FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 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 October 31, 2013, there were 26,895,188 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION   

ITEM 1.

  FINANCIAL STATEMENTS (Unaudited):   
  Consolidated Statements of Financial Position as of September 30, 2013 and December 31, 2012      3   
  Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2012      4   
  Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2013 and 2012      5   
  Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2013 and 2012      5   
  Consolidated Statements of Cash Flows for the nine months ended September 30, 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      33   

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      54   

ITEM 4.

  CONTROLS AND PROCEDURES      54   
  PART II – OTHER INFORMATION   

ITEM 1.

  LEGAL PROCEEDINGS      55   

ITEM 1A.

  RISK FACTORS      55   

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      55   

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      55   

ITEM 4

  MINE SAFETY DISCLOSURES      55   

ITEM 5.

  OTHER INFORMATION      55   

ITEM 6.

  EXHIBIT INDEX      56   

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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

 

     September 30,     December 31,  
     2013     2012  

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair Value $9,102,292 and $9,840,751)

   $ 8,674,301      $ 9,009,282   

Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $4,371,545 and $4,316,467)

     4,557,161        4,665,576   

Equity securities, at fair value
(Cost $724,658 and $688,579)

     1,277,131        1,075,439   

Mortgage loans on real estate, net of allowance

     3,333,363        3,143,011   

Policy loans

     395,709        395,333   

Investment real estate, net of accumulated depreciation of $207,346 and $223,462

     471,810        511,233   

Short-term investments

     339,479        313,086   

Other invested assets

     161,515        125,104   
  

 

 

   

 

 

 

Total investments

     19,210,469        19,238,064   
  

 

 

   

 

 

 

Cash and cash equivalents

     122,637        303,008   

Investments in unconsolidated affiliates

     316,062        248,425   

Accrued investment income

     203,684        207,314   

Reinsurance recoverables

     400,860        418,743   

Prepaid reinsurance premiums

     51,881        56,826   

Premiums due and other receivables

     309,694        283,446   

Deferred policy acquisition costs

     1,274,750        1,247,675   

Property and equipment, net

     101,245        92,695   

Current tax receivable

     —          14,578   

Other assets

     179,903        154,911   

Separate account assets

     931,947        841,389   
  

 

 

   

 

 

 

Total assets

   $ 23,103,132      $ 23,107,074   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,677,978      $ 2,650,822   

Annuity

     854,576        811,192   

Accident and health

     65,919        69,962   

Policyholders’ account balances

     11,201,569        11,555,201   

Policy and contract claims

     1,290,890        1,340,366   

Unearned premium reserve

     773,020        757,532   

Other policyholder funds

     303,680        288,391   

Liability for retirement benefits

     273,410        265,317   

Notes payable

     114,126        163,384   

Current federal income taxes

     16,397        —     

Deferred tax liabilities, net

     120,992        92,150   

Other liabilities

     453,576        432,041   

Separate account liabilities

     931,947        841,389   
  

 

 

   

 

 

 

Total liabilities

     19,078,080        19,267,747   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value,—Authorized 50,000,000
Issued 30,832,449 and 30,832,449,
Outstanding 26,895,044 and 26,836,664 shares

     30,832        30,832   

Additional paid-in capital

     4,120        —     

Accumulated other comprehensive income

     281,995        242,010   

Retained earnings

     3,791,911        3,653,280   

Treasury stock, at cost

     (97,442     (98,286
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,011,416        3,827,836   

Noncontrolling interest

     13,636        11,491   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,025,052        3,839,327   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 23,103,132      $ 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
September 30,
    Nine months ended
September 30,
 
    2013     2012     2013     2012  

PREMIUMS AND OTHER REVENUE

       

Premiums

       

Life

  $ 75,278      $ 72,203      $ 215,479      $ 209,353   

Annuity

    23,412        30,140        89,733        93,275   

Accident and health

    52,839        56,199        159,100        167,965   

Property and casualty

    271,270        272,903        801,106        814,503   

Other policy revenues

    52,975        49,343        152,910        146,406   

Net investment income

    254,336        258,190        752,488        754,449   

Realized investment gains (losses)

    43,795        26,905        107,473        46,852   

Other-than-temporary impairments

    (312     (13,975     (3,503     (22,073

Other income

    11,911        8,160        29,423        22,975   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

