307        —     

Corporate debt securities

    3,970,150        —          3,899,707        70,443   

Residential mortgage-backed securities

    81,573        —          79,117        2,456   

Commercial mortgage-backed securities

    32,008        —          —          32,008   

Collateralized debt securities

    18,450        —          16,519        1,931   

Other debt securities

    11,421        —          11,421        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total bonds available-for-sale

    4,769,136        —          4,659,773        109,363   
 

 

 

   

 

 

   

 

 

   

 

 

 

Equity securities

       

Common stock

    1,168,491        1,168,491        —          —     

Preferred stock

    40,297        40,297        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total equity securities

    1,208,788        1,208,788        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Options

    105,254        —          —          105,254   

Mortgage loans on real estate

    3,426,043        —          3,426,043        —     

Policy loans

    393,710        —          —          393,710   

Short-term investments

    233,101        —          233,101        —     

Separate account assets

    888,388        —          888,388        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total financial assets

  $ 20,885,127      $ 1,208,788      $ 18,985,971      $ 690,368   
 

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities

       

Investment contracts

  $ 9,782,653      $ —        $ —        $ 9,782,653   

Embedded derivative liability for equity-indexed contracts

    93,988        —          —          93,988   

Notes payable

    165,127        —          —          165,127   

Separate account liabilities

    888,388        —          888,388        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Total financial liabilities

  $ 10,930,156      $ —        $ 888,388      $ 10,041,768   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Fair Value Measurement as of December 31, 2012  
     Total
Estimated

Fair Value
     Level 1      Level 2      Level 3  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. treasury and government

   $ 3,662       $ —         $ 3,662       $ —     

U.S. states and political subdivisions

     433,695         —           433,695         —     

Foreign governments

     33,438         —           33,438         —     

Corporate debt securities

     8,735,158         —           8,662,164         72,994   

Residential mortgage-backed securities

     590,502         —           589,441         1,061   

Collateralized debt securities

     2,821         —           —           2,821   

Other debt securities

     41,475         —           41,475         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     9,840,751         —           9,763,875         76,876   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     20,805         —           20,805         —     

U.S. states and political subdivisions

     615,438         —           612,913         2,525   

Foreign governments

     7,344         —           7,344         —     

Corporate debt securities

     3,872,633         —           3,796,949         75,684   

Residential mortgage-backed securities

     94,385         —           91,938         2,447   

Commercial mortgage-backed securities

     24,442         —           —           24,442   

Collateralized debt securities

     19,091         —           17,156         1,935   

Other debt securities

     11,438         —           11,438         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,665,576         —           4,558,543         107,033   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,037,784         1,037,784         —           —     

Preferred stock

     37,655         37,652         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,075,439         1,075,436         —           3   
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     82,625         —           —           82,625   

Mortgage loans on real estate

     3,441,645         —           3,441,645         —     

Policy loans

     395,333         —           —           395,333   

Short-term investments

     313,086         —           313,086         —     

Separate account assets

     841,389         —           841,389         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,655,844       $ 1,075,436       $ 18,918,538       $ 661,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,987,431       $ —         $ —         $ 9,987,431   

Embedded derivative liability for equity-indexed contracts

     75,032         —           —           75,032   

Notes payable

     163,384         —           —           163,384   

Separate account liabilities

     841,389         —           841,389         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 11,067,236       $ —         $ 841,389       $ 10,225,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Investment
Securities
    Equity-
Indexed
Options
    Embedded
Derivative
Liability
 

Beginning balance, 2012

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

Total realized and unrealized investment gains/losses

      

Included in other comprehensive income

     3,678        —          —     

Net fair value change included in realized gains/losses

     (17     —          —     

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

     —          17,798        —     

Net change included in interest credited

     —          —          (18,457

Purchases, sales and settlements or maturities

      

Purchases

     18        4,341        —     

Sales

     (2,502     —          —     

Settlements or maturities

     (178     (2,621     —     

Premiums less benefits

     —          —          3,078   
  

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2012

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

 

 

   

 

 

   

 

 

 

 

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Table of Contents
           Equity-     Embedded  
     Investment     Indexed     Derivative  
     Securities     Options     Liability  

Beginning balance, 2013

   $ 183,912      $ 82,625      $ (75,032

Total realized and unrealized investment gains/losses

      

Included in other comprehensive income

     9,188        —          —     

Net fair value change included in realized gains/losses

     203        —          —     

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

     —          22,466        —     

Net change included in interest credited

     —          —          (20,647

Net capitalized interest

      

Purchases, sales and settlements or maturities

      

Purchases

     1,975        3,290        —     

Sales

     (3,874     —          —     

Settlements or maturities

     —          (3,127     —     

Premiums less benefits

     —          —          1,691   
  

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2013

   $ 191,404      $ 105,254      $ (93,988
  

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were an unrealized gain of $21,580,000 and $17,399,000 relating to assets still held at March 31, 2013 and 2012, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies. 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.

