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, 2014

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   x    Accelerated filer   ¨
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, 2014, there were 26,871,942 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):      3   
   Consolidated Statements of Financial Position as of September 30, 2014 and December 31, 2013      3   
   Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013      4   
  

Consolidated Statements of Comprehensive Income (Loss) for the three and nine months ended September 30, 2014 and 2013

     5   
  

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2014 and 2013

     5   
   Consolidated Statements of Cash Flows for the nine months ended September 30, 2014 and 2013      6   
   Notes to the Unaudited Consolidated Financial Statements      7   
ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      32   
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      51   
ITEM 4.    CONTROLS AND PROCEDURES      51   
   PART II – OTHER INFORMATION   
ITEM 1.    LEGAL PROCEEDINGS      52   
ITEM 1A.    RISK FACTORS      52   
ITEM 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      52   
ITEM 3.    DEFAULTS UPON SENIOR SECURITIES      52   
ITEM 4.    MINE SAFETY DISCLOSURES      52   
ITEM 5.    OTHER INFORMATION      52   
ITEM 6.    EXHIBIT INDEX      53   

 

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,
2014
    December 31,
2013
 

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair Value $8,826,253 and $8,823,068)

   $ 8,364,731      $ 8,491,347   

Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $4,700,235 and $4,456,391)

     4,926,218        4,599,673   

Equity securities, at fair value
(Cost $745,733 and $741,080)

     1,494,471        1,410,608   

Mortgage loans on real estate, net of allowance

     3,318,552        3,299,242   

Policy loans

     404,705        397,407   

Investment real estate, net of accumulated depreciation of $181,125 and $211,575

     458,116        507,142   

Short-term investments

     346,343        495,386   

Other invested assets

     202,131        201,442   
  

 

 

   

 

 

 

Total investments

     19,515,267        19,402,247   
  

 

 

   

 

 

 

Cash and cash equivalents

     136,142        117,946   

Investments in unconsolidated affiliates

     335,419        341,012   

Accrued investment income

     198,559        194,830   

Reinsurance recoverables

     410,525        414,743   

Prepaid reinsurance premiums

     55,681        57,869   

Premiums due and other receivables

     294,678        279,929   

Deferred policy acquisition costs

     1,249,704        1,277,733   

Property and equipment, net

     119,259        107,070   

Current tax receivable

     4,403        18,507   

Other assets

     148,448        142,043   

Separate account assets

     992,615        970,954   
  

 

 

   

 

 

 

Total assets

   $ 23,460,700      $ 23,324,883   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,736,156      $ 2,677,213   

Annuity

     982,720        903,437   

Accident and health

     70,699        71,941   

Policyholders’ account balances

     10,893,918        11,181,650   

Policy and contract claims

     1,289,997        1,297,646   

Unearned premium reserve

     779,934        739,878   

Other policyholder funds

     332,411        326,885   

Liability for retirement benefits

     143,400        160,853   

Notes payable

     109,349        113,849   

Deferred tax liabilities, net

     286,545        220,428   

Other liabilities

     433,855        456,818   

Separate account liabilities

     992,615        970,954   
  

 

 

   

 

 

 

Total liabilities

     19,051,599        19,121,552   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value,—Authorized 50,000,000
Issued 30,832,449 and 30,832,449,
Outstanding 26,871,942 and 26,895,188 shares

     30,832        30,832   

Additional paid-in capital

     8,862        4,650   

Accumulated other comprehensive income

     504,338        413,712   

Retained earnings

     3,954,731        3,838,821   

Treasury stock, at cost

     (101,941     (97,441
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,396,822        4,190,574   

Noncontrolling interest

     12,279        12,757   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,409,101        4,203,331   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 23,460,700      $ 23,324,883   
  

 

 

   

 

 

 

See accompanying notes to the 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,  
    2014     2013     2014     2013  

PREMIUMS AND OTHER REVENUE

       

Premiums

       

Life

  $ 79,492      $ 75,278      $ 224,165      $ 215,479   

Annuity

    34,661        23,412        148,250        89,733   

Accident and health

    53,454        52,839        164,169        159,100   

Property and casualty

    279,429        271,270        820,953        801,106   

Other policy revenues

    55,255        52,975        167,041        152,910   

Net investment income

    236,489        254,336        697,604        752,488   

Realized investment gains (losses)

    (649     43,795        27,548        107,473   

Other-than-temporary impairments

    (1,608     (312     (3,045     (3,503

Other income

    9,647        11,911        26,707        29,423   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

    746,170        785,504        2,273,392        2,304,209   
 

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

       

Policyholder benefits

       

Life

    83,740        83,821        257,505        246,896   

Annuity

    43,893        34,860        180,372        118,155   

Claims incurred

       

Accident and health

    33,193        34,404        109,859        106,378   

Property and casualty

    180,413        182,809        563,650        581,042   

Interest credited to policyholders’ account balances

    83,746        98,862        258,952        309,738   

Commissions for acquiring and servicing policies

    97,608        94,504        299,992        273,360   

Other operating expenses

    118,002        128,115        357,043        381,850   

Change in deferred policy acquisition costs

    10,800        7,265        10,854        19,568   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

    651,395        664,640        2,038,227        2,036,987   
 

 

 

   

 

 

   

 

 

   

 

 

 

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

    94,775        120,864        235,165        267,222   
 

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

       

Current

    23,639        36,541        55,690        63,920   

Deferred

    3,110        (782     9,974        7,959   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

    26,749        35,759        65,664        71,879   

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

    2,735        121        10,405        9,774   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    70,761        85,226        179,906        205,117   

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

    2,877        2,613        1,883        4,364   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) attributable to American National

  $ 67,884      $ 82,613      $ 178,023      $ 200,753   
 

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

       

Earnings per share

       

Basic

  $ 2.53      $ 3.08      $ 6.64      $ 7.49   

Diluted

    2.52        3.07        6.61        7.46   

Cash dividends to common stockholders

    0.77        0.77        2.31        2.31   

Weighted average common shares outstanding

    26,805,535        26,780,313        26,800,835        26,789,564   

Weighted average common shares outstanding and dilutive potential common shares

    26,911,507        26,905,093        26,919,414        26,910,017   

See accompanying notes to the 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,  
     2014     2013     2014     2013  

Net income (loss)

   $ 70,761      $ 85,226      $ 179,906      $ 205,117   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Change in net unrealized gain (loss) on securities

     (17,708     26,747        89,051        31,569   

Foreign currency transaction and translation adjustments

     (476     (625     (577     (211

Defined pension benefit plan adjustment

     718        2,876        2,152        8,627   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (17,466     28,998        90,626        39,985   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     53,295        114,224        270,532        245,102   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     2,877        2,613        1,883        4,364   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to American National

   $ 50,418      $ 111,611      $ 268,649      $ 240,738   
  

 

 

   

 

 

   

 

 

   

 

 

 

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,  
     2014     2013  

Common Stock

    

Balance at beginning and end of the period

   $ 30,832      $ 30,832   
  

 

 

   

 

 

 

Additional Paid-In Capital

    

Balance as of January 1,

     4,650        —     

Reissuance of treasury shares

     1,635        3,012   

Income tax effect from restricted stock arrangement

     —          80   

Amortization of restricted stock

     2,577        1,028   
  

 

 

   

 

 

 

Balance at end of period

     8,862        4,120   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance as of January 1,

     413,712        242,010   

Other comprehensive income (loss)

     90,626        39,985   
  

 

 

   

 

 

 

Balance at end of the period

     504,338        281,995   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     3,838,821        3,653,280   

Net income (loss) attributable to American National

     178,023        200,753   

Cash dividends to common stockholders

     (62,113     (62,122
  

 

 

   

 

 

 

Balance at end of the period

     3,954,731        3,791,911   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (97,441     (98,286

Reissuance (purchases) of treasury shares

     (4,500     844   
  

 

 

   

 

 

 

Balance at end of the period

     (101,941     (97,442
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     12,757        11,491   

Contributions

     478        456   

Distributions

     (2,839     (2,675

Gain (loss) attributable to noncontrolling interest

     1,883        4,364   
  

 