    785,504        760,068        2,304,209        2,233,705   
 

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

       

Policyholder benefits

       

Life

    83,821        84,615        246,896        245,237   

Annuity

    34,860        37,964        118,155        120,931   

Claims incurred

       

Accident and health

    34,404        38,436        106,378        119,586   

Property and casualty

    182,809        187,944        581,042        620,462   

Interest credited to policyholders’ account balances

    98,862        108,069        309,738        323,952   

Commissions for acquiring and servicing policies

    94,504        92,253        273,360        283,295   

Other operating expenses

    128,115        114,234        381,850        336,378   

Change in deferred policy acquisition costs

    7,265        7,168        19,568        12,468   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

    664,640        670,683        2,036,987        2,062,309   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    120,864        89,385        267,222        171,396   
 

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

       

Current

    36,541        19,900        63,920        43,384   

Deferred

    (782     7,754        7,959        (1,131
 

 

 

   

 

 

   

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

    35,759        27,654        71,879        42,253   

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

    121        (895     9,774        (2,462
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    85,226        60,836        205,117        126,681   

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

    2,613        1,650        4,364        1,773   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to American National

  $ 82,613      $ 59,186      $ 200,753      $ 124,908   
 

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

       

Earnings per share

       

Basic

  $ 3.08      $ 2.21      $ 7.49      $ 4.68   

Diluted

    3.07        2.20        7.46        4.65   

Cash dividends to common stockholders

    0.77        0.77        2.31        2.31   

Weighted average common shares outstanding

    26,780,313        26,736,464        26,789,564        26,699,211   

Weighted average common shares outstanding and dilutive potential common shares

    26,905,093        26,870,655        26,910,017        26,859,100   

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Net income (loss)

   $ 85,226      $ 60,836      $ 205,117      $ 126,681   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Change in net unrealized gain (loss) on securities

     26,747        53,446        31,569        113,183   

Foreign currency transaction and translation adjustments

     (625     (300     (211     30   

Defined benefit plan adjustment

     2,876        2,351        8,627        7,144   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     28,998        55,497        39,985        120,357   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     114,224        116,333        245,102        247,038   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     2,613        1,650        4,364        1,773   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to American National

   $ 111,611      $ 114,683      $ 240,738      $ 245,265   
  

 

 

   

 

 

   

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

     Nine months ended
September 30,
 
     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

     3,012        (204

Income tax effect from restricted stock arrangement

     80        (610

Amortization of restricted stock

     1,028        7,710   

Purchase of ownership interest from noncontrolling interest

     —          (1,892
  

 

 

   

 

 

 

Balance at end of period

     4,120        5,004   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance as of January 1,

     242,010        159,403   

Other comprehensive income (loss)

     39,985        120,357   
  

 

 

   

 

 

 

Balance at end of the period

     281,995        279,760   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     3,653,280        3,545,546   

Net income (loss) attributable to American National

     200,753        124,908   

Cash dividends to common stockholders

     (62,122     (61,995
  

 

 

   

 

 

 

Balance at end of the period

     3,791,911        3,608,459   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (98,286     (98,490

Reissuance of treasury shares

     844        204   
  

 

 

   

 

 

 

Balance at end of the period

     (97,442     (98,286
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     11,491        12,947   

Contributions

     456        —     

Distributions

     (2,675     (2,591

Gain (loss) attributable to noncontrolling interest

     4,364        1,773   

Purchase of ownership interest from noncontrolling interest

     —          299   
  

 

 

   

 

 

 

Balance at end of the period

     13,636        12,428   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 4,025,052      $ 3,838,197   
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

      Nine months ended
September 30,
 
     2013     2012  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 205,117      $ 126,681   

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

    

Realized investment (gains) losses

     (107,473     (46,852

Other-than-temporary impairments

     3,503        22,073   

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

     4,460        (1,719

Net capitalized interest on policy loans and mortgage loans

     (20,156     (22,635

Depreciation

     24,873        27,697   

Interest credited to policyholders’ account balances

     309,738        323,952   

Charges to policyholders’ account balances

     (152,910     (146,406

Deferred federal income tax (benefit) expense

     7,959        (1,131

Equity in (earnings) losses of unconsolidated affiliates

     (9,774     2,462   

Distributions from equity method investments

     18,925        11,274   

Changes in

    

