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 March 31, 2015

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 May 5, 2015, there were 26,894,101 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION    

ITEM 1.

FINANCIAL STATEMENTS (Unaudited):

Consolidated Statements of Financial Position as of March 31, 2015 and December 31, 2014

  3   

Consolidated Statements of Operations for the three months ended March 31, 2015 and 2014

  4   

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2015 and 2014

  5   

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2015 and 2014

  5   

Consolidated Statements of Cash Flows for the three months ended March 31, 2015 and 2014

  6   

Notes to the Unaudited Consolidated Financial Statements

  7   

ITEM 2.

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

  33   

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

  50   

ITEM 4.

CONTROLS AND PROCEDURES

  50   
PART II – OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

  51   

ITEM 1A.

RISK FACTORS

  51   

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

  51   

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

  51   

ITEM 4.

MINE SAFETY DISCLOSURES

  51   

ITEM 5.

OTHER INFORMATION

  51   

ITEM 6.

EXHIBIT INDEX

  52   

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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

 

     March 31,
2015
    December 31,
2014
 
           (As Adjusted)  

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost (Fair Value $8,482,362 and $8,652,913)

   $ 7,969,007     $ 8,225,050   

Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $4,796,596 and $4,694,716)

     5,070,780       4,921,807   

Equity securities, at fair value (Cost $756,460 and $739,384)

     1,521,619       1,516,978   

Mortgage loans on real estate, net of allowance

     3,344,260       3,359,586   

Policy loans

     406,394        405,979   

Investment real estate, net of accumulated depreciation of $196,303 and $193,611

     501,992       479,062   

Short-term investments

     520,333       431,000   

Other invested assets

     216,981       220,255   
  

 

 

   

 

 

 

Total investments

  19,551,366      19,559,717   
  

 

 

   

 

 

 

Cash and cash equivalents

  170,017     209,455   

Investments in unconsolidated affiliates

  345,675     311,779   

Accrued investment income

  184,337     185,943   

Reinsurance recoverables

  415,872     428,654   

Prepaid reinsurance premiums

  55,181     56,019   

Premiums due and other receivables

  295,304     280,587   

Deferred policy acquisition costs

  1,233,034     1,253,544   

Property and equipment, net

  117,877     110,794   

Current tax receivable

  —        8,669   

Other assets

  175,166      137,856   

Separate account assets

  992,970     1,001,515   
  

 

 

   

 

 

 

Total assets

$ 23,536,799    $ 23,544,532   
  

 

 

   

 

 

 

LIABILITIES

Future policy benefits

Life

$ 2,787,668    $ 2,770,232   

Annuity

  1,030,933     1,006,748   

Accident and health

  56,368      58,364   

Policyholders’ account balances

  10,604,889     10,781,285   

Policy and contract claims

  1,296,887     1,297,708   

Unearned premium reserve

  763,636     755,051   

Other policyholder funds

  356,776     344,090   

Liability for retirement benefits

  200,060     195,712   

Notes payable

  116,435     108,177   

Current tax liability

  24,204     —     

Deferred tax liabilities, net

  302,505     287,175   

Other liabilities

  471,914     498,528   

Separate account liabilities

  992,970     1,001,515   
  

 

 

   

 

 

 

Total liabilities

  19,005,245      19,104,585   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

Common stock, $1.00 par value, - Authorized 50,000,000, Issued 30,832,449 and 30,832,449, Outstanding 26,896,982 and 26,871,942 shares

  30,832     30,832   

Additional paid-in capital

  11,603     9,248   

Accumulated other comprehensive income

  498,223     490,782   

Retained earnings

  4,080,915     3,998,642   

Treasury stock, at cost

  (101,698 )   (101,941
  

 

 

   

 

 

 

Total American National stockholders’ equity

  4,519,875     4,427,563   

Noncontrolling interest

  11,679     12,384   
  

 

 

   

 

 

 

Total stockholders’ equity

  4,531,554     4,439,947   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

$ 23,536,799   $ 23,544,532   
  

 

 

   

 

 

 

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 March 31,  
     2015     2014  
           (As Adjusted)  

PREMIUMS AND OTHER REVENUE

    

Premiums

    

Life

   $ 72,082     $ 71,995   

Annuity

     41,443       66,936   

Accident and health

     51,837       55,336   

Property and casualty

     276,481       270,608   

Other policy revenues

     57,524       55,927   

Net investment income

     209,213       218,823   

Net realized investment gains

     39,302       26,446   

Other-than-temporary impairments

     (25 )     (975

Other income

     8,710       7,340   
  

 

 

   

 

 

 