 

   

 

 

 

Balance at end of the period

     12,279        13,636   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 4,409,101      $ 4,025,052   
  

 

 

   

 

 

 

See accompanying notes to the 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,  
     2014     2013  

OPERATING ACTIVITIES

    

Net income (loss)

   $ 179,906      $ 205,117   

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

    

Realized investment (gains) losses

     (27,548     (107,473

Other-than-temporary impairments

     3,045        3,503   

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

     6,316        4,460   

Net capitalized interest on policy loans and mortgage loans

     (23,988     (20,156

Depreciation

     26,421        24,873   

Interest credited to policyholders’ account balances

     258,952        309,738   

Charges to policyholders’ account balances

     (167,041     (152,910

Deferred federal income tax (benefit) expense

     9,974        7,959   

Equity in (earnings) losses of unconsolidated affiliates

     (10,405     (9,774

Distributions from equity method investments

     679        18,925   

Changes in

    

Policyholder liabilities

     166,392        48,816   

Deferred policy acquisition costs

     10,854        19,568   

Reinsurance recoverables

     4,218        17,883   

Premiums due and other receivables

     (15,189     (26,248

Prepaid reinsurance premiums

     2,188        4,945   

Accrued investment income

     (3,729     3,630   

Current tax receivable/payable

     14,104        30,975   

Liability for retirement benefits

     (17,453     8,093   

Other, net

     (44,626     (38,730
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     373,070        353,194   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     442,748        1,209,058   

Available-for-sale securities

     705,681        702,625   

Investment real estate

     45,843        84,371   

Mortgage loans

     421,023        446,480   

Policy loans

     41,331        43,911   

Other invested assets

     34,537        11,021   

Disposals of property and equipment

     2,571        674   

Distributions from unconsolidated affiliates

     49,403        22,834   

Payment for the purchase/origination of

    

Held-to-maturity securities

     (356,452     (856,086

Available-for-sale securities

     (883,346     (737,342

Investment real estate

     (28,865     (35,240

Mortgage loans

     (444,140     (638,690

Policy loans

     (21,721     (19,564

Other invested assets

     (14,376     (13,690

Additions to property and equipment

     (13,038     (17,958

Contributions to unconsolidated affiliates

     (40,333     (94,078

Change in short-term investments

     149,043        (26,393

Other, net

     3,834        8,561   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     93,743        90,494   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     783,255        654,346   

Policyholders’ account withdrawals

     (1,162,898     (1,164,806

Change in notes payable

     (4,500     (49,258

Dividends to stockholders

     (62,113     (62,122

Proceeds from (payments to) noncontrolling interest

     (2,361     (2,219
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     (448,617     (624,059
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     18,196        (180,371

Beginning of the period

     117,946        303,008   
  

 

 

   

 

 

 

End of period

   $ 136,142      $ 122,637   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NOTES TO THE 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, annuities, health insurance, and property and casualty insurance. Business is conducted in 50 states, the District of Columbia, Puerto Rico, Guam and American Samoa.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES

The consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and are reported in U.S. currency. American National consolidates entities that are wholly-owned and those in which American National owns less than 100% but controls, as well as variable interest entities in which American National is the primary beneficiary. Intercompany balances and 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 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, 2013. 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, 2014 and, unless stated otherwise, did not have a material effect on the consolidated financial statements.

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. The amended guidance requires the entity to measure obligations resulting from joint and several liability arrangements as the sum of the amount the reporting entity agreed with co-obligors to pay and any additional amounts it expects to pay on behalf of one or more co-obligors.

 

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Future Adoption of New Accounting Standards—The FASB issued the following accounting standards relevant to American National:

Guidance that allows investors to elect the use of proportional amortization method to account for investments in qualified affordable housing projects, if certain conditions are met. The new guidance replaces the effective yield method and allows an investor to amortize the cost of its investment, in proportion to the tax credits and other tax benefits it receives, to income tax expense. The guidance requires new disclosure for all investors for all investments in qualified affordable housing projects, regardless of the accounting method used for those investments.

Guidance that will supersede most existing revenue recognition requirements in U.S. Generally Accepted Accounting Principles. The Standard will become effective for American National on January 1, 2017 and allows for both retrospective and prospective methods of adoption. American National is in the process of determining the adoption method and is currently assessing the impact of this standard.

 

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4. INVESTMENTS IN SECURITIES

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

 

     September 30, 2014  
     Cost or
Amortized Cost
     Gross
Unrealized
Gains
     Gross
Unrealized
(Losses)
    Fair Value  

Fixed maturity securities, bonds held-to-maturity

          

U.S. states and political subdivisions

   $ 327,022       $ 25,144       $ (67   $ 352,099   

Foreign governments

     29,122         1,641         —          30,763   

Corporate debt securities

     7,636,327         453,220         (40,292     8,049,255   

Residential mortgage-backed securities

     353,444         22,178         (1,921     373,701   

Collateralized debt securities

     2,236         223         —          2,459   

Other debt securities

     16,580         1,396         —          17,976   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     8,364,731         503,802         (42,280     8,826,253   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     24,073         783         —          24,856   

U.S. states and political subdivisions

     746,801         33,661         (2,940     777,522   

Foreign governments

     5,000         1,900         —          6,900   

Corporate debt securities

     3,866,518         206,396         (16,342     4,056,572   

Residential mortgage-backed securities

     45,644         2,112         (754     47,002   

Collateralized debt securities

     12,199         1,175         (8     13,366   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,700,235         246,027         (20,044     4,926,218   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     722,015         734,419         (3,791     1,452,643   

Preferred stock

     23,718         18,123         (13     41,828   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     745,733         752,542         (3,804     1,494,471   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,810,699       $ 1,502,371       $ (66,128   $ 15,246,942   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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

Fixed maturity securities, bonds held-to-maturity

          

U.S. treasury and government

   $ 1,738       $ 6       $ —        $ 1,744   

U.S. states and political subdivisions

     346,240         16,945         (529     362,656   

Foreign governments

     29,099         2,505         —          31,604   

Corporate debt securities

     7,700,559         410,232         (116,900     7,993,891   

Residential mortgage-backed securities

     400,619         20,711         (2,647     418,683   

Collateralized debt securities

     2,366         225         —          2,591   

Other debt securities

     10,726         1,173         —          11,899   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     8,491,347         451,797         (120,076     8,823,068   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     21,751         725         —          22,476   

U.S. states and political subdivisions

     630,199         22,118         (13,756     638,561   

Foreign governments

     5,000         1,649         —          6,649   

Corporate debt securities

     3,689,349         171,717         (54,033     3,807,033   

Residential mortgage-backed securities

     61,135         2,940         (1,068     63,007   

Commercial mortgage-backed securities

     18,223         11,037         —          29,260   

Collateralized debt securities

     13,884         1,320         (18     15,186   

Other debt securities

     16,850         679         (28     17,501   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     4,456,391         212,185         (68,903     4,599,673   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     717,390         653,967         (2,362     1,368,995   

Preferred stock

     23,690         18,301         (378     41,613   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     741,080         672,268         (2,740     1,410,608   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,688,818       $ 1,336,250       $ (191,719   $ 14,833,349   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

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The amortized costs and fair values, by contractual maturity, of fixed maturity securities are shown below (in thousands):

 

     September 30, 2014  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 902,160       $ 921,894       $ 345,538       $ 351,549   

Due after one year through five years

     2,046,277         2,257,421         855,878         932,247   

Due after five years through ten years

     4,988,483         5,196,155         3,029,503         3,154,290   

Due after ten years

     421,961         445,711         464,316         483,132   

Without single maturity date

     5,850         5,072         5,000         5,000   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 8,364,731       $ 8,826,253       $ 4,700,235       $ 4,926,218   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

Proceeds from 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,  
    2014     2013     2014     2013  