Policyholder liabilities

     48,816        79,909   

Deferred policy acquisition costs

     19,568        12,468   

Reinsurance recoverables

     17,883        16,574   

Premiums due and other receivables

     (26,248     (30,021

Prepaid reinsurance premiums

     4,945        7,368   

Accrued investment income

     3,630        (3,877

Current tax receivable/payable

     30,975        21,856   

Liability for retirement benefits

     8,093        2,117   

Other, net

     (38,730     (80,674
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     353,194        321,116   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     1,209,058        975,850   

Available-for-sale securities

     702,625        437,265   

Investment real estate

     84,371        —     

Mortgage loans

     446,480        226,527   

Policy loans

     43,911        50,928   

Other invested assets

     11,021        6,436   

Disposals of property and equipment

     674        1,323   

Distributions from unconsolidated affiliates

     22,834        19,246   

Payment for the purchase/origination of

    

Held-to-maturity securities

     (856,086     (916,538

Available-for-sale securities

     (737,342     (568,180

Investment real estate

     (35,240     (21,948

Mortgage loans

     (638,690     (385,263

Policy loans

     (19,564     (33,423

Other invested assets

     (13,690     (11,507

Additions to property and equipment

     (17,958     (19,733

Contributions to unconsolidated affiliates

     (94,078     (29,099

Change in short-term investments

     (26,393     23,818   

Other, net

     8,561        8,945   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     90,494        (235,353
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     654,346        897,654   

Policyholders’ account withdrawals

     (1,164,806     (960,668

Change in notes payable

     (49,258     102,353   

Dividends to stockholders

     (62,122     (61,995

Proceeds from (payments to) noncontrolling interest

     (2,219     (2,591
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (624,059     (25,247
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (180,371     60,516   

Beginning of the period

     303,008        102,114   
  

 

 

   

 

 

 

End of period

   $ 122,637      $ 162,630   
  

 

 

   

 

 

 

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 primarily in stocks and real estate. Business is conducted in 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 the 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 interim consolidated statements of financial position, operations, comprehensive income (loss), changes in stockholders’ equity, and cash flows.

The 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 accounting standards 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:

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.

Guidance that amends the disclosures about offsetting assets and liabilities. The new guidance requires disclosures of both gross and net information about offsetting and related arrangements. Subsequently, amendments were issued to clarify the scope of this guidance covering only those derivatives 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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Amended guidance on presentation of accumulated other comprehensive income (“AOCI”). The amendments require disclosures 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 GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under 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:

Guidance addressing questions on the recognition and classification of fees mandated by the Patient Protection and Affordable Care Act on the health insurers’ financial 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.

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 GAAP guidance.

4. INVESTMENTS IN SECURITIES

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

 

     September 30, 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

   $ 1,967       $ 19       $ —        $ 1,986   

U.S. states and political subdivisions

     357,495         21,895         (333     379,057   

Foreign governments

     29,092         3,005         —          32,097   

Corporate debt securities

     7,844,517         465,822         (89,678     8,220,661   

Residential mortgage-backed securities

     421,530         26,654         (2,039     446,145   

Collateralized debt securities

     2,370         243         —          2,613   

Other debt securities

     17,330         2,403         —          19,733   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     8,674,301         520,041         (92,050     9,102,292   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     21,537         853         —          22,390   

U.S. states and political subdivisions

     608,732         25,882         (11,290     623,324   

Foreign governments

     5,000         1,803         —          6,803   

Corporate debt securities

     3,622,629         193,827         (42,486     3,773,970   

Residential mortgage-backed securities

     67,257         3,240         (688     69,809   

Commercial mortgage-backed securities

     20,934         12,251         —          33,185   

Collateralized debt securities

     15,436         1,157         (19     16,574   

Other debt securities

     10,020         1,086         —          11,106   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,371,545         240,099         (54,483     4,557,161   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     701,968         543,559         (6,232     1,239,295   

Preferred stock

     22,690         15,440         (294     37,836   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     724,658         558,999         (6,526     1,277,131   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,770,504       $ 1,319,139       $ (153,059   $ 14,936,584   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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   
  

 

 

    

 

 

    

 

 

   

 

 

 

The amortized cost and estimated fair value, by contractual maturity, of fixed maturity securities are shown below (in thousands):

 