Total premiums and other revenues

  756,567     772,436   
  

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

Policyholder benefits

Life

  88,004     91,280   

Annuity

  54,367     77,452   

Claims incurred

Accident and health

  31,797     43,929   

Property and casualty

  192,252     178,512   

Interest credited to policyholders’ account balances

  75,753     83,412   

Commissions for acquiring and servicing policies

  93,115     98,435   

Other operating expenses

  123,458     118,524   

Change in deferred policy acquisition costs

  6,462     6,424   
  

 

 

   

 

 

 

Total benefits, losses and expenses

  665,208     697,968   
  

 

 

   

 

 

 

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

  91,359     74,468   
  

 

 

   

 

 

 

Less: Provision for federal income taxes

Current

  15,588     13,781   

Deferred

  10,298     9,127   
  

 

 

   

 

 

 

Total provision for federal income taxes

  25,886     22,908   

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

  36,780     (62
  

 

 

   

 

 

 

Net income

  102,253     51,498   

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

  (729 )   (756
  

 

 

   

 

 

 

Net income attributable to American National

$ 102,982   $ 52,254   
  

 

 

   

 

 

 

Amounts available to American National common stockholders

Earnings per share

Basic

$ 3.84   $ 1.95   

Diluted

  3.82     1.94   

Cash dividends to common stockholders

  0.77     0.77   

Weighted average common shares outstanding

  26,818,215     26,792,281   

Weighted average common shares outstanding and dilutive potential common shares

  26,964,350     26,925,152   

See accompanying notes to the consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2015     2014  
           (As Adjusted)  

Net income

   $ 102,253      $ 51,498   
  

 

 

   

 

 

 

Other comprehensive income, net of tax

Change in net unrealized gain (losses) on securities

  7,836      33,834   

Foreign currency transaction and translation adjustments

  (1,838   (966

Defined pension benefit plan adjustment

  1,443      717   
  

 

 

   

 

 

 

Other comprehensive income, net of tax

  7,441      33,585   
  

 

 

   

 

 

 

Total comprehensive income

  109,694      85,083   

Less: Comprehensive income (loss) attributable to noncontrolling interest

  (729   (756
  

 

 

   

 

 

 

Total comprehensive income attributable to American National

$ 110,423    $ 85,839   
  

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

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

 

     Three months ended March 31,  
     2015     2014  
           (As Adjusted)  

Common Stock

    

Balance at beginning and end of the period

   $ 30,832      $ 30,832   
  

 

 

   

 

 

 

Additional Paid-In Capital

Balance as of January 1,

  9,248      4,650   

Reissuance of treasury shares

  1,978      1,621   

Amortization of restricted stock

  377      505   
  

 

 

   

 

 

 

Balance at end of period

  11,603      6,776   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

Balance as of January 1,

  490,782      413,712   

Other comprehensive income

  7,441      33,585   
  

 

 

   

 

 

 

Balance at end of the period

  498,223      447,297   
  

 

 

   

 

 

 

Retained Earnings

Balance as of January 1,

  3,998,644      3,836,112   

Net income attributable to American National

  102,982      52,254   

Cash dividends to common stockholders

  (20,711   (20,731
  

 

 

   

 

 

 

Balance at end of the period

  4,080,915      3,867,635   
  

 

 

   

 

 

 

Treasury Stock

Balance as of January 1,

  (101,941   (97,441

Reissuance of treasury shares

  243      222   
  

 

 

   

 

 

 

Balance at end of the period

  (101,698   (97,219
  

 

 

   

 

 

 

Noncontrolling Interest

Balance as of January 1,

  12,384      12,757   

Contributions

  24      42   

Loss attributable to noncontrolling interest

  (729   (756

Cumulative tax adjustment

  —        (507
  

 

 

   

 

 

 

Balance at end of the period

  11,679      11,536   
  

 

 

   

 

 

 

Total Stockholders’ Equity

$ 4,531,554    $ 4,266,857   
  

 

 

   

 

 

 

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)

 

     Three months ended March 31,  
     2015     2014  
           (As Adjusted)  

OPERATING ACTIVITIES

    

Net income

   $ 102,253     $ 51,498  

Adjustments to reconcile net income to net cash provided by operating activities

    

Net realized investment gains

     (39,302 )     (26,446 )

Other-than-temporary impairments

     25       975  

Amortization (accretion) of premiums, discounts and loan origination fees

     977       3,400  

Net capitalized interest on policy loans and mortgage loans

     (7,708 )     (8,298 )

Depreciation

     10,896       7,350  

Interest credited to policyholders’ account balances

     75,753       83,412  

Charges to policyholders’ account balances

     (57,524 )     (55,927 )

Deferred federal income tax expense

     10,298       9,127  

Equity in (earnings) losses of unconsolidated affiliates

     (36,780 )     62  

Distributions from equity method investments

     199       2,688  

Changes in

    

Policyholder liabilities

     57,193       94,640  

Deferred policy acquisition costs

     6,462       6,424  

Reinsurance recoverables

     12,782       4,436  

Premiums due and other receivables

     (15,042 )     4,245  

Prepaid reinsurance premiums

     838       3,174  

Accrued investment income

     1,606       (9,936 )