Proceeds from sales of available-for-sale securities

  $ 2,671      $ 33,390      $ 139,137      $ 189,438   

Gross realized gains

    228        10,349        24,994        33,699   

Gross realized losses

    —          (97     (2,123     (623

All gains and losses for securities sold throughout the periods presented were determined using specific identification of the securities sold. During the nine months ended September 30, 2014 and 2013, bonds with a carrying value of $44,781,000 and $13,492,000, respectively, were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ creditworthiness became evident. An unrealized gain of $1,301,000 and unrealized loss of $263,000 were established in 2014 and 2013, respectively 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,  
     2014     2013  

Bonds available-for-sale

   $ 82,701      $ (163,493

Equity securities

     79,211        165,613   
  

 

 

   

 

 

 

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

     161,912        2,120   

Adjustments for

    

Deferred policy acquisition costs

     (17,175     46,643   

Participating policyholders’ interest

     (8,526     1,018   

Deferred federal income tax benefit (expense)

     (47,160     (18,212
  

 

 

   

 

 

 

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

   $ 89,051      $ 31,569   
  

 

 

   

 

 

 

 

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Table of Contents

The gross unrealized losses and fair value of the investment 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, 2014  
     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

   $ (2   $ 588       $ (65   $ 2,455       $ (67   $ 3,043   

Corporate debt securities

     (7,727     511,249         (32,565     799,719         (40,292     1,310,968   

Residential mortgage-backed securities

     (225     18,589         (1,696     31,203         (1,921     49,792   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (7,954     530,426         (34,326     833,377         (42,280     1,363,803   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. Treasury & other U.S. Gov corporations and agencies

     —          476         —          —           —          476   

U.S. states and political subdivisions

     (449     37,887         (2,491     79,485         (2,940     117,372   

Corporate debt securities

     (5,167     372,578         (11,175     338,870         (16,342     711,448   

Residential mortgage-backed securities

     (147     10,908         (607     13,835         (754     24,743   

Collateralized debt securities

     (1     117         (7     361         (8     478   

Other Debt Securities

     —          —           —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (5,764     421,966         (14,280     432,551         (20,044     854,517   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (3,791     37,132         —          —           (3,791     37,132   

Preferred stock

     (13     1,874         —          —           (13     1,874   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (3,804     39,006         —          —           (3,804     39,006   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (17,522   $ 991,398       $ (48,606   $ 1,265,928       $ (66,128   $ 2,257,326   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     December 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

   $ (529   $ 22,430       $ —        $ —         $ (529   $ 22,430   

Corporate debt securities

     (104,308     1,916,758         (12,592     109,603         (116,900     2,026,361   

Residential mortgage-backed securities

     (1,718     31,715         (929     13,514         (2,647     45,229   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (106,555     1,970,903         (13,521     123,117         (120,076     2,094,020   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. Treasury & other U.S. Gov corporations and agencies

     —          725         —          —           —          725   

U.S. states and political subdivisions

     (13,271     168,093         (485     2,905         (13,756     170,998   

Corporate debt securities

     (49,198     1,083,677         (4,835     92,004         (54,033     1,175,681   

Residential mortgage-backed securities

     (978     16,835         (90     1,872         (1,068     18,707   

Collateralized debt securities

     (3     205         (15     587         (18     792   

Other debt securities

     (28     10,027         —          —           (28     10,027   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (63,478     1,279,562         (5,425     97,368         (68,903     1,376,930   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (2,362     29,978         —          —           (2,362     29,978   

Preferred stock

     (378     6,123         —          —           (378     6,123   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (2,740     36,101         —          —           (2,740     36,101   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (172,773   $ 3,286,566       $ (18,946   $ 220,485       $ (191,719   $ 3,507,051   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

As of September 30, 2014, 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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Credit Risk Management

Bonds distributed by credit quality rating, using both S&P and Moody’s ratings, are shown below:

 

     September 30, 2014     December 31, 2013  

AAA

     4.9     4.9

AA

     12.5        11.3   

A

     40.1        40.7   

BBB

     39.0        39.2   

BB and below

     3.5        3.9   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

     September 30, 2014     December 31, 2013  

Consumer goods

     19.2     19.8

Energy and utilities

     14.7        15.0   

Financials

     18.8        19.3   

Healthcare

     13.8        12.7   

Industrials

     8.4        9.0   

Information technology

     16.3        15.7   

Other

     8.8        8.5   
  

 

 

   

 

 

 

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, 2014     December 31, 2013  

Hotel and motel

     11.3     10.0

Industrial

     21.2        24.9   

Office

     35.6        34.0   

Retail

     18.2        19.6   

Other

     13.7        11.5   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     September 30, 2014     December 31, 2013  

East North Central

     19.5     19.3

East South Central

     5.0        6.8   

Mountain

     10.3        10.0   

Pacific

     12.3        12.3   

South Atlantic

     21.0        19.6   

West South Central

     25.1        26.4   

Other

     6.8        5.6   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

As of September 30, 2014, American National was in the process of foreclosure on two loans with a recorded investment of $15,945,000; there was one loan foreclosed in the same period in 2013 with a recorded investment of $5,600,000. No loans were sold in the nine months ended September 30, 2014 and 2013.

 

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Table of Contents

Credit Quality

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):

 

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

September 30, 2014

                 

Industrial

   $ —         $ —         $ —         $ —         $ 705,801       $ 705,801   

Office

     —           —           —           —           1,191,525         1,191,525   

Retail

     —           —           —           —           610,335         610,335   

Other

     —           —           —           —           828,496         828,496   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ —         $ 3,336,157         3,336,157   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    17,605   
                 

 

 

 

Mortgage loans on real estate, net of allowance

  

            $ 3,318,552   
                 

 

 

 

December 31, 2013

                 

Industrial

   $ —         $ —         $ 2,739       $ 2,739       $ 821,741       $ 824,480   

Office

     —           —           —           —           1,124,818         1,124,818   

Retail

     —           —           —           —           651,236         651,236   

Other

     —           —           —           —           710,889         710,889   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 2,739       $ 2,739       $ 3,308,684         3,311,423   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

                    12,181   
                 

 

 

 

Mortgage loans on real estate, net of allowance

  

            $ 3,299,242   
                 

 

 

 

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

 

     September 30,
2014
     December 31,
2013
 

Industrial

   $       $ 2,739   

Total mortgage loans are net of unamortized discounts of $708,000 and $852,000 and unamortized origination fees of $16,378,000 and $15,709,000 at September 30, 2014 and December 31, 2013, respectively. No unearned income is included in these amounts.

Allowance for Credit Losses

Loans not evaluated individually for collectability 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.

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

 

     Nine months ended September 30, 2014  
     Collectively
Evaluated

for Impairment
    Individually
Evaluated

for Impairment
 

Beginning balance, 2014

   $ 11,688      $ 493   

Change Due to Factor Development

     (441     —     

Change in allowance

     775        5,090   
  

 

 

   

 

 

 

Ending balance, 2014

   $ 12,022      $ 5,583   
  

 

 

   

 

 

 

At September 30, 2014 and December 31, 2013, the recorded investment for loans collectively evaluated for impairment was $3,279,133,000 and $3,294,235,000, respectively, and the recorded investment for loans individually evaluated for impairment was $57,024,000 and $17,188,000, respectively.