     September 30, 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

   $ 626,017       $ 635,488       $ 587,342       $ 601,975   

Due after one year through five years

     2,597,458         2,837,116         1,174,148         1,290,383   

Due after five years through ten years

     4,928,988         5,082,875         2,223,776         2,271,703   

Due after ten years

     515,987         541,638         381,279         388,300   

Without single maturity date

     5,851         5,175         5,000         4,800   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,674,301       $ 9,102,292       $ 4,371,545       $ 4,557,161   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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Table of Contents

Proceeds from the sales of available-for-sale securities, with the related gross realized gains and losses, are shown below (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Proceeds from sales of available-for-sale securities

   $ 33,390      $ 85,400      $ 189,438      $ 123,705   

Gross realized gains

     10,349        15,742        33,699        27,769   

Gross realized losses

     (97     (204     (623     (374

All gains and losses for securities sold throughout the year were determined using specific identification of the securities sold. During the nine months ended September 30, 2013 and 2012, bonds with a carrying value of $13,492,000 and $34,227,000, respectively, were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ creditworthiness became evident. An unrealized loss of $263,000 was established at the time of the transfer in 2013, while an other-than-temporary impairment of $11,358,000 was recorded in 2012 following the transfers at fair value.

Change in net unrealized gains (losses) on securities

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

 

     Nine months ended
September 30,
 
     2013     2012  

Bonds available-for-sale

   $ (163,493   $ 109,003   

Equity securities

     165,613        111,498   
  

 

 

   

 

 

 

Change in net unrealized gains (losses) on securities during the year

     2,120        220,501   

Adjustments for

    

Deferred policy acquisition costs

     46,643        (38,358

Participating policyholders’ interest

     1,018        (8,192

Deferred federal income tax benefit (expense)

     (18,212     (60,768
  

 

 

   

 

 

 

Change in net unrealized gains (losses) on securities, net of tax

   $ 31,569      $ 113,183   
  

 

 

   

 

 

 

 

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Table of Contents

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

 

     September 30, 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

   $ (333   $ 9,506       $ —        $ —         $ (333   $ 9,506   

Corporate debt securities

     (84,681     1,675,699         (4,997     65,551         (89,678     1,741,250   

Residential mortgage-backed securities

     (1,113     32,648         (926     13,333         (2,039     45,981   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (86,127     1,717,853         (5,923     78,884         (92,050     1,796,737   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. states and political subdivisions

     (11,290     139,386         —          —           (11,290     139,386   

Corporate debt securities

     (38,704     869,875         (3,782     88,918         (42,486     958,793   

Residential mortgage-backed securities

     (552     17,462         (136     1,902         (688     19,364   

Collateralized debt securities

     (2     208         (17     644         (19     852   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (50,548     1,026,931         (3,935     91,464         (54,483     1,118,395   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (6,232     59,238         —          —           (6,232     59,238   

Preferred stock

     (294     6,207         —          —           (294     6,207   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (6,526     65,445         —          —           (6,526     65,445   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (143,201   $ 2,810,229       $ (9,858   $ 170,348       $ (153,059   $ 2,980,577   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     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

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

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

As of September 30, 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 an issuer’s financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.

 

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Table of Contents

Credit Risk Management

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

 

     September 30, 2013     December 31, 2012  

AAA

     4.9     5.5

AA

     10.8        10.6   

A

     41.0        38.2   

BBB

     39.6        41.4   

BB and below

     3.7        4.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

     September 30, 2013     December 31, 2012  

Consumer goods

     18.9     20.3

Energy and utilities

     15.9        15.8   

Financials

     19.6        18.9   

Healthcare

     12.7        12.7   

Industrials

     8.9        9.1   

Information technology

     15.9        16.9   

Other

     8.1        6.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

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 location of the underlying collateral. Mortgage loans by property-type and geographic distribution are as follows:

 

     September 30, 2013     December 31, 2012  

Hotel and motel

     9.6     13.9

Industrial

     25.1        24.0   

Office

     34.1        34.9   

Retail

     18.6        17.7   

Other

     12.6        9.5   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     September 30, 2013     December 31, 2012  

East North Central

     18.6     18.2

East South Central

     5.5        7.1   

Mountain

     8.0        7.0   

Pacific

     11.3        13.3   

South Atlantic

     21.6        23.0   

West South Central

     28.5        23.2   

Other

     6.5        8.2   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

During the nine months ended September 30, 2013, American National foreclosed one loan with a recorded investment of $5,600,000, and four loans with a recorded investment of $34,562,000 in the same period in 2012. There were no loans sold during the nine months ended September 30, 2013, however, during the same period in 2012, American National sold one commercial loan with a recorded investement of $19,665,000 resulting in a realized gain of $2,607,000.