Current tax receivable/payable

     32,873       8,869  

Liability for retirement benefits

     4,348       (12,854 )

Other, net

     (37,413 )     19,224  
  

 

 

   

 

 

 

Net cash provided by operating activities

  122,734     186,063  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

Proceeds from sale/maturity/prepayment of

Held-to-maturity securities

  319,361     176,063  

Available-for-sale securities

  120,746     292,496  

Investment real estate

  10,821     27,650  

Mortgage loans

  167,304     85,094  

Policy loans

  13,929     13,357  

Other invested assets

  6,080     28,700  

Disposals of property and equipment

  800     157  

Distributions from unconsolidated affiliates

  24,465     994  

Payment for the purchase/origination of

Held-to-maturity securities

  (85,733 )   (193,554 )

Available-for-sale securities

  (236,077 )   (487,904 )

Investment real estate

  (16,533 )   (5,539 )

Mortgage loans

  (155,138 )   (81,600 )

Policy loans

  (6,134 )   (5,524 )

Other invested assets

  (3,729 )   (4,640 )

Additions to property and equipment

  (13,580 )   (5,449 )

Contributions to unconsolidated affiliates

  (24,668 )   (17,260 )

Change in short-term investments

  (89,333 )   249,785  

Other, net

  12,301     4,225  
  

 

 

   

 

 

 

Net cash provided by investing activities

  44,882     77,051  
  

 

 

   

 

 

 

FINANCING ACTIVITIES

Policyholders’ account deposits

  212,245     265,636  

Policyholders’ account withdrawals

  (406,870 )   (455,999 )

Change in notes payable

  8,258     (783 )

Dividends to stockholders

  (20,711 )   (20,731 )

Proceeds from (payments to) noncontrolling interest

  24     42  
  

 

 

   

 

 

 

Net cash used in financing activities

  (207,054 )   (211,835 )
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

  (39,438 )   51,279  

Beginning of the period

  209,455     117,946  
  

 

 

   

 

 

 

End of period

$ 170,017   $ 169,225  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Operations

American National Insurance Company and its consolidated subsidiaries (collectively “American National” or “the Company”) 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 all 50 states, the District of Columbia and Puerto Rico.

Note 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, 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, 2014. 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.

Note 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:

In January 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. The new standard allows a proportional amortization approach and treats the net investment performance as a component of income tax expense. Previously, these investments were accounted for under the equity method that records changes to investment value as a component of investment income and generates a deferred tax balance until the investment terminates. American National adopted this standard effective January 1, 2015, with retrospective adoption back to January 1, 2013. Accordingly, upon adoption the investment in unconsolidated affiliates asset was reduced by $7,504,000 with a release of a related deferred tax liability of $2,937,000 resulting in a $4,567,000 reduction in the opening balance of stockholders’ equity at January 1, 2015.

 

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Table of Contents

Note 3 – Recently Issued Accounting Pronouncements – (Continued)

 

Financial statement amounts previously reported were revised as shown below (in thousands):

 

     As of December 31, 2014  
     As Reported      As Adjusted      Effect of Change  

Investments in unconsolidated affiliates

   $ 319,283       $ 311,779       $ (7,504

Deferred tax liabilities, net

     290,112         287,175         (2,937

Retained earnings

     4,003,209         3,998,642         (4,567
     Three months ended March 31, 2014  
     As Reported      As Adjusted      Effect of Change  

Provision for federal income taxes, current

   $ 12,360       $ 13,781       $ 1,421   

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

     (859      (62      797   

Net income attributable to American National

     52,878         52,254         (624

American National held investments in Qualified Affordable Housing Projects totaling $34,064,000 and $27,595,000 as of March 31, 2015 and December 31, 2014, respectively. For the three month periods ending March 31, 2015 and March 31, 2014, American National recognized tax credits and other tax benefits of $1,923,000 and $1,551,000, respectively, and amortized cost of $1,945,000 and $1,897,000, relating to these investments. At March 31, 2015 American National had commitments to provide additional funding to these investments during the following fiscal years as follows:

 

Expected year of payment    2015      2016      2017      2018      2019      Total  

Equity commitments (in thousands)

   $ 10,885         4,148         1,314         726         1,078       $ 18,151   

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

In May 2014, the FASB issued guidance that will supersede most existing revenue recognition requirements in U.S. GAAP. Insurance contracts are excluded from the scope of the new guidance. For those contracts which are impacted by the guidance, the transaction price is attributed to the underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. The guidance is effective for reporting periods beginning after December 15, 2016 (although the FASB has proposed a delay until 2018) and is to be applied retrospectively. Early adoption before 2017 is not permitted. Expected amendments to the standard include new practical expedients and clarifications to the guidance. The Company is in the process of evaluating the impact of adoption, which is not expected to be material to the Company’s financial statements.