 

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Table of Contents

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

 

     September 30, 2014      September 30, 2013  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

Three months ended

           

With an allowance recorded

           

Office

   $ 27,564       $ 547       $ 23,159       $ 393   

Retail

     —           —           493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 27,564       $ 547       $ 23,652       $ 393   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 26,941       $ 431       $ 6,432       $ 110   

Industrial

     2,702         36         —           —     

Retail

     851         11         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,494       $ 478       $ 6,432       $ 110   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended

           

With an allowance recorded

           

Office

   $ 29,421       $ 1,663       $ 23,234       $ 1,192   

Retail

     —           —           493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,421       $ 1,663       $ 23,727       $ 1,192   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 27,019       $ 1,298       $ 6,439       $ 331   

Industrial

     2,721         110         —           —     

Retail

     1,149         16         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,889       $ 1,424       $ 6,439       $ 331   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2014      December 31, 2013  
     Recorded
Investment
     Unpaid
Principal
Balance
     Recorded
Investment
     Unpaid
Principal
Balance
 

With an allowance recorded

           

Office

   $ 26,662       $ 27,947       $ —         $ —     

Retail

     —           —           493         493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,662       $ 27,947       $ 493       $ 493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 26,941       $ 26,941       $ 12,377       $ 12,377   

Industrial

     2,702         2,702         2,739         2,739   

Retail

     719         719         1,579         1,579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,362       $ 30,362       $ 16,695       $ 16,695   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

American National has granted concessions to mortgage loan borrowers related to their ability to pay the loans which are 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 decrease significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

 

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The number of mortgage loans and recorded investments in troubled debt restructuring are as follows (in thousands except for number of contracts):

 

   

Nine months ended September 30,

 
   

2014

     2013  
   

Number of

contracts

   Recorded
investment pre-
modification
     Recorded
investment post
modification
     Number of
contracts
     Recorded
investment pre-
modification
     Recorded
investment post
modification
 

Office

  3    $ 34,400       $ 30,996         1       $ 6,432       $ 6,432   

There were no commitments to lend additional funds to debtors whose loans have been modified in troubled debt restructuring. One restructured loan is in the process of foreclosure.

6. INVESTMENT REAL ESTATE

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

 

     September 30, 2014     December 31, 2013  

Industrial

     13.8     12.3

Office

     20.7        23.1   

Retail

     46.4        43.4   

Other

     19.1        21.2   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     September 30, 2014     December 31, 2013  

East North Central

     4.8     7.8

East South Central

     4.8        5.4   

Mountain

     6.5        6.0   

Pacific

     7.4        5.5   

South Atlantic

     12.7        13.4   

West South Central

     57.1        59.0   

Other

     6.7        2.9   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

American National regularly invests in real estate partnerships and joint ventures. American National frequently 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 their liabilities. 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 2014 or 2013.

 

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The assets and liabilities relating to the VIEs included in the consolidated financial statements are as follows (in thousands):

 

     September 30, 2014      December 31, 2013  

Investment real estate

   $ 138,994       $ 123,624   

Cash and cash equivalents

     1,761         2,154   

Accrued investment income

     412         2,197   

Other receivables

     7,986         8,488   

Other assets

     5,686         6,016   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 154,839       $ 142,479   
  

 

 

    

 

 

 

Notes payable

   $ 109,349       $ 113,849   

Other liabilities

     4,595         6,680   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 113,944       $ 120,529   
  

 

 

    

 

 

 

The notes payable in the consolidated statements of financial position pertain to the borrowings of the consolidated VIEs. The liability of American National Insurance Company relating to notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $14,948,000 and $12,782,000 at September 30, 2014 and December 31, 2013, respectively. The current portion of notes payable was $543,000 and $3,199,000 at September 30, 2014 and December 31, 2013, respectively. The average interest rate on the current portion of the notes payable was 4.25% during 2014. The total long-term portion of notes payable consists of three notes with the following interest rates: 4.0 %, and adjusted LIBOR plus 1.0%. 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 invests, 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 owners. The following table presents the carrying amount and maximum exposure to loss relating to unconsolidated VIEs (in thousands):

 

     September 30, 2014      December 31, 2013  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 195,794       $ 195,794       $ 195,794       $ 195,794   

Mortgage loans

     153,626         153,626         101,648         101,648   

Accrued investment income

     617         617         454         454   

 

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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 policies are exposed. Equity-indexed policies include a fixed host universal-life insurance or annuity policy and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands, except the number of instruments):

 

        September 30, 2014     December 31, 2013  

Derivatives Not Designated
as Hedging Instruments

 

Location in the
Consolidated Statements of Financial Position

  Number of
Instruments
    Notional
Amounts
    Estimated
Fair Value
    Number of
Instruments
    Notional
Amounts
    Estimated
Fair Value
 

Equity-indexed options

  Other invested assets     416      $ 1,034,600      $ 170,343        394      $ 951,400      $ 164,753   

Equity-indexed embedded derivative

  Policyholders’ account balances     39,723        957,600        191,760        33,579        819,200        148,435   

 

Derivatives Not Designated

as Hedging Instruments

 

Location in the

Consolidated Statements of

Operations

  Gains (Losses) Recognized in Income on Derivatives  
    Three months ended September 30,     Nine months ended September 30,  
    2014     2013     2014     2013  

Equity-indexed options

  Net investment income   $ 6,562      $ 13,260      $ 29,011      $ 48,019   

Equity-indexed embedded derivative

  Interest credited to policyholders’ account balances     (1,762     (11,056     (16,484     (39,750

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,  
     2014      2013      2014      2013  

Bonds

   $ 148,715       $ 157,888       $ 450,110       $ 479,296   

Equity securities

     8,146         7,417         26,488         22,653   

Mortgage loans

     51,652         55,629         159,010         163,497   

Real estate

     14,245         11,297         11,347         10,228   

Options

     6,562         13,260         29,011         48,019   

Other invested assets

     7,169         8,845         21,638         28,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 236,489       $ 254,336       $ 697,604       $ 752,488   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended September 30,     Nine months ended September 30,  
     2014     2013     2014     2013  

Bonds

   $ 1,925      $ 9,907      $ 21,837      $ 16,826   

Equity securities

     229        10,149        10,293        30,668   

Mortgage loans

     (1,551     (1,561     (5,424     (1,172

Real estate

     (1,242     25,311        1,787        61,257   

Other invested assets

     (10     (11     (945     (106
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (649   $ 43,795      $ 27,548      $ 107,473   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

     Three months ended September 30,     Nine months ended September 30,  
     2014     2013     2014     2013  

Bonds

   $ —        $ —        $ (41   $ —     

Equity securities

     (1,608     (312     (3,004     (3,503
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (1,608   $ (312   $ (3,045   $ (3,503
  

 

 

   

 

 

   

 

 

   

 

 

 

9. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

 

     September 30, 2014      December 31, 2013  
     Carrying             Carrying         
     Amount      Fair Value      Amount      Fair Value  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 8,364,731       $ 8,826,253       $ 8,491,347       $ 8,823,068   

Fixed maturity securities, bonds available-for-sale

     4,926,218         4,926,218         4,599,673         4,599,673   

Equity securities

     1,494,471         1,494,471         1,410,608         1,410,608   

Equity-indexed options

     170,343         170,343         164,753         164,753   

Mortgage loans on real estate, net of allowance

     3,318,552         3,515,463         3,299,242         3,470,663   

Policy loans

     404,705         404,705         397,407         397,407   

Short-term investments

     346,343         346,343         495,386         495,386   

Separate account assets

     992,615         992,615         970,954         970,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,017,978       $ 20,676,411       $ 19,829,370       $ 20,332,512   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,039,356       $ 9,039,356       $ 9,423,122       $ 9,423,122   

Embedded derivative liability for equity-indexed contracts

     191,760         191,760         148,435         148,435   

Notes payable

     109,349         109,349         113,849         113,849   

Separate account liabilities

     992,615         992,615         970,954         970,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,333,080       $ 10,333,080       $ 10,656,360       $ 10,656,360   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 produce an estimate of fair value only 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.

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 performed quarterly.

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 estimated fair value of mortgage loans is determined 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 priority, 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.

 

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Table of Contents

The significant unobservable input used to calculate the fair value of the embedded derivatives is equity option implied volatility. 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, 2014 and December 31, 2013, the one year implied volatility used to estimate embedded derivative value was 16.0% and 15.0%, respectively.

Other Financial InstrumentsOther 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, that it cannot be separated from the policy contract and the unpredictable timing of repayments and that settlement is at outstanding value, American National believes 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.