10. DEFERRED POLICY ACQUISITION COSTS

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

 

                 Accident     Property &        
     Life     Annuity     & Health     Casualty     Total  

Beginning balance 2013

   $ 653,416      $ 406,540      $ 49,206      $ 138,513      $ 1,247,675   

Additions

     25,908        13,229        2,575        49,827        91,539   

Amortization

     (19,959     (22,652     (4,124     (56,138     (102,873

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

     (2,314     208        —          —          (2,106
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     3,635        (9,215     (1,549     (6,311     (13,440
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2013

     657,051        397,325        47,657        132,202        1,234,235   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Commissions comprise the majority of the additions to deferred policy acquisition costs for each year.

 

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Table of Contents

11. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES

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

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

 

     Three months ended March 31,  
     2013     2012  

Unpaid claims balance, beginning

   $ 1,168,047      $ 1,180,259   

Less reinsurance recoverables

     256,885        235,174   
  

 

 

   

 

 

 

Net beginning balance

     911,162        945,085   
  

 

 

   

 

 

 

Incurred related to

    

Current

     254,035        258,886   

Prior years

     (23,037     (25,720
  

 

 

   

 

 

 

Total incurred claims

     230,998        233,166   
  

 

 

   

 

 

 

Paid claims related to

    

Current

     92,894        100,383   

Prior years

     133,698        138,587   
  

 

 

   

 

 

 

Total paid claims

     226,592        238,970   
  

 

 

   

 

 

 

Net balance

     915,568        939,281   

Plus reinsurance recoverables

     240,844        232,251   
  

 

 

   

 

 

 

Unpaid claims balance, ending

   $ 1,156,412      $ 1,171,532   
  

 

 

   

 

 

 

The net and gross reserve calculations have shown favorable development for the last several years as a result of favorable loss emergence compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred claims and CAE attributable to insured events of prior years decreased by approximately $23,037,000 during the first three months of 2013 and $25,720,000 during the same period in 2012.

12. FEDERAL INCOME TAXES

A reconciliation of the effective tax rate to the statutory federal tax rate is shown below (in thousands, except percentages):

 

     Three months ended March 31,  
     2013     2012  
     Amount     Rate     Amount     Rate  

Income tax expense on pre-tax income

   $ 21,752        35.0   $ 22,180        35.0

Tax-exempt investment income

     (1,623     (2.6     (1,905     (3.0

Dividend exclusion

     (1,471     (2.4     (1,469     (2.3

Miscellaneous tax credits, net

     (1,961     (3.2     (2,111     (3.3

Other items, net

     (5,380     (8.6     288        0.4   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 11,317        18.2   $ 16,983        26.8
  

 

 

   

 

 

   

 

 

   

 

 

 

There were no federal income tax payments or refunds during the three months ended March 31, 2013. American National received net refunds of $6,425,000 during the three months ended March 31, 2012.

 

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

 

     March 31,     December 31,  
     2013     2012  

DEFERRED TAX ASSETS

    

Investments, principally due to impairment losses

   $ 69,131      $ 70,103   

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

     7,583        7,259   

Policyholder funds, principally due to policy reserve discount

     228,822        229,429   

Policyholder funds, principally due to unearned premium reserve

     31,689        30,337   

Participating policyholders’ surplus

     37,858        37,014   

Pension

     95,860        94,847   

Commissions and other expenses

     7,791        7,889   

Tax carryforwards

     13,421        23,041   

Other assets

     —          3,343   
  

 

 

   

 

 

 

Gross deferred tax assets

     492,155        503,262   
  

 

 

   

 

 

 

DEFERRED TAX LIABILITIES

    

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

     (293,527     (257,290

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

     (8,964     (9,415

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

     (323,280     (327,245

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

     (1,083     (1,462

Other Liabilities

     (728     —     
  

 

 

   

 

 

 

Gross deferred tax liabilities

     (627,582     (595,412
  

 

 

   

 

 

 

Total net deferred tax liability

   $ (135,427   $ (92,150
  

 

 

   

 

 

 

Management believes that a sufficient level of taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of March 31, 2013 and December 31, 2012. However, if not utilized beforehand, approximately $13,421,000 in ordinary loss tax carryforwards will expire at the end of tax year 2033.