In January 2015, the FASB issued guidance to simplify income statement presentation by eliminating the concept and separate presentation of extraordinary and unusual items. The new guidance is effective for calendar years beginning after December 15, 2015. The impact of the adoption is not expected to be material to the Company’s financial statements.

In February 2015, the FASB issued guidance that amends the consolidation analysis. The guidance modifies the evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs) or voting interest entities. The guidance eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs. The amended guidance is effective for reporting periods beginning after December 15, 2015. The impact of the adoption is not expected to be material to the Company’s financial statements.

 

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Note 4 – Investment in Securities

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

 

     March 31, 2015  
     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

   $ 313,543       $ 29,479      $ (37 )    $ 342,985  

Foreign governments

     4,132         1,110        —           5,242  

Corporate debt securities

     7,311,516         486,417        (28,013 )      7,769,920  

Residential mortgage-backed securities

     321,700         24,123        (1,045 )      344,778  

Commercial mortgage-backed securities

     —           —           —           —     

Collateralized debt securities

     1,935         190        —           2,125  

Other debt securities

     16,181         1,131        —           17,312  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

  7,969,007      542,450     (29,095 )   8,482,362  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

U.S. treasury and government

  24,051      881     (3 )   24,929  

U.S. states and political subdivisions

  851,970      38,641     (1,084 )   889,527  

Foreign governments

  5,000      2,105     —        7,105  

Corporate debt securities

  3,868,058      239,285     (8,035 )   4,099,308  

Residential mortgage-backed securities

  37,090      1,964     (297 )   38,757  

Collateralized debt securities

  10,427      735     (8 )   11,154  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

  4,796,596      283,611     (9,427 )   5,070,780  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

Common stock

  736,727      766,362      (13,234 )   1,489,855  

Preferred stock

  19,733      12,031     —        31,764  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

  756,460      778,393     (13,234 )   1,521,619  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

$ 13,522,063    $ 1,604,454   $ (51,756 ) $ 15,074,761  
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 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

   $ 323,053       $ 26,800      $ (93 )    $ 349,760  

Foreign governments

     29,130         1,293        —           30,423  

Corporate debt securities

     7,517,195         424,845        (47,315 )      7,894,725  

Residential mortgage-backed securities

     336,853         22,317        (1,535 )      357,635  

Commercial mortgage-backed securities

     —           —           —           —     

Collateralized debt securities

     2,232         238        —           2,470  

Other debt securities

     16,587         1,313        —           17,900  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

  8,225,050      476,806     (48,943 )   8,652,913  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

U.S. treasury and government

  22,415      825     (7 )   23,233  

U.S. states and political subdivisions

  802,846      36,151     (1,381 )   837,616  

Foreign governments

  5,000      2,021     —        7,021  

Corporate debt securities

  3,812,771      203,048     (15,770 )   4,000,049  

Residential mortgage-backed securities

  40,988      1,903     (492 )   42,399  

Collateralized debt securities

  10,696      863     (70 )   11,489  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

  4,694,716      244,811     (17,720 )   4,921,807  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

Common stock

  719,651      774,650      (7,176 )   1,487,125  

Preferred stock

  19,733      10,121     (1 )   29,853  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

  739,384      784,771     (7,177 )   1,516,978  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

$ 13,659,150    $ 1,506,388   $ (73,840 ) $ 15,091,698  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

9


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2015  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 763,705       $ 778,027       $ 347,014       $ 355,345   

Due after one year through five years

     2,022,357         2,235,239         837,834         909,750   

Due after five years through ten years

     4,796,691         5,054,077         3,063,953         3,237,161   

Due after ten years

     380,404         409,994         542,795         563,574   

Without single maturity date

     5,850         5,025         5,000         4,950   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 7,969,007    $ 8,482,362    $ 4,796,596    $ 5,070,780   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 March 31,  
     2015      2014  

Proceeds from sales of available-for-sale securities

   $ 15,582       $ 81,664   

Gross realized gains

     6,783         19,943   

Gross realized losses

     —           (2,122

Gains and losses are determined using specific identification of the securities sold. During the three months ended March 31, 2015 there were no bonds transferred from held-to-maturity to available-for-sale. During the three months ended March 31, 2014 bonds with a carrying value of $14,818,000, were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ creditworthiness became evident. Unrealized gains of $339,000 were established following the transfer at fair value.