 

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Table of Contents

Credit Quality

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

 

     September 30, 2013      December 31, 2012  

Commercial mortgages

     

Retail

   $ —         $ 12,861   

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):

 

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

Commercial mortgages

                 

Industrial

   $ —         $ —         $ —         $ —         $ 839,095       $ 839,095   

Office

     —           —           —           —           1,141,901         1,141,901   

Retail

     —           —           —           —           627,821         627,821   

Other

     —           —           —           —           739,789         739,789   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ —         $ 3,348,606         3,348,606   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    15,243   
                 

 

 

 

Mortgage loans on real estate, net of allowance

  

            $ 3,333,363   
                 

 

 

 
     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

                 

Industrial

   $ —         $ —         $ —         $ —         $ 755,198       $ 755,198   

Office

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

Retail

     —           —           12,861         12,861         547,965         560,826   

Other

     —           —           —           —           738,592         738,592   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 12,861       $ 12,861       $ 3,142,162       $ 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 $898,000 and $4,346,000 and unamortized origination fees of $15,599,000 and $14,076,000 at September 30, 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 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.

 

13


Table of Contents

The change in allowance for credit losses in commercial mortgage loans is shown below (in thousands):

 

     Three Months Ended September 30,      Nine Months Ended September 30  
     Collectively
Evaluated for
Impairment
     Individually
Evaluated for
Impairment
     Collectively
Evaluated for
Impairment
     Individually
Evaluated for
Impairment
 

Beginning balance, 2013

   $ 12,019       $ 1,662       $ 11,519       $ 493   

Change in allowance

     1,562         —           2,062         1,169   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance, 2013

   $ 13,581       $ 1,662       $ 13,581       $ 1,662   
  

 

 

    

 

 

    

 

 

    

 

 

 

Beginning balance, 2012

   $ 11,873       $ 493       $ 10,828       $ 493   

Write down

     —           —           —           (2,277

Change in allowance

     475         —           1,520         2,277   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance, 2012

   $ 12,348       $ 493       $ 12,348       $ 493   
  

 

 

    

 

 

    

 

 

    

 

 

 

At September 30, 2013 and 2012, the recorded investment for loans collectively evaluated for impairment was $3,318,555,000 and $2,999,164,000, respectively, and the recorded investment for loans individually evaluated for impairment was $30,051,000 and $72,340,000, respectively.

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

 

     September 30, 2013      September 30, 2012  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Three months ended

           

With an allowance recorded

           

Office

   $ 23,159       $ 393       $ —         $ —     

Retail

     493         —           493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,652       $ 393       $ 493       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

     6,432         110         13,022         847   

Retail

     —           —           14,425         158   

Other

     —           —           45,277         756   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,432       $ 110       $ 72,724       $ 1,761   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended

           

With an allowance recorded

           

Office

   $ 23,234       $ 1,192       $ —         $ —     

Retail

     493         —           493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,727       $ 1,192       $ 493       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 6,439       $ 331       $ 13,050       $ 635   

Retail

     —           —           13,992         604   

Other

     —           —           45,283         2,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,439       $ 331       $ 72,325       $ 3,515   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2013      December 31, 2012  
     Recorded
Investment
     Unpaid
Principal
Balance
     Recorded
Investment
     Unpaid
Principal
Balance
 

With an allowance recorded

           

Office (related allowance of $1,169 and $0)

   $ 23,126       $ 23,304       $ —         $ —     

Retail (related allowance of $493 and $493)

     493         493         493         493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,619       $ 23,797       $ 493       $ 493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 6,432       $ 6,432       $ 36,544       $ 36,544   

Retail

     —           —           17,180         17,180   

Other

     —           —           55,320         55,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,432       $ 6,432       $ 109,044       $ 109,044   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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.