 

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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, 2014  
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 352,099       $ —         $ 352,099       $ —     

Foreign governments

     30,763         —           30,763         —     

Corporate debt securities

     8,049,255         —           7,998,901         50,354   

Residential mortgage-backed securities

     373,701         —           372,724         977   

Collateralized debt securities

     2,459         —           —           2,459   

Other debt securities

     17,976         —           13,113         4,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     8,826,253                    8,767,600         58,653   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,856         —           24,856         —     

U.S. states and political subdivisions

     777,522         —           775,012         2,510   

Foreign governments

     6,900         —           6,900         —     

Corporate debt securities

     4,056,572         —           4,021,030         35,542   

Residential mortgage-backed securities

     47,002         —           45,076         1,926   

Collateralized debt securities

     13,366         —           11,200         2,166   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,926,218         —           4,884,074         42,144   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,452,643         1,452,643         —           —     

Preferred stock

     41,828         41,828         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,494,471         1,494,471                         
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     170,343         —           —           170,343   

Mortgage loans on real estate

     3,515,463         —           3,515,463         —     

Policy loans

     404,705         —           —           404,705   

Short-term investments

     346,343         —           346,343         —     

Separate account assets

     992,615         —           992,615         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,676,411       $ 1,494,471       $ 18,506,095       $ 675,845   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,039,356       $ —         $ —         $ 9,039,356   

Embedded derivative liability for equity-indexed contracts

     191,760         —           —           191,760   

Notes payable

     109,349         —           —           109,349   

Separate account liabilities

     992,615         —           992,615         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,333,080       $ —         $ 992,615       $ 9,340,465   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Fair Value Measurement as of December 31, 2013  
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. treasury and government

   $ 1,744       $ —         $ 1,744       $ —     

U.S. states and political subdivisions

     362,656         —           362,656         —     

Foreign governments

     31,604         —           31,604         —     

Corporate debt securities

     7,993,891         —           7,950,418         43,473   

Residential mortgage-backed securities

     418,683         —           417,688         995   

Collateralized debt securities

     2,591         —           —           2,591   

Other debt securities

     11,899         —           11,899         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     8,823,068         —           8,776,009         47,059   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     22,476         —           22,476         —     

U.S. states and political subdivisions

     638,561         —           636,041         2,520   

Foreign governments

     6,649         —           6,649         —     

Corporate debt securities

     3,807,033         —           3,794,809         12,224   

Residential mortgage-backed securities

     63,007         —           60,841         2,166   

Commercial mortgage-backed securities

     29,260         —           —           29,260   

Collateralized debt securities

     15,186         —           13,052         2,134   

Other debt securities

     17,501         —           17,501         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,599,673         —           4,551,369         48,304   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,368,995         1,368,995         —           —     

Preferred stock

     41,613         41,613         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,410,608         1,410,608         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     164,753         —           —           164,753   

Mortgage loans on real estate

     3,470,663         —           3,470,663         —     

Policy loans

     397,407         —           —           397,407   

Short-term investments

     495,386         —           495,386         —     

Separate account assets

     970,954         —           970,954         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,332,512       $ 1,410,608       $ 18,264,381       $ 657,523   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,423,122       $ —         $ —         $ 9,423,122   

Embedded derivative liability for equity-indexed contracts

     148,435         —           —           148,435   

Notes payable

     113,849         —           —           113,849   

Separate account liabilities

     970,954         —           970,954         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,656,360       $ —         $ 970,954       $ 9,685,406   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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, 2014

   $  11,932      $ 163,861      $ 186,261      $ 48,304      $ 164,753      $ 148,435   

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

     138        —          —          (11,735     —          —     

Net fair value change included in realized gains/losses

     —          —          —          13,056        —          —     

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

     —          4,998        —          —          23,788        —     

Net change included in interest credited

     —          —          1,762        —          —          16,484   

Purchases, sales and settlements or maturities

            

Purchases

     —          3,655        —          —          12,345        —     

Sales

     (120     —          —          (37,670     —          —     

Settlements or maturities

     (5     (2,171     —          (10     (30,543     —     

Premiums less benefits

         3,737            26,841   

Gross transfers into Level 3

     30,199        —          —          30,199        —          —     

Gross transfers out of Level 3

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance September 30, 2014

   $ 42,144      $ 170,343      $ 191,760      $ 42,144      $ 170,343      $ 191,760   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gain/(loss) of $7,395,000 and $39,652,000 relating to assets still held at September 30, 2014 and 2013, respectively.

 

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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 2014

   $ 684,084      $ 424,158      $ 47,220      $ 122,271      $ 1,277,733   

Additions

     77,261        36,413        14,949        161,978        290,601   

Amortization

     (61,488     (58,469     (14,084     (167,414     (301,455

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

     (4,147     (13,028     —          —          (17,175
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     11,626        (35,084     865        (5,436     (28,029
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2014

   $ 695,710      $ 389,074      $ 48,085      $ 116,835      $ 1,249,704   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 IBNR claims. 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,  
     2014     2013  

Unpaid claims balance, beginning

   $ 1,096,299      $ 1,168,047   

Less reinsurance recoverables

     215,161        256,885   
  

 

 

   

 

 

 

Net beginning balance

     881,138        911,162   
  

 

 

   

 

 

 

Incurred related to

    

Current

     706,824        743,194   

Prior years

     (29,044     (50,553
  

 

 

   

 

 

 

Total incurred claims

     677,780        692,641   
  

 

 

   

 

 

 

Paid claims related to

    

Current

     410,077        442,100   

Prior years

     252,082        266,472   
  

 

 

   

 

 

 

Total paid claims

     662,159        708,572   
  

 

 

   

 

 

 

Net balance

     896,759        895,231   

Plus reinsurance recoverables

     235,485        226,822   
  

 

 

   

 

 

 

Unpaid claims balance, ending

   $ 1,132,244      $ 1,122,053   
  

 

 

   

 

 

 

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 $29,044,000 during the first nine months of 2014 and $50,553,000 during the same period in 2013.

 

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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,  
     2014     2013     2014     2013  
     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  

Income tax (benefit) on pre-tax income

   $ 33,171        35.0   $ 42,302        35.0   $ 82,308        35.0   $ 93,527        35.0

Tax-exempt investment income

     (1,742     (1.8     (1,502     (1.2     (4,897     (2.1     (4,700     (1.8

Dividend exclusion

     (1,700     (1.8     (1,710     (1.4     (5,253     (2.2     (4,802     (1.8

Miscellaneous tax credits, net

     (2,658     (2.8     (1,930     (1.6     (5,873     (2.5     (5,820     (2.2

Other items, net

     (322     (0.3     (1,401     (1.2     (621     (0.3     (6,326     (2.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
   $ 26,749        28.3   $ 35,759        29.6   $ 65,664        27.9   $ 71,879        26.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

American National made federal tax payments of $41,121,000 during the nine months ended September 30, 2014 and $37,784,000 during the nine months ended September 30, 2013.

Management believes 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 September 30, 2014 and December 31, 2013. However, if not utilized beforehand, approximately $2,260,000 of ordinary loss tax carryforwards will expire on December 31, 2034.

The statute of limitations for the examination of federal income tax returns by the Internal Revenue Service for years 2006 to 2009 has been extended. 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 2014 or 2013, relating to uncertain tax positions. Management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

 

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13. ACCUMULATED OTHER 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 2014

   $ 457,937      $ (43,884   $ (341   $ 413,712   

Amounts reclassified from AOCI (net of tax benefit $8,906 and expense $1,159)

     (16,539     2,152        —          (14,387

Unrealized holding gains (losses) arising during the period (net of tax expense $65,575)

     121,782            121,782   

Unrealized adjustment to DAC (net of tax benefit $6,525)

     (10,650         (10,650

Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax benefit $2,984)

     (5,542         (5,542

Foreign currency adjustment (net of tax benefit $311)

         (577     (577
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2014

   $ 546,988      $ (41,732   $ (918   $ 504,338   
  

 

 

   

 

 

   

 

 

   

 

 

 
     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   

Amounts reclassified from AOCI (net of tax benefit $12,720 and expense $4,645)

     (23,095     8,627        —          (14,468

Unrealized holding gains (losses) arising during the period (net of tax expense $13,277)

     24,658            24,658   

Unrealized adjustment to DAC (net of tax expense $17,299)

     29,344            29,344   

Unrealized (gains) losses on investments attributable to participating policyholders’ interest (net of tax expense $356)

     662            662   

Foreign currency adjustment (net of tax benefit $114)

         (211     (211
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2013

   $ 402,411      $ (120,376   $ (40   $ 281,995   
  

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

     September 30,     December 31,  
     2014     2013  

Common stock

    

Shares issued

     30,832,449        30,832,449   

Treasury shares

     (3,960,507     (3,937,261
  

 

 

   

 

 

 

Outstanding shares

     26,871,942        26,895,188   

Restricted shares

     (142,667     (190,667
  

 

 

   

 

 

 

Unrestricted outstanding shares

     26,729,275        26,704,521   
  

 

 

   

 

 

 

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 by the Board of Directors, both when setting applicable performance objectives and at the payment of the awards. The number of shares available for grants under the plan cannot exceed 2,900,000, 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.