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

 

     Three months ended March 31,  
     2015      2014  

Bonds available-for-sale

   $ 47,093       $ 55,574   

Equity securities

     (12,435      15,517   
  

 

 

    

 

 

 

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

  34,658      71,091   

Adjustments for

Deferred policy acquisition costs

  (14,048   (12,638

Participating policyholders’ interest

  (2,882   (4,751

Deferred federal income tax expense

  (9,892   (19,868
  

 

 

    

 

 

 

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

$ 7,836    $ 33,834   
  

 

 

    

 

 

 

 

10


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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):

 

     March 31, 2015  
     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

   $ —        $ —         $ (37   $ 134       $ (37   $ 134   

Corporate debt securities

     (14,690     501,908         (13,323     227,587         (28,013     729,495   

Residential mortgage-backed securities

     (251     16,343         (794     14,158         (1,045     30,501   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

  (14,941   518,251      (14,154   241,879      (29,095   760,130   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

U.S. treasury and government

  (3   6,046      —        —        (3   6,046   

U.S. states and political subdivisions

  (895   94,492      (189   2,817      (1,084   97,309   

Corporate debt securities

  (6,847   330,836      (1,188   77,730      (8,035   408,566   

Residential mortgage-backed securities

  (190   17,862      (107   1,569      (297   19,431   

Collateralized debt securities

  (1   248      (7   319      (8   567   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

  (7,936   449,484      (1,491   82,435      (9,427   531,919   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

Common stock

  (13,234   72,577      —        —        (13,234   72,577   

Preferred stock

  —        —        —        —        —        —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

  (13,234   72,577      —        —        (13,234   72,577   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ (36,111 $ 1,040,312    $ (15,645 $ 324,314    $ (51,756 $ 1,364,626   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     December 31, 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

   $ (37   $ 3,388       $ (56   $ 2,465       $ (93   $ 5,853   

Corporate debt securities

     (20,575     523,766         (26,740     662,362         (47,315     1,186,128   

Residential mortgage-backed securities

     (232     12,186         (1,303     31,163         (1,535     43,349   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

  (20,844   539,340      (28,099   695,990      (48,943   1,235,330   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

U.S. treasury and government

  (7   14,552      —        —        (7   14,552   

U.S. states and political subdivisions

  (166   27,719      (1,215   78,851      (1,381   106,570   

Corporate debt securities

  (8,852   384,451      (6,918   288,808      (15,770   673,259   

Residential mortgage-backed securities

  (170   9,386      (322   14,042      (492   23,428   

Collateralized debt securities

  (63   2,033      (7   339      (70   2,372   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

  (9,258   438,141      (8,462   382,040      (17,720   820,181   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

Common stock

  (7,176   43,907      —        —        (7,176   43,907   

Preferred stock

  (1   —        —        —        (1   —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

  (7,177   43,907      —        —        (7,177   43,907   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

$ (37,279 $ 1,021,388    $ (36,561 $ 1,078,030    $ (73,840 $ 2,099,418   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

As of March 31, 2015, the securities with unrealized losses including those exceeding one year were not deemed to be other-than-temporarily impaired. American National has the ability and intent to hold those securities until a market price recovery or maturity. 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.

 

11


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2015     December 31, 2014  

AAA

     5.1     5.0

AA

     12.3        12.8   

A

     39.9        39.4   

BBB

     39.1        39.5   

BB and below

     3.6        3.3   
  

 

 

   

 

 

 

Total

  100.0   100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

     March 31, 2015     December 31, 2014  

Consumer goods

     21.1     20.4

Energy and utilities

     15.1        13.3   

Financials

     19.3        19.1   

Healthcare

     15.0        14.0   

Industrials

     8.4        8.4   

Information technology

     15.5        16.2   

Other

     5.6        8.6   
  

 

 

   

 

 

 

Total

  100.0   100.0
  

 

 

   

 

 

 

Note 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. The distribution based on carrying amount of mortgage loans by property-type and location are as follows:

 

     March 31, 2015     December 31, 2014  

Hotel and motel

     10.4     10.8

Industrial

     20.9        20.9   

Office

     36.8        36.1   

Retail

     17.5        18.1   

Other

     14.4        14.1   
  

 

 

   

 

 

 

Total

  100.0   100.0
  

 

 

   

 

 

 

 

     March 31, 2015     December 31, 2014  

East North Central

     19.8     19.4

East South Central

     5.1        5.0   

Mountain

     11.0        11.0   

Pacific

     9.6        10.8   

South Atlantic

     22.6        21.9   

West South Central

     25.4        24.9   

Other

     6.5        7.0   
  

 

 

   

 

 

 

Total

  100.0   100.0
  

 

 

   

 

 

 

As of March 31, 2015, American National had foreclosed on one loan with a recorded investment of $5,945,000; there were no loans foreclosed for the same period in 2014. American National sold no commercial loans for the three months ended March 31, 2015 and 2014.

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.