The number of mortgage loans and recorded investment in troubled debt restructuring are as follows:

 

     Nine months ended September 30, 2013      Nine months ended September 30, 2012  
     Number of
contracts
     Recorded
investment pre-
modification
     Recorded
investment post
modification
     Number of
contracts
     Recorded
investment pre-
modification
     Recorded
investment post
modification
 

Office

     1       $ 6,432       $ 6,432         1       $ 6,803       $ 6,803   

Retail

     —           —           —           1         4,319         4,319   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 6,432       $ 6,432         2       $ 11,122       $ 11,122   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There are no commitments to lend additional funds to debtors whose loans have been modified in troubled debt restructuring, and there have been no defaults on modified loans during the period.

6. INVESTMENT REAL ESTATE

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

 

     September 30, 2013     December 31, 2012  

Industrial

     17.8     18.1

Office

     25.7        21.9   

Shopping centers

     33.4        41.0   

Other

     23.1        19.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     September 30, 2013     December 31, 2012  

East North Central

     8.9     10.3

East South Central

     6.4        5.3   

Mountain

     6.9        6.2   

South Atlantic

     10.8        11.2   

West South Central

     58.7        60.8   

Other

     8.3        6.2   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

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Table of Contents

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 first be used 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.

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

 

     September 30, 2013      December 31, 2012  

Investment real estate

   $ 113,214       $ 162,502   

Short-term investments

     —           969   

Cash and cash equivalents

     2,372         3,671   

Accrued investment income

     2,146         2,641   

Other receivables

     9,165         11,709   

Other assets

     5,437         6,487   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 132,334       $ 187,979   
  

 

 

    

 

 

 

Notes payable

   $ 114,126       $ 163,384   

Other liabilities

     5,470         6,647   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 119,596       $ 170,031   
  

 

 

    

 

 

 

The total notes payable in the consolidated statements of financial position pertain to the borrowings of the 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 $12,856,000 and $18,063,000 at September 30, 2013 and December 31, 2012, respectively. The current portion of notes payable was $3,200,000 and $50,884,000 at September 30, 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, $9,375,000 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):

 

     September 30, 2013      December 31, 2012  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 153,425       $ 153,425       $ 81,548       $ 81,548   

Mortgage loans

     84,497         84,497         57,434         57,434   

Accured investment income

     631         631         309         309   

 

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Table of Contents

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 insurance or annuity contract and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands, except the number of instruments):

 

          September 30, 2013      December 31, 2012  
Derivatives Not Designated    Location in the    Number of      Notional      Estimated Fair      Number of      Notional      Estimated Fair  

as Hedging Instruments

  

Consolidated Statements of Financial Position

   Instruments      Amounts      Value      Instruments      Amounts      Value  

Equity-indexed options

   Other invested assets      379       $ 918,100       $ 129,749         356       $ 846,900       $ 82,625   

Equity-indexed embedded derivative

   Future policy benefits      30,804         782,900         111,289         22,941         722,500         75,032   

 

          Gains (Losses) Recognized in Income on Derivatives  
          Three months ended     Nine months ended  
Derivatives Not Designated    Location in the    September 30,     September 30,  

as Hedging Instruments

  

Consolidated Statements of Operations

   2013     2012     2013     2012  

Equity-indexed options

   Net investment income    $ 13,260      $ 10,448      $ 48,019      $ 21,947   

Equity-indexed embedded derivative

   Interest credited to policyholders’ account balances      (11,056     (7,756     (39,750     (16,765

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

Net investment income is shown below (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013      2012      2013      2012  

Bonds

   $ 157,888       $ 171,515       $ 479,296       $ 514,237   

Equity securities

     7,417         6,965         22,653         20,718   

Mortgage loans

     55,629         52,501         163,497         153,008   

Real estate

     11,297         8,173         10,228         16,456   

Options

     13,260         10,448         48,019         21,947   

Other invested assets

     8,845         8,588         28,795         28,083   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 254,336       $ 258,190       $ 752,488       $ 754,449   
  

 

 

    

 

 

    

 

 

    

 

 

 

Realized investment gains (losses) are shown below (in thousands):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2013     2012      2013     2012  

Bonds

   $ 9,907      $ 8,393       $ 16,826      $ 21,813   

Equity securities

     10,149        12,172         30,668        22,386   

Mortgage loans

     (1,561     2,132         (1,172     (1,190

Real estate

     25,311        3,386         61,257        3,134   

Other invested assets

     (11     822         (106     709   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 43,795      $ 26,905       $ 107,473      $ 46,852   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Table of Contents