The statute of limitations for the examination of federal income tax returns by the IRS for years 2006 to 2011 either has been extended or has not expired. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld. No provision for penalties was established, and no interest expense was incurred for 2013 or 2012, relating to uncertain tax positions. Management does not believe that there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

13. COMPONENTS OF COMPREHENSIVE INCOME (LOSS)

The components of and changes in the accumulated other comprehensive income (loss) (“AOCI”), and the related tax effects, are shown below (in thousands):

 

     Net  Unrealized
Gains/(Losses)
on Securities
    Defined
Benefit
Pension Plan
Adjustments
    Foreign
Currency
Adjustments
     AOCI  

Beginning balance 2012

   $ 274,837      $ (115,485)      $ 51       $ 159,403   

Unrealized holding gains (losses) arising during the period (net of tax expense $52,330)

     97,184             97,184   

Unrealized adjustment to DAC (net of tax benefit $5,901)

     (11,604          (11,604

Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax benefit $2,048)

     (3,804          (3,804

Foreign currency adjustment (net of tax expense $82)

         152         152   

Amounts reclassified from AOCI (net of tax benefit $2,955 and expense $1,437)

     (5,245     2,668           (2,577
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at March 31, 2012

   $ 351,368      $ (112,817   $ 203       $ 238,754   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

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     Net  Unrealized
Gains/(Losses)
on Securities
    Defined
Benefit
Pension
Plan
Adjustments
    Foreign
Currency
Adjustments
     AOCI  

Beginning balance 2013

   $ 370,842      $ (129,003   $ 171       $ 242,010   

Unrealized holding gains (losses) arising during the period (net of tax expense $39,671)

     73,674             73,674   

Unrealized adjustment to DAC (net of tax benefit $439)

     (1,667          (1,667

Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax benefit $1,782)

     (3,309          (3,309

Foreign currency adjustment (net of tax expense $80)

         149         149   

Amounts reclassified from AOCI (net of tax benefit $3,434 and expense $1,549)

     (5,979     2,876           (3,103
  

 

 

   

 

 

   

 

 

    

 

 

 

Ending balance at March 31, 2013

   $ 433,561      $ (126,127   $ 320       $ 307,754   
  

 

 

   

 

 

   

 

 

    

 

 

 

14. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS

American National has one class of common stock with a par value of $1.00 per share and 50,000,000 authorized shares. The amounts outstanding at the dates indicated are shown below:

 

     March 31,     December 31,  
     2013     2012  

Common stock

    

Shares issued

     30,832,449        30,832,449   

Treasury shares

     (3,939,037     (3,995,785
  

 

 

   

 

 

 

Outstanding shares

     26,893,412        26,836,664   

Restricted shares

     (195,334     (185,334
  

 

 

   

 

 

 

Unrestricted outstanding shares

     26,698,078        26,651,330   
  

 

 

   

 

 

 

Stock-based compensation

American National has one stock-based compensation plan, which allows for grants of Non-Qualified Stock Options, Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, Restricted Stock Units (“RSU”), Performance Awards, Incentive Awards or any combination thereof. This plan is administered by the American National Board Compensation Committee. The Board Compensation Committee makes incentive awards under this plan to our executives after meeting established performance objectives. All awards are subject to review and approval by the committee and the Board of Directors, both at the time of setting applicable performance objectives and at the same time of payment of the awards. The number of shares available for grants under the plan cannot exceed 2,900,000 shares, and no more than 200,000 shares may be granted to any one individual in any calendar year. Grants are made to certain officers and directors as compensation and to align their interests with those of other shareholders.