 

12


Table of Contents

Note 5 – Mortgage Loans – (Continued)

 

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

 

March 31, 2015 30-59 Days
Past Due
  60-89 Days
Past Due
  Greater Than
90 Days
  Total
Past Due
  Current   Total
Mortgage
Loans
 
                 

Industrial

$ —      $ —      $ —      $ —      $ 701,712    $ 701,712   

Office

  —        —        13,383      13,383      1,226,713      1,240,096   

Retail

  —        —        —        —        587,088      587,088   

Other

  —        —        —        —        833,748      833,748   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ —      $ —      $ 13,383    $ 13,383    $ 3,349,261      3,362,644   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

  18,384   
                 

 

 

 

Mortgage loans on real estate, net of allowance

$ 3,344,260   
                 

 

 

 

December 31, 2014

Industrial

$ —      $ —      $ —      $ —      $ 702,541    $ 702,541   

Office

  —        —        19,327      19,327      1,201,833      1,221,160   

Retail

  —        —        —        —        615,813      615,813   

Other

  —        —        —        —        837,932      837,932   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ —      $ —      $ 19,327    $ 19,327    $ 3,358,119    $ 3,377,446   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

Allowance for loan losses

  17,860   
                 

 

 

 

Mortgage loans on real estate, net of allowance

$ 3,359,586   
                 

 

 

 

Total mortgage loans are net of unamortized discounts of $608,000 and $658,000 and unamortized origination fees of $14,574,000 and $15,659,000 at March 31, 2015 and December 31, 2014, 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):

 

     Three months ended March 31,  
     Collectively
Evaluated
for Impairment
     Individually
Evaluated
for Impairment
 

Beginning balance, 2015

   $ 12,277       $ 5,583   

Change in allowance

     (1,078      1,602   
  

 

 

    

 

 

 

Ending balance, 2015

$ 11,199    $ 7,185   
  

 

 

    

 

 

 

At March 31, 2015 and December 31, 2014, the recorded investment for loans collectively evaluated for impairment was $3,330,569,000 and $3,321,241,000, respectively, and the recorded investment for loans individually evaluated for impairment was $32,075,000 and $56,205,000, respectively.

 

13


Table of Contents

Note 5 – Mortgage Loans – (Continued)

 

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

 

     Three months ended  
     March 31, 2015      March 31, 2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 

With an allowance recorded

           

Office

   $ 9,979       $ 209       $ —         $ —     

Industrial

     1,100         37         —           —     

Retail

     —           —           493         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 11,079    $ 246    $ 493    $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

Office

$ 20,996    $ 341    $ 12,377    $ 204   

Industrial

  —        —        2,721      45   

Other

  —        —        1,410      17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 20,996    $ 341    $ 16,508    $ 266   
  

 

 

    

 

 

    

 

 

    

 

 

 
     March 31, 2015      December 31, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Recorded
Investment
     Unpaid
Principal
Balance
 

With an allowance recorded

           

Office

   $ 9,979       $ 13,383       $ 26,563       $ 31,653   

Industrial

     1,100         2,702         —        

Retail

     —           —           —           493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 11,079    $ 16,085    $ 26,563    $ 32,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

Office

$ 20,996    $ 20,996    $ 26,941    $ 26,941   

Industrial

  —        —        2,702      2,702   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 20,996    $ 20,996    $ 29,643    $ 29,643   
  

 

 

    

 

 

    

 

 

    

 

 

 

Troubled Debt Restructurings

American National has granted concessions which are classified as troubled debt restructurings to mortgage loan borrowers. Concessions are generally one of, or a combination of, a delay in payment of principal or interest, a reduction of the contractual interest rate or an extension of the maturity date. American National considers the amount, timing and extent of concessions in determining any impairment or changes in the specific allowance for loan losses recorded in connection with a troubled debt restructuring. The carrying value after specific allowance, before and after modification in a troubled debt restructuring, may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

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

 

     Three months ended March 31,  
     2015      2014  
     Number of
contracts
     Recorded
investment pre-
modification
     Recorded
investment post
modification
     Number of
contracts
     Recorded
investment pre-
modification
     Recorded
investment post
modification
 

Office

     —           —           —           1       $ 6,432       $ 6,432   

 

14


Table of Contents

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

Note 6 – Investment Real Estate

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

 

     March 31, 2015     December 31, 2014  

Industrial

     12.7     13.0

Office

     27.2        25.0   

Retail

     43.2        44.1   

Other

     16.9        17.9   
  

 

 

   

 

 

 

Total

  100.0   100.0
  

 

 

   

 

 

 
     March 31, 2015     December 31, 2014  

East North Central

     6.7     4.5

East South Central

     4.2        4.6   

Mountain

     9.1        9.6   

Pacific

     6.6        7.1   

South Atlantic

     11.7        12.2   

West South Central

     55.7        55.6   

Other

     6.0        6.4   
  

 

 

   

 

 

 

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 2015 or 2014.