The other-than-temporary-impairment losses are shown below (in thousands):

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2013     2012     2013     2012  

Bonds

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

Equity securities

     (312     (1,316     (3,503     (9,414
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (312   $ (13,975   $ (3,503   $ (22,073
  

 

 

   

 

 

   

 

 

   

 

 

 

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

     September 30, 2013      December 31, 2012  
     Carrying      Estimated      Carrying      Estimated  
     Amount      Fair Value      Amount      Fair Value  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 8,674,301       $ 9,102,292       $ 9,009,282       $ 9,840,751   

Fixed maturity securities, bonds available-for-sale

     4,557,161         4,557,161         4,665,576         4,665,576   

Equity securities

     1,277,131         1,277,131         1,075,439         1,075,439   

Equity-indexed options

     129,749         129,749         82,625         82,625   

Mortgage loans on real estate, net of allowance

     3,333,363         3,679,838         3,143,011         3,441,645   

Policy loans

     395,709         395,709         395,333         395,333   

Short-term investments

     339,479         339,479         313,086         313,086   

Separate account assets

     931,947         931,947         841,389         841,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,638,840       $ 20,413,306       $ 19,525,741       $ 20,655,844   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,495,111       $ 9,495,111       $ 9,987,431       $ 9,987,431   

Embedded derivative liability for equity-indexed contracts

     111,289         111,289         75,032         75,032   

Notes payable

     114,126         114,126         163,384         163,384   

Separate account liabilities

     931,947         931,947         841,389         841,389   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,652,473       $ 10,652,473       $ 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.

 

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Table of Contents

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.

The pricing service evaluates each asset class based on relevant market information, 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 that the pricing 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 September 30, 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 quality, region, property type, lien number, payment type and current status.

 

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Table of Contents

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 September 30, 2013 and December 31, 2012, the implied volatility used to estimate embedded derivative value ranges from 14.5% to 29.4% and 15.9.% to 30.1%, respectively.

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 —The carrying value of investment contracts 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 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.

 

20


Table of Contents

Quantitative Disclosures

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

 

     Fair Value Measurement as of September 30, 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

   $ 1,986       $ —         $ 1,986       $ —     

U.S. states and political subdivisions

     379,057         —           379,057         —     

Foreign governments

     32,097         —           32,097         —     

Corporate debt securities

     8,220,661         —           8,174,665         45,996   

Residential mortgage-backed securities

     446,145         —           445,139         1,006   

Collateralized debt securities

     2,613         —           —           2,613   

Other debt securities

     19,733         —           19,733         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     9,102,292         —           9,052,677         49,615   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     22,390         —           22,390         —     

U.S. states and political subdivisions

     623,324         —           620,804         2,520   

Foreign governments

     6,803         —           6,803         —     

Corporate debt securities

     3,773,970         —           3,761,613         12,357   

Residential mortgage-backed securities

     69,809         —           67,683         2,126   

Commercial mortgage-backed securities

     33,185         —           —           33,185   

Collateralized debt securities

     16,574         —           14,614         1,960   

Other debt securities

     11,106         —           11,106         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,557,161         —           4,505,013         52,148   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,239,295         1,239,295         —           —     

Preferred stock

     37,836         37,836         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,277,131         1,277,131         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     129,749         —           —           129,749   

Mortgage loans on real estate

     3,679,838         —           3,679,838         —     

Policy loans

     395,709         —           —           395,709   

Short-term investments

     339,479         —           339,479         —     

Separate account assets

     931,947         —           931,947         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,413,306       $ 1,277,131       $ 18,508,954       $ 627,221   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,495,111       $ —         $ —         $ 9,495,111   

Embedded derivative liability for equity-indexed contracts

     111,289         —           —           111,289   

Notes payable

     114,126         —           —           114,126   

Separate account liabilities

     931,947         —           931,947         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,652,473       $ —         $ 931,947       $ 9,720,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

    Level 3  
    Three months ended September 30,     Nine months ended September 30,  
    Assets     Liability     Assets     Liability  
          Equity-                 Equity-        
    Investment     Indexed     Embedded     Investment     Indexed     Embedded  
    Securities     Options     Derivative     Securities     Options     Derivative  