SAR, RS and RSU information for the periods indicated is shown below:

 

     SAR      RS Shares      RS Units  
     Shares     Weighted-
Average  Grant
Date Fair Value
     Shares      Weighted-
Average  Grant
Date Fair Value
     Units     Weighted-
Average  Grant
Date Fair Value
 

Outstanding at December 31, 2012

     108,951      $ 111.31         185,334       $ 109.13         127,059      $ 75.06   

Granted

     —          —           10,000         80.05         71,084        80.05   

Exercised

     (200     66.76         —           —           (74,580     77.03   

Forfeited

     (134     66.76         —           —           (99     77.20   

Expired

     (4,600     111.95         —           —           —          —     
  

 

 

      

 

 

       

 

 

   

Outstanding at March 31, 2013

     104,017      $ 111.42         195,334       $ 107.64         123,464      $ 76.74   
  

 

 

      

 

 

       

 

 

   

 

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Table of Contents
     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life

     2.6 years         4.8 years         2.4 years   

Weighted-average exercise price

   $ 111.42       $ 107.64       $ 76.74   

Exercisable shares

     88,292         N/A         —     

Weighted-average exercise price Exercisable shares

   $ 111.27         N/A         N/A   

The SARs give the holder the right to cash compensation based on the difference between the price of a share of stock on the grant date and the price on the exercise date. The SARs vest at a rate of 20% per year for five years and expire five years after vesting. The fair value of the SARs was $34,000 and $3,000 at March 31, 2013 and December 31, 2012, respectively. Compensation expense was recorded totaling $32,000 for the three months ended March 31, 2013, and a credit to compensation expense was recorded totaling $2,000 for the three months ended March 31, 2012.

Effective December 31, 2012, the settlement provision within outstanding RSU awards was modified to allow the recipient of the awards to settle the vested RSUs in either cash or American National’s common stock. This change in the settlement provision is expected to apply to all future issuance of RSU awards. Prior to the modification, vested RSUs were converted to American National’s common stock on a one-for-one basis. This modification changes the award classification from equity to liability award. At the date of modification, American National recorded a liability of $7,974,000 with a corresponding reduction in additional paid-in capital. The liability will be remeasured and adjusted for changes in the fair value each reporting period through the vesting date. The fair value of the liability was $4,579,000 and $7,974,000 at March 31, 2013 and December 31, 2012, respectively. RSUs generally vest after a three-year graded vesting requirement. Certain awards vest over a shorter period as a result of retirement provisions. Compensation expense of $5,563,000 and $1,493,000 was recorded for the three months ended March 31, 2013 and 2012, respectively. The modification, which was applied consistently to all participants added an incremental cost of $1,408,000.

RS Awards entitle the participant to full dividend and voting rights. Each award has the value of one share of restricted stock and vests 10 years from the grant date. Unvested shares are restricted as to disposition, and are subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years, and these awards feature a graded vesting schedule in the case of the retirement of an award holder. Restricted stock for 350,334 shares has been granted at an exercise price of zero, of which 195,334 shares are unvested. The compensation expense recorded was $505,000 and $670,000 for the three months ended March 31, 2013 and 2012, respectively.

Earnings (loss) per share

Basic earnings (losses) per share were calculated using a weighted-average number of shares outstanding. The Restricted Stock awards and units resulted in diluted earnings per share as follows (in thousands, except share-related data):

 

     Three months ended March 31,  
     2013      2012  

Weighted average shares outstanding

     26,763,896         26,565,164   

Incremental shares from RS awards and RSUs

     123,255         193,791   
  

 

 

    

 

 

 

Total shares for diluted calculations

     26,887,151         26,758,955   

Net income (loss) attributable to American National Insurance Company

   $ 59,971       $ 45,216   
  

 

 

    

 

 

 

Basic earnings (loss) per share

   $ 2.24       $ 1.70   

Diluted earnings (loss) per share

     2.23         1.69   

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by statutory regulations. The restrictions require life insurance companies to maintain minimum amounts of capital and surplus, and in the absence of special approval, limit the payment of dividends to the greater of statutory net gain from operations on an annual, non-cumulative basis, or 10% of statutory surplus. Additionally, insurance companies are not permitted to distribute the excess of stockholders’ equity, as determined on a GAAP basis, over that determined on a statutory basis. At March 31, 2013 and December 31, 2012, American National Insurance Company’s statutory capital and surplus was $2,376,889,000 and $2,260,268,000, respectively.

 

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Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to the parent company apply to American National’s insurance subsidiaries. Net assets of insurance subsidiaries were approximately $1,557,463,000 and $1,535,082,000 at March 31, 2013 and December 31, 2012, respectively.

Noncontrolling interests

American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company that is owned by its policyholders. American National has a management agreement that effectively gives it complete control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at March 31, 2013 and December 31, 2012.