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

 

     March 31, 2015      December 31, 2014  

Investment real estate

   $ 153,777       $ 140,032   

Short-term investments

     1         1   

Cash and cash equivalents

     2,293         2,495   

Accrued investment income

     —           683   

Other receivables

     7,998         7,999   

Other assets

     9,357         8,483   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

$ 173,426    $ 159,693   
  

 

 

    

 

 

 

Notes payable

$ 116,435    $ 108,177   

Other liabilities

  12,287      8,954   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

$ 128,722    $ 117,131   
  

 

 

    

 

 

 

 

15


Table of Contents

Note 6 – Investment Real Estate – (Continued)

 

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 $15,031,000 and $15,016,000 at March 31, 2015 and December 31, 2014, respectively. The total long-term portion of notes payable consists of four notes with the following interest rates: 4.0%, prime plus .5%, and two notes with adjusted LIBOR plus LIBOR margin. Of the long-term notes payable, $9,375,000 will mature in 2016, with the remainder maturing beyond 5 years.

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

 

     March 31, 2015      December 31, 2014  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 138,667       $ 138,667       $ 157,620       $ 157,620   

Mortgage loans

     198,272         198,272         172,408         172,408   

Accrued investment income

     847         847         721         721   

As of March 31, 2015, a real estate investment with a carrying value of $4,027,000 was classified as held for sale.

Note 7 – Derivative Instruments

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

 

        March 31, 2015     December 31, 2014  

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

    448      $ 1,129,800      $ 188,006        436      $ 1,095,300      $ 189,449   

Equity-indexed embedded derivative

 

Policyholders’ account balances

    44,085        987,100        208,412        42,287        961,300        208,187   

 

Derivatives Not Designated

as Hedging Instruments

  

Location in the Consolidated

Statements of Operations

   Gains (Losses) Recognized
in Income on Derivatives
 
      Three months ended March 31,  
      2015     2014  

Equity-indexed options

  

Net investment income

   $ 1,131      $ 3,985   

Equity-indexed embedded derivative

  

Interest credited to policyholders’ account balances

     (1,196     (2,896

 

 

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Note 8 – Net Investment Income and Realized Investment Gains (Losses)

Net investment income is shown below (in thousands):

 

     Three months ended March 31,  
     2015      2014  

Bonds

   $ 143,741       $ 151,516   

Equity securities

     8,467         9,084   

Mortgage loans

     49,499         51,454   

Real estate

     (1,753      (4,971

Options

     1,131         3,985   

Other invested assets

     8,128         7,755   
  

 

 

    

 

 

 

Total

$ 209,213    $ 218,823   
  

 

 

    

 

 

 

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

 

     Three months ended March 31,  
     2015      2014  

Bonds

   $ 1,298       $ 16,619   

Equity securities

     28,627         6,531   

Mortgage loans

     (524      (728

Real estate

     9,911         4,963   

Other invested assets

     (10      (939
  

 

 

    

 

 

 

Total

$ 39,302    $ 26,446   
  

 

 

    

 

 

 

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

 

     Three months ended March 31,  
     2015      2014  

Bonds

   $ —         $ (41

Equity securities

     (25      (934
  

 

 

    

 

 

 

Total

$ (25 $ (975
  

 

 

    

 

 

 

 

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Table of Contents

Note 9 – Fair Value of Financial Instruments

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

 

     March 31, 2015      December 31, 2014  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 7,969,007       $ 8,482,362       $ 8,225,050       $ 8,652,913   

Fixed maturity securities, bonds available-for-sale

     5,070,780         5,070,780         4,921,807         4,921,807   

Equity securities

     1,521,619         1,521,619         1,516,978         1,516,978   

Equity-indexed options

     188,006         188,006         189,449         189,449   

Mortgage loans on real estate, net of allowance

     3,344,260         3,558,237         3,359,586         3,618,944   

Policy loans

     406,394         406,394         405,979         405,979   

Short-term investments

     520,333         520,333         431,000         431,000   

Separate account assets

     992,970         992,970         1,001,515         1,001,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

$ 20,013,369    $ 20,740,701    $ 20,051,364    $ 20,738,585   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

Investment contracts

$ 8,705,429    $ 8,705,429    $ 8,894,747    $ 8,894,747   

Embedded derivative liability for equity-indexed contracts

  208,412      208,412      208,187      208,187   

Notes payable

  116,435      116,435      108,177      108,177   

Separate account liabilities

  992,970      992,970      1,001,515      1,001,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

$ 10,023,246    $ 10,023,246    $ 10,212,626    $ 10,212,626   
  

 

 

    

 

 

    

 

 

    

 

 

 

Summary

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability. A fair value hierarchy is used to determine fair value based on a hypothetical transaction at the measurement date from the perspective of a market participant. American National has evaluated the types of securities in its investment portfolio to determine an appropriate hierarchy level based upon trading activity and the observability of market inputs. The classification of assets or liabilities within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:

 

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

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

 

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Table of Contents

Note 9 – Fair Value of Financial Instruments – (Continued)

 

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

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

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

American National holds a small amount of private placement debt and fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these securities, a quote from an independent broker (typically a market maker) is obtained. Due to the disclaimers on the quotes that indicate that the price is indicative only, American National includes these fair value estimates in Level 3.