 

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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, 2013

     74,435      $ 114.08         190,667      $ 107.54         121,369      $ 76.23   

Granted

     —          —           —          —           66,383        113.49   

Exercised

     (2,817     95.58         (48,000     108.00         (59,438     76.53   

Forfeited

     —          —           —          —           (100     113.49   

Expired

     (15,279     115.23         —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Outstanding at September 30, 2014

     56,339      $ 114.69         142,667      $ 107.39         128,214      $ 95.82   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     SAR     RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     2.0        4.1         2.0   

Exercisable shares

       

Weighted-average exercise price

   $ 114.69      $ 107.39       $ 95.82   

Weighted-average exercise price exercisable shares

     114.78        N/A         N/A   

Compensation expense (credits)

       

Three months ended September 30, 2014

   $ (19,000   $ 496,000       $ 522,000   

Three months ended September 30, 2013

     87,000        674,000         409,000   

Nine months ended September 30, 2014

     (33,000     2,577,000         6,447,000   

Nine months ended September 30, 2013

     160,000        1,703,000         8,692,000   

Fair value of liability award

       

September 30, 2014

   $ 157,000        N/A       $ 15,039,000   

December 31, 2013

     376,000        N/A         15,018,000   

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.

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 generally 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 142,667 shares are unvested.

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. RSUs generally vest after a three-year graded vesting requirement. Certain awards vest over a shorter period as a result of retirement provisions. The modification, which was applied consistently to all participants, resulted in an incremental cost of $5,310,000 for the nine months ended September 30, 2014 and added an incremental cost of $2,947,000 during the nine months ended September 30, 2013.

 

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Table of Contents

Earnings per share

Basic earnings 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 for share and per share data):

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Weighted average shares outstanding

     26,805,535         26,780,313         26,800,835         26,789,564   

Incremental shares from RS awards and RSUs

     105,972         124,780         118,579         120,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shares for diluted calculations

     26,911,507         26,905,093         26,919,414         26,910,017   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income (loss) attributable to American National

   $ 67,884       $ 82,613       $ 178,023       $ 200,753   

Basic earnings per share

   $ 2.53       $ 3.08       $ 6.64       $ 7.49   

Diluted earnings per share

     2.52         3.07         6.61         7.46   

Statutory Capital and Surplus

Risk Based Capital (“RBC”) requirements are measures insurance regulators use to evaluate the capital adequacy of American National Insurance Company and its insurance subsidiaries. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, risks related to the type and quality of the invested assets, insurance risks associated with an insurer’s products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level at least 200% of the authorized control level RBC are required to take certain actions. At September 30, 2014 and December 31, 2013, American National Insurance Company’s statutory capital and surplus was $2,842,984,000 and $2,667,858,000, respectively. Additionally, each of the insurance subsidiaries had statutory capital and surplus at September 30, 2014 and December 31, 2013, substantially above each subsidiary’s authorized control level RBC.

American National’s insurance subsidiaries prepare statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile, which include certain components of the National Association of Insurance Commissioners’ Codification of Statutory Accounting Principles (“NAIC Codification”). NAIC Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting practices continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the statutory capital and surplus of American National Insurance Company and its insurance subsidiaries.

Statutory accounting differs from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, and valuing securities on a different basis. In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus.

One of American National’s insurance subsidiaries has been granted a permitted practice from the Missouri Department of Insurance to record as the valuation of its investment in a wholly-owned subsidiary that is the attorney-in-fact for a Texas domiciled insurer, the statutory capital and surplus of the Texas domiciled insurer. This permitted practice increases the statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary by $60,732,000 and $56,205,000 at September 30, 2014 and 2013, respectively. The statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary would have remained substantially above the company action level RBC had it not used the permitted practice.

 

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Table of Contents

The statutory capital and surplus and net income (loss) of our insurance entities in accordance with statutory accounting practices are shown below (in thousands):

 

     September 30,
2014
     December 31,
2013
 

Statutory capital and surplus

     

Life insurance entities

   $ 1,898,939       $ 1,771,999   

Property and casualty insurance entities

     952,964         904,557   

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

Statutory net income

           

Life insurance entities

   $ 43,447       $ 59,602       $ 139,564       $ 159,286   

Property and casualty insurance entities

     22,718         20,205         44,852         26,136   

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by state laws. 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 prior year statutory net income from operations on an annual, non-cumulative basis, or 10% of prior year statutory surplus. Under Texas insurance law, American National Insurance Company is permitted to pay total dividends of $266,786,000 during 2014 without prior approval of the Texas Department of Insurance. Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to American National Insurance Company apply to its insurance subsidiaries.

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 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 September 30, 2014 and December 31, 2013.

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 other partners in the consolidated joint ventures are shown as noncontrolling interests of $5,529,000 and $6,007,000 at September 30, 2014 and December 31, 2013, 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, independent agents and direct marketing channels.

 

    Annuity—offers fixed, indexed, and variable annuity products. These products are 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 and commercial coverages and credit-related property insurance. These products are sold through multiple-line and independent agents.

 

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Table of Contents
    Corporate and Other—consists of net investment income from investments not allocated to the insurance segments and revenues from non-insurance operations.

The accounting policies of the segments are the same as those described in Note 2 to American National’s annual report on form 10-K. All revenue and expense amounts specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Revenues 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 capital 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.

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

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  

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

           

Life

   $ 10,794       $ 9,005       $ 22,076       $ 23,420   

Annuity

     24,366         18,631         70,415         69,633   

Health

     9,304         7,170         19,579         16,164   

Property and casualty

     30,088         24,634         59,790         33,198   

Corporate and other

     20,223         61,424         63,305         124,807   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 94,775       $ 120,864       $ 235,165       $ 267,222   
  

 

 

    

 

 

    

 

 

    

 

 

 

16. COMMITMENTS AND CONTINGENCIES

Commitments

American National had aggregate commitments at September 30, 2014, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $452,166,000 of which $176,259,000 is expected to be funded in 2014. The remaining $275,907,000 will be funded in 2015 and beyond.

American National has a $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 September 30, 2014 and December 31, 2013, the outstanding letters of credit were $12,191,000 and $15,560,000, respectively, and there were no borrowings on this facility. This facility expires on October 30, 2015. 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 September 30, 2014, was approximately $206,376,000, while the total cash values of the related life insurance policies was approximately $208,418,000.

 

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Litigation

American National Insurance Company 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.

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 is shown below (in thousands):

 

            Dollar Amount of Transactions      Amount due to/(from) American National  
            Nine months ended September 30,      September 30,
2014
    December 31,
2013
 

Related Party

   Financial Statement Line Impacted      2014      2013       

Gal-Tex Hotel Corporation

     Mortgage loan on real estate       $ 917       $ 853       $ 6,825      $ 7,742   

Gal-Tex Hotel Corporation

     Net investment income         399         463         41        47   

Greer, Herz and Adams, LLP

     Other operating expenses         8,037         7,484         (404     (284

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): The Moody Foundation and the Libbie Shearn Moody Trust own 34.0% and 50.2%, respectively, of Gal-Tex Hotel Corporation. The Moody Foundation and the Libbie Shearn Moody Trust also own approximately 22.9% and 37.1%, respectively, of American National. American National holds a first mortgage loan originated in 1999, with an interest rate of 7.30% and final maturity date of April 1, 2019 issued to Gal-Tex, which is collateralized by a hotel property in San Antonio, Texas. 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.