American National Insurance Company and its subsidiaries exercise significant control or ownership of various joint ventures, resulting in their consolidation into American National’s consolidated financial statements. The interests of the joint ventures’ other partners are shown as noncontrolling interests, of $4,158,000 and $4,741,000 at March 31, 2013 and December 31, 2012, respectively.

15. SEGMENT INFORMATION

Management organizes the business into five operating segments:

 

   

Life—markets whole, term, universal, indexed and variable life insurance on a national basis primarily through career and multiple-line agents, as well as through independent agents and direct marketing channels.

 

   

Annuity—offers fixed, indexed, and variable annuity products. These products are primarily sold through independent agents, brokers, and financial institutions, along with multiple-line and career agents.

 

   

Health—primary lines of business are Medicare Supplement, stop loss, other supplemental health products and credit disability insurance. Health products are typically distributed through independent agents and managing general underwriters.

 

   

Property and Casualty—writes personal, commercial and credit-related property insurance. These products are primarily sold through multiple-line agents and independent agents.

 

   

Corporate and Other—consists of net investment income on the investments not allocated to the insurance segments and the operations of non-insurance lines of business.

The accounting policies of the segments are the same as those described in Note 2. All income and expense amounts specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Income and expenses not specifically attributable to policy transactions are allocated to each segment as follows:

 

   

Recurring income from bonds and mortgage loans is allocated based on the assets allocated to each line of business at the average yield available from these assets.

 

   

Net investment income from all other assets is allocated to the insurance segments in accordance with the amount of equity allocated to each segment, with the remainder recorded in the Corporate and Other business segment.

 

   

Expenses are allocated based upon various factors, including premium and commission ratios within the respective operating segments.

 

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Table of Contents

The following summarizes results of operations by operating segments (in thousands):

 

     Three months ended March 31,  
     2013     2012  

Income (loss) from continuing operations before federal income taxes, and equity in earnings/losses of unconsolidated affiliates

    

Life

   $ 6,004      $ 7,556   

Annuity

     27,334        23,734   

Health

     (686     (1,452

Property and casualty

     12,909        24,560   

Corporate and other

     16,587        8,973   
  

 

 

   

 

 

 

Total

   $ 62,148      $ 63,371   
  

 

 

   

 

 

 

16. COMMITMENTS AND CONTINGENCIES

Commitments

American National had aggregate commitments at March 31, 2013, to purchase, expand or improve real estate, to fund fixed interest into mortgage loans, and to purchase other invested assets of $269,983,000, of which $206,225,000 is expected to be funded in 2013. The remaining $63,758,000 will be funded in 2014 and beyond.

In September 2012, American National renewed an existing $100,000,000 short-term variable rate borrowing facility containing a $55,000,000 sub-feature for the issuance of letters of credit. Borrowings under the facility are at the discretion of the lender and would be used only for funding working capital requirements. The combination of borrowings and outstanding letters of credit cannot exceed $100,000,000 at any time. As of March 31, 2013 and December 31, 2012, the outstanding letters of credit were $33,495,000 and $33,696,000, respectively, and there were no borrowings on this facility to meet liquidity requirements. This facility expires on September 30, 2013. American National expects it will be renewed on substantially equivalent terms upon expiration.

Guarantees

American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on the bank loan, American National would be obligated to pay off the loans. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of March 31, 2013, was approximately $206,376,000, while the total cash values of the related life insurance policies was approximately $211,857,000.

Litigation

American National and certain subsidiaries, in common with the insurance industry in general, are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information presently available, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position, liquidity or results of operations; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future. Such speculation warrants caution, as the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given lawsuit. These lawsuits are in various stages of development, and future facts and circumstances could result in management’s changing its conclusions. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than management can anticipate, the resulting liability could have a material impact on our consolidated financial position, liquidity or results of operations. With respect to the existing litigation, management currently believes that the possibility of a material judgment adverse to American National is remote and no estimate of range can be made for loss contingencies that are at least reasonably possible but not accrued.

 

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17. RELATED PARTY TRANSACTIONS

American National has entered into recurring transactions and agreements with certain related parties. These include mortgage loans, management contracts, agency commission contracts, marketing agreements, accident and health insurance contracts and legal services. The impact on the consolidated financial statements of the significant related party transactions for the periods indicated is shown below (in thousands):

 

          Dollar Amount of Transactions      Amount due to/(from) American National  
          Three months ended March 31,      March 31,     December 31,  

Related Party

  

Financial Statement Line Impacted

   2013      2012      2013     2012  

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 280       $ 260       $ 8,610      $ 8,890   

Gal-Tex Hotel Corporation

   Net investment income      159         179         52        54   

Greer, Herz and Adams, LLP

   Other operating costs and expenses      2,131         1,958         (429     (268

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National held a first mortgage loan issued to Gal-Tex collateralized by hotel property in San Antonio, Texas. This loan was originated in 1999, has a current interest rate of 7.30%, and has a final maturity date of April 1, 2019. This loan is current as to principal and interest payments.