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

Note 9 – Fair Value of Financial Instruments – (Continued)

 

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 March 31, 2015 and December 31, 2014, the one year implied volatility used to estimate embedded derivative value was 16.7% and 17.3%, respectively.

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

Policy loans—The carrying value of policy loans is the outstanding balance plus any accrued interest. Due to the collateralized nature of policy loans 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

Note 9 – Fair Value of Financial Instruments – (Continued)

 

Quantitative Disclosures

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

 

     Fair Value Measurement as of March 31, 2015  
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 342,985       $ —         $ 342,985       $ —     

Foreign governments

     5,242         —           5,242         —     

Corporate debt securities

     7,769,920         —           7,714,782         55,138   

Residential mortgage-backed securities

     344,778         —           343,826         952   

Collateralized debt securities

     2,125         —           —           2,125   

Other debt securities

     17,312         —           12,842         4,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

  8,482,362      —        8,419,677      62,685   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

U.S. treasury and government

  24,929      —        24,929      —     

U.S. states and political subdivisions

  889,527      —        887,027      2,500   

Foreign governments

  7,105      —        7,105      —     

Corporate debt securities

  4,099,308      —        4,040,371      58,937   

Residential mortgage-backed securities

  38,757      —        36,831      1,926   

Collateralized debt securities

  11,154      —        9,218      1,936   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

  5,070,780      —        5,005,481      65,299   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

Common stock

  1,489,856      1,489,856      —        —     

Preferred stock

  31,763      31,763      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

  1,521,619      1,521,619      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

  188,006      —        —        188,006   

Mortgage loans on real estate

  3,558,237      —        3,558,237      —     

Policy loans

  406,394      —        —        406,394   

Short-term investments

  520,333      —        520,333      —     

Separate account assets

  992,970      —        992,970      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

$ 20,740,701    $ 1,521,619    $ 18,496,698    $ 722,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

Investment contracts

$ 8,705,429    $ —      $ —      $ 8,705,429   

Embedded derivative liability for
equity-indexed contracts

  208,412      —        —        208,412   

Notes payable

  116,435      —        —        116,435   

Separate account liabilities

  992,970      —        992,970      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

$ 10,023,246    $ —      $ 992,970    $ 9,030,276   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 9 – Fair Value of Financial Instruments – (Continued)

 

 

     Fair Value Measurement as of December 31, 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

   $ 349,760       $ —         $ 349,760       $ —     

Foreign governments

     30,423         —           30,423         —     

Corporate debt securities

     7,894,725         —           7,833,564         61,161   

Residential mortgage-backed securities

     357,635         —           356,670         965   

Collateralized debt securities

     2,470         —           —           2,470   

Other debt securities

     17,900         —           12,975         4,925   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

  8,652,913      —        8,583,392      69,521   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

U.S. treasury and government

  23,233      —        23,233      —     

U.S. states and political subdivisions

  837,616      —        835,106      2,510   

Foreign governments

  7,021      —        7,021      —     

Corporate debt securities

  4,000,049      —        3,941,925      58,124   

Residential mortgage-backed securities

  42,399      —        40,473      1,926   

Collateralized debt securities

  11,489      —        9,616      1,873   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

  4,921,807      —        4,857,374      64,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

Common stock

  1,487,125      1,487,125      —        —     

Preferred stock

  29,853      29,853      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

  1,516,978      1,516,978      —        —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

  189,449      —        —        189,449   

Mortgage loans on real estate

  3,618,944      —        3,618,944      —     

Policy loans

  405,979      —        —        405,979   

Short-term investments

  431,000      —        431,000      —     

Separate account assets

  1,001,515      —        1,001,515      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

$ 20,738,585    $ 1,516,978    $ 18,492,225    $ 729,382   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

Investment contracts

$ 8,894,747    $ —      $ —      $ 8,894,747   

Embedded derivative liability for
equity-indexed contracts

  208,187      —        —        208,187   

Notes payable

  108,177      —        —        108,177   

Separate account liabilities

  1,001,515      —        1,001,515      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

$ 10,212,626    $ —      $ 1,001,515    $ 9,211,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Note 9 – Fair Value of Financial Instruments – (Continued)

 

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 March 31,  
     Assets      Liability  
     Investment
Securities
     Equity-
Indexed
Options
     Embedded
Derivative
 

Beginning balance, 2015

   $ 64,433       $ 189,449       $ 208,187   

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

     937         —           —     

Net fair value change included in realized gains (losses)