 

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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 and nine months ended September 30, 2014 and 2013 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 guarantees 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 2013 Annual Report on Form 10-K filed with the SEC on February 28th, 2014, 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, expense, 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;

 

    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 or changes in federal healthcare policy, both of which could impact our supplement healthcare business;

 

    Litigation and Regulation Risk Factors

 

    adverse determinations in litigation or regulatory proceedings which may result in significant financial losses and harm our reputation;

 

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    the effects of extensive government regulation;

 

    changes in tax 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

American National had no material changes to the general trends, as discussed in the MD&A included in our 2013 Annual Report on Form 10-K filed with the SEC on February 28, 2014.

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 and notes requires us to make estimates and assumptions that affect the amounts reported. Actual results could differ from results reported using those estimates and assumptions. Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity, persistency, expenses, interest rates, and property and casualty loss frequency, severity, claim reporting and settlement patterns. Due to the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could vary from those reported in the consolidated financial statements.

For a discussion of our critical accounting estimates, see the MD&A in our 2013 Annual Report on Form 10-K filed with the SEC on February 28, 2014. There have been no material changes in accounting policies since December 31, 2013.

Recently Issued Accounting Pronouncements

Refer to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements in Item 1.

 

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Consolidated Results of Operations

The following sets forth the consolidated results of operations (in thousands):

 

     Three months ended September 30,            Nine months ended September 30,         
     2014     2013      Change     2014      2013      Change  

Premiums and other revenues

               

Premiums

   $ 447,036      $ 422,799       $ 24,237      $ 1,357,537       $ 1,265,418       $ 92,119   

Other policy revenues

     55,255        52,975         2,280        167,041         152,910         14,131   

Net investment income

     236,489        254,336         (17,847     697,604         752,488         (54,884

Realized investments gains (losses), net

     (2,257     43,483         (45,740     24,503         103,970         (79,467

Other income

     9,647        11,911         (2,264     26,707         29,423         (2,716
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     746,170        785,504         (39,334     2,273,392         2,304,209         (30,817
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

               

Policyholder benefits

     127,633        118,681         8,952        437,877         365,051         72,826   

Claims incurred

     213,606        217,213         (3,607     673,509         687,420         (13,911

Interest credited to policyholders’ account balances

     83,746        98,862         (15,116     258,952         309,738         (50,786

Commissions for acquiring and servicing policies

     97,608        94,504         3,104        299,992         273,360         26,632   

Other operating expenses

     118,002        128,115         (10,113     357,043         381,850         (24,807

Change in deferred policy acquisition costs (1)

     10,800        7,265         3,535        10,854         19,568         (8,714
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     651,395        664,640         (13,245     2,038,227         2,036,987         1,240   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income (loss) before other items and federal income taxes

   $ 94,775      $ 120,864       $ (26,089   $ 235,165       $ 267,222       $ (32,057
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated, a positive net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings (income before other items and taxes) decreased for the quarter and nine months ended September 30, 2014 compared to the same periods in 2013, primarily a result of lower realized investment gains (losses) net. Earnings excluding realized investment gains (losses) increased for the quarter and nine months ended September 30, 2014 compared to 2013.

 

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Life

Life segment financial results for the periods indicated were as follows (in thousands):

 

     Three months ended September 30,           Nine months ended September 30,        
     2014      2013     Change     2014     2013     Change  

Premiums and other revenues

             

Premiums

   $ 79,492       $ 75,278      $ 4,214      $ 224,165      $ 215,479      $ 8,686   

Other policy revenues

     51,751         49,158        2,593        155,355        142,034        13,321   

Net investment income

     57,598         57,008        590        172,633        173,195        (562

Other income

     338         708        (370     1,027        2,093        (1,066
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     189,179         182,152        7,027        553,180        532,801        20,379   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

             

Policyholder benefits

     83,740         83,821        (81     257,505        246,896        10,609   

Interest credited to policyholders’ account balances

     16,649         13,653        2,996        48,265        40,750        7,515   

Commissions for acquiring and servicing policies

     30,239         30,341        (102     91,971        86,491        5,480   

Other operating expenses

     47,622         52,042        (4,420     149,136        156,269        (7,133

Change in deferred policy acquisition costs (1)

     135         (6,710     6,845        (15,773     (21,025     5,252   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     178,385         173,147        5,238        531,104        509,381        21,723   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 10,794       $ 9,005      $ 1,789      $ 22,076      $ 23,420      $ (1,344
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated, a positive net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings increased during the quarter ended September 30, 2014 compared to 2013 due to a decrease in operating expenses. Earnings decreased during the nine months ended September 30, 2014 compared to 2013 primarily due to an increase in policyholder benefits, a result of higher than expected claims in the first quarter of 2014.

Premiums and other policy revenues

Premiums increased during the three and nine months ended September 30, 2014 compared to 2013. The increases were primarily driven by the continued growth of the in-force block of business of term products.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies. An increase in interest-sensitive life policies contributed to the increases in these charges during the three and nine months ended September 30, 2014 compared to 2013.

Life insurance sales

The following table presents life insurance sales as measured by annualized premium, a non-GAAP measure used by the insurance industry, which allows a comparison of new policies written by an insurance company during the period (in thousands):

 

     Three months ended September 30,            Nine months ended September 30,         
     2014      2013      Change     2014      2013      Change  

Whole life

   $ 5,656       $ 5,643       $ 13      $ 19,387       $ 19,044       $ 343   

Term life

     6,890         7,756         (866     22,049         24,436         (2,387

Universal life

     8,427         8,920         (493     26,409         26,759         (350
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total recurring

   $ 20,973       $ 22,319       $ (1,346   $ 67,845       $ 70,239       $ (2,394
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Single and excess (1)

   $ 505       $ 584       $ (79   $ 1,466       $ 1,676       $ (210

Credit life (1)

     1,046         1,107         (61     2,978         3,108         (130

 

(1) These are weighted amounts representing 10% of single and excess premiums and 15% of credit life premuims.

 

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Life insurance sales are based on the total yearly premium that insurance companies would expect to receive if all recurring premium policies would remain in force, plus 10% of single and excess premiums and 15% of credit life premium. Life insurance sales measure activity associated with gaining new insurance business in the current period whereas GAAP premium revenues are associated with policies sold in current and prior periods; therefore, a reconciliation of premium revenues and insurance sales is not meaningful.

Life insurance sales decreased during the three and nine months ended September 30, 2014 compared to 2013 driven primarily by a decline in term life sales. Marketing activities at financial institutions with whom the Company markets life insurance have been curtailed at the financial institutions to ensure compliance with Consumer Financial Protection Bureau views on appropriate marketing practices.

Benefits, losses and expenses

Policyholder benefits increased during the nine months ended September 30, 2014 compared to 2013 primarily due to higher than expected claims in the first quarter of 2014.

The increase in commissions during the nine months ended September 30, 2014 compared to 2013 is primarily due to an increase in first year premiums on term and equity-indexed universal life products.

Other operating expenses decreased during the three and nine months ended September 30, 2014 compared to 2013.

The following table presents the components of the change in DAC (in thousands), which increased expenses due to a decrease in acquisition cost capitalized.

 

     Three months ended September 30,           Nine months ended September 30,        
     2014     2013     Change     2014     2013     Change  

Acquisition cost capitalized

   $ 26,271      $ 30,999      $ (4,728   $ 77,261      $ 80,226      $ (2,965

Amortization of DAC

     (26,406     (24,289     (2,117     (61,488     (59,201     (2,287
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in DAC (1)

   $ (135   $ 6,710      $ (6,845   $ 15,773      $ 21,025      $ (5,252
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) A positive amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated, a negative net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Policy in-force information

The following table summarizes changes in the life insurance in-force amounts (in thousands) and number of policies in-force:

 

     September 30,
2014
     December 31,
2013
     Change  

Life insurance in-force

        

Traditional life

   $ 58,249,120       $ 54,788,898       $ 3,460,222   

Interest-sensitive life

     25,803,248         25,281,391         521,857   
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 84,052,368       $ 80,070,289       $ 3,982,079   
  

 

 

    

 

 

    

 

 

 

Number of policies in-force

        

Traditional life

     1,961,707         2,002,602         (40,895

Interest-sensitive life

     202,748         196,949         5,799   
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,164,455         2,199,551         (35,096
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during 2014 compared to 2013, while the total number of policies decreased reflecting the transition to fewer but larger face amount policies.