Transactions with Greer, Herz & Adams, L.L.P.: Irwin M. Herz, Jr. is an American National advisory director and a Partner with Greer, Herz Adams, L.L.P., which serves as American National’s General Counsel.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Set forth on the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three months ended March 31, 2013 and 2012 of American National Insurance Company and its subsidiaries (referred to in this document as “we”, “our”, “us”, or the “Company”). This information should be read in conjunction with our consolidated financial statements included in Item 1, Financial Statements (unaudited), of this Form 10-Q.

Forward-Looking Statements

This document contains forward-looking statements that reflect our estimates and assumptions related to business, economic, competitive and legislative developments. Forward-looking statements generally are indicated by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning and include, without limitation, statements regarding the outlook of our business and expected financial performance. Forward-looking statements are not a guarantee of future performance and involve various risks and uncertainties. Moreover, forward-looking statements speak only as of the date made, and we undertake no obligation to update them. Certain important factors could cause our actual results to differ, possibly materially, from our expectations or estimates. These factors are described in greater detail in Item IA, Risk Factors, in our 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013, and they include among others:

 

   

Economic Risk Factors

 

   

difficult conditions in the economy, which may not improve in the near future, and risks related to persistently low, or unpredictable, interest rates;

 

   

Operational Risk Factors

 

   

differences between actual experience regarding mortality, morbidity, persistency, surrenders and investment returns, and our assumptions for establishing liabilities and reserves or for other purposes;

 

   

potential ineffectiveness of our risk management policies and procedures;

 

   

changes in our experience related to deferred policy acquisition costs;

 

   

failures or limitations of our computer, data security and administration systems;

 

   

potential employee error or misconduct, which may result in fraud or adversely affect the execution and administration of our policies and claims;

 

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Investment and Financial Market Risk Factors

 

   

fluctuations in the markets for fixed maturity securities, equity securities, and commercial real estate, which could adversely affect the valuation of our investment portfolio, our net investment income, our retirement expense, and sales of or fees from certain of our products;

 

   

lack of liquidity for certain of our investments;

 

   

risk of investment losses and defaults;

 

   

Catastrophic Event Risk Factors

 

   

natural or man-made catastrophes, pandemic disease, or other events resulting in increased claims activity from catastrophic loss of life or property;

 

   

the effects of unanticipated events on our disaster recovery and business continuity planning;

 

   

Marketplace Risk Factors

 

   

the highly competitive nature of the insurance and annuity business;

 

   

potential difficulty in attraction and retention of qualified employees and agents;

 

   

the introduction of alternative healthcare solutions, which could impact our Medicare Supplement business;

 

   

Litigation and Regulation Risk Factors

 

   

adverse determinations in litigation or regulatory proceedings and our exposure to contingent liabilities, including and in connection with our divestiture or winding down of businesses;

 

   

the effects of extensive government regulation;

 

   

changes in tax and securities law;

 

   

changes in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;

 

   

Reinsurance and Counterparty Risk Factors

 

   

potential changes in the availability, affordability and adequacy of reinsurance protection;

 

   

potential default or failure to perform by the counterparties to our reinsurance arrangements and derivative instruments;

 

   

Other Risk Factors

 

   

potentially adverse rating agency actions; and

 

   

control of our company by a small number of stockholders.

Overview

We are a diversified insurance and financial services company, offering a broad spectrum of insurance products. Chartered in 1905, we are headquartered in Galveston, Texas. We operate in all 50 states, the District of Columbia, Guam, American Samoa and Puerto Rico.

General Trends

There were no material changes to the general trends we are experiencing, as discussed in the MD&A included in our 2012 Annual Report on Form 10-K filed with the SEC on March 8, 2013.

Critical Accounting Estimates

The unaudited interim consolidated financial statements have been prepared in conformity with GAAP. In addition to GAAP, insurance companies apply specific SEC regulations when preparing the consolidated financial statements. The preparation of the consolidated financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the