Beginning balance, 2013

  $ 55,558      $ 115,558      $ 100,963      $ 107,036      $ 82,625      $ 75,032   

Total realized and unrealized investment gains/losses included in other comprehensive income

    (633     —          —          10,496        —          —     

Net fair value change included in realized gains/losses

    (1     —          —          218        —          —     

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

    —          11,775        —          —          42,941        —     

Net change included in interest credited

    —          —          11,056        —          —          39,750   

Purchases, sales and settlements or maturities

           

Purchases

    45        4,470        —          2,115        12,178        —     

Sales

    (138     —          —          (14,272     —          —     

Settlements or maturities

    —          (2,054     —          —          (7,995     —     

Premiums less benefits

    —          —          (730     —          —          (3,493

Gross transfers into Level 3

    157        —          —          157        —          —     

Gross transfers out of Level 3

    (2,840     —          —          (53,602     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance September 30, 2013

  $ 52,148      $ 129,749      $ 111,289      $ 52,148      $ 129,749      $ 111,289   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
    Level 3  
    Three months ended September 30,     Nine months ended September 30,  
    Assets     Liability     Assets     Liability  
    Investment
Securities
    Equity-
Indexed
Options
    Embedded
Derivative
    Investment
Securities
    Equity-
Indexed
Options
    Embedded
Derivative
 

Beginning balance, 2012

  $ 47,921      $ 77,136      $ 72,194      $ 15,815      $ 65,188      $ 63,275   

Total realized and unrealized investment gains/losses included in other comprehensive income

    11,372        —          —          10,836        —          —     

Net fair value change included in realized gains/losses

    (11,471     —          —          (11,441     —          —     

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

    —          9,708        —          —          17,878        —     

Net change included in interest credited

    —          —          7,756        —          —          16,765   

Purchases, sales and settlements or maturities

           

Purchases

    46        2,991        —          598        11,472        —     

Sales

    (3     —          —          (269     —          —     

Settlements or maturities

    —          (1,359     —          (395     (6,062     —     

Premiums less benefits

    —          —          374        —          —          284   

Transfers from held to maturity

    13,118            13,118       

Gross transfers into Level 3

    2        —          —          32,723        —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance, 2012

  $ 60,985      $ 88,476      $ 80,324      $ 60,985      $ 88,476      $ 80,324   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $39,652,000 and $16,334,000 relating to assets still held at September 30, 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.

 

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10. DEFERRED POLICY ACQUISITION COSTS

Deferred policy acquisition costs 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

     80,226        38,467        9,457        157,206        285,356   

Amortization

     (59,201     (66,129     (11,537     (168,057     (304,924

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

     5,654        40,989        —          —          46,643   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     26,679        13,327        (2,080     (10,851     27,075   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2013

   $ 680,095      $ 419,867      $ 47,126      $ 127,662      $ 1,274,750   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

11. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES

The liability for unpaid claims and claim adjustment expenses (“claims”) 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 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.

Information regarding the liability for unpaid claims is shown below (in thousands):

 

     Nine months  ended
September 30,
 
     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

     743,194        779,602   

Prior years

     (50,553     (46,037
  

 

 

   

 

 

 

Total incurred claims

     692,641        733,565   
  

 

 

   

 

 

 

Paid claims related to

    

Current

     442,100        454,183   

Prior years

     266,472        284,025   
  

 

 

   

 

 

 

Total paid claims

     708,572        738,208   
  

 

 

   

 

 

 

Net balance

     895,231        940,442   

Plus reinsurance recoverables

     226,822        238,268   
  

 

 

   

 

 

 

Unpaid claims balance, ending

   $ 1,122,053      $ 1,178,710   
  

 

 

   

 

 

 

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 attributable to insured events of prior years decreased by approximately $50,553,000 during the first nine months of 2013 and $46,037,000 during the same period in 2012.

 

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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 September 30,     Nine months ended September 30,  
     2013     2012     2013     2012  
     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  

Income tax expense on pre-tax income

   $ 42,302        35.0   $ 31,285        35.0   $ 93,527        35.0   $ 59,989        35.0

Tax-exempt investment income

     (1,502     (1.2     (1,827     (2.0     (4,700     (1.8     (5,569     (3.2

Dividend exclusion

     (1,710     (1.4     (1,501     (1.7     (4,802     (1.8     (4,453