 

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Annuity

Annuity segment financial results for the periods indicated were as follows (in thousands):

 

     Three months ended September 30,            Nine months ended September 30,         
     2014     2013      Change     2014     2013      Change  

Premiums and other revenues

              

Premiums

   $ 34,661      $ 23,412       $ 11,249      $ 148,250      $ 89,733       $ 58,517   

Other policy revenues

     3,504        3,817         (313     11,686        10,876         810   

Net investment income

     128,890        148,322         (19,432     404,347        463,530         (59,183

Other income

     (1     96         (97     (1     241         (242
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total premiums and other revenues

     167,054        175,647         (8,593     564,282        564,380         (98
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Benefits, losses and expenses

              

Policyholder benefits

     43,893        34,860         9,033        180,372        118,155         62,217   

Interest credited to policyholders’ account balances

     67,097        85,208         (18,111     210,687        268,987         (58,300

Commissions for acquiring and servicing policies

     10,787        10,303         484        37,358        31,890         5,468   

Other operating expenses

     12,465        16,242         (3,777     43,394        48,053         (4,659

Change in deferred policy acquisition costs (1)

     8,446        10,403         (1,957     22,056        27,662         (5,606
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total benefits and expenses

     142,688        157,016         (14,328     493,867        494,747         (880
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 24,366      $ 18,631       $ 5,735      $ 70,415      $ 69,633       $ 782   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(1) A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated, a positive net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Earnings increased during the three and nine months ended September 30, 2014 compared to 2013, primarily due to lower operating expenses.

Premiums and other policy revenues

Annuity premium and deposit amounts received are shown below (in thousands):

 

     Three months ended September 30,            Nine months ended September 30,         
     2014      2013      Change     2014      2013      Change  

Fixed deferred annuity

   $ 67,414       $ 53,250       $ 14,164      $ 261,123       $ 186,765       $ 74,358   

Single premium immediate annuity

     40,996         32,245         8,751        171,244         127,146         44,098   

Equity-indexed deferred annuity

     67,524         47,405         20,119        185,602         126,898         58,704   

Variable deferred annuity

     24,514         30,485         (5,971     84,960         94,553         (9,593
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premium and deposits

     200,448         163,385         37,063        702,929         535,362         167,567   

Less: Policy deposits

     165,787         139,973         25,814        554,679         445,629         109,050   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 34,661       $ 23,412       $ 11,249      $ 148,250       $ 89,733       $ 58,517   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

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We monitor account values and changes in those values as key indicators of performance in our Annuity segment. Changes in account values are mainly the result of net inflows, surrenders, policy fees, interest credited and market value changes (shown below in thousands):

 

     Nine months ended September 30,  
     2014     2013  

Fixed deferred and equity-indexed annuity

    

Account value, beginning of period

   $ 9,355,946      $ 9,803,197   

Net inflows

     322,605        183,832   

Surrenders

     (875,968     (842,436

Fees

     (7,174     (6,795

Interest credited

     203,460        262,472   
  

 

 

   

 

 

 

Account value, end of period

   $ 8,998,869      $ 9,400,270   
  

 

 

   

 

 

 

Single premium immediate annuity

    

Reserve, beginning of period

   $ 1,199,276      $ 1,075,638   

Net inflows

     75,450        36,436   

Interest and mortality

     35,374        32,726   
  

 

 

   

 

 

 

Reserve, end of period

   $ 1,310,100      $ 1,144,800   
  

 

 

   

 

 

 

Variable deferred annuity

    

Account value, beginning of period

   $ 489,305      $ 417,645   

Net inflows

     83,843        91,664   

Surrenders

     (95,054     (84,866

Fees

     (4,308     (3,945

Change in market value and other

     19,854        52,440   
  

 

 

   

 

 

 

Account value, end of period

   $ 493,640      $ 472,938   
  

 

 

   

 

 

 

Deferred and single premium immediate annuity sales increased compared to last year, which resulted in the increase in fund inflows to these products. The Company has increased its focus on the annuity channel, expanding distribution through the introduction of additional marketing programs and the development of new accounts. The Company also introduced a new indexed annuity.

Variable deferred annuities have no guaranteed minimum withdrawal benefits. Our total direct exposure on the guaranteed minimum death benefits associated with these products was $1.3 million and $1.6 million as of September 30, 2014 and 2013, respectively. After reinsurance, which is with reinsurers rated “A” or higher by A.M. Best, the net exposure was $0.2 million and $0.3 million, as of September 30, 2014 and 2013, respectively.

Benefits, losses and expenses

Policyholder benefits are highly correlated to the sales volume of Single Premium Immediate Annuity (“SPIA”) contracts and increased for 2014 compared to 2013.

These benefits consist of annuity payments and reserve increases for annuity contracts. Commissions increased for the three and nine months ended September 30, 2014 compared to 2013 primarily as a result of increased annuity sales.

Other operating expenses decreased during the three and nine months ended September 30, 2014 compared to 2013.

 

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The change in DAC represents acquisition costs capitalized less the amortization of existing DAC, which is calculated in proportion to expected gross profits. The following table shows the components of the change in DAC (in thousands):

 

     Three months ended September 30,           Nine months ended September 30,        
     2014     2013     Change     2014     2013     Change  

Acquisition cost capitalized

   $ 12,219      $ 13,315      $ (1,096   $ 36,413      $ 36,370      $ 43   

Amortization of DAC

     (20,665     (23,718     3,053        (58,469     (64,032     5,563   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change in DAC (1)

   $ (8,446   $ (10,403   $ 1,957      $ (22,056   $ (27,662   $ 5,606   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) A positive amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated, a negative net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

The amortization of DAC as a percentage of gross profits is an important ratio for the Annuity segment. Changes in this ratio reflect the impact of items such as surrenders which impact the DAC amortization relative to gross margins. The ratios for the three months ended September 30, 2014 and 2013 were 36.9% and 42.7%, respectively. The ratios for the nine months ended September 30, 2014 and 2013 were 33.8% and 36.1%, respectively.

Options and Derivatives

Shown below is the incremental impact of the option return to net investment income, and the impact of the equity-indexed annuity embedded derivatives to interest credited to policyholders’ account balances (in thousands):

 

     Three months ended September 30,            Nine months ended September 30,         
     2014      2013      Change     2014      2013      Change  

Net investment income

                

Without option return

   $ 122,684       $ 135,304       $ (12,620   $ 376,841       $ 416,132       $ (39,291

Option return

     6,206         13,018         (6,812     27,506         47,398         (19,892

Interest credited to policy account balances

                

Without embedded derivatives

     65,333         74,261         (8,928     194,877         229,681         (34,804

Equity-indexed annuity embedded derivatives

     1,764         10,947         (9,183     15,810         39,306         (23,496

Net investment income without option return decreased for the three and nine months ended September 30, 2014 compared to 2013 primarily due to lower portfolio yield and aggregate account values. Fixed interest credited to policyholders’ account balances without embedded derivatives decreased during the three and nine months ended September 30, 2014 compared to 2013 due to these same two factors.

The returns from options and the related equity-indexed embedded derivative return, decreased during the three and nine months ended September 30, 2014 compared to the same period in 2013, due to the relative change in the S&P 500 Index during the respective periods. These option returns correlate to the 0.6% and 4.7% change in the S&P 500 Index during the quarters ended September 30, 2014 and 2013, respectively. For the nine months ended September 30, 2014 and 2013 the decrease correlates to the 6.7% and 17.9% return in the S&P 500, respectively.

 

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Table of Contents

Health

Health segment results for the periods indicated were as follows (in thousands):

 

    Three months ended September 30,           Nine months ended September 30,        
    2014     2013     Change     2014     2013     Change  

Premiums and other revenues

           

Premiums

  $ 53,454      $ 52,839      $ 615      $ 164,169  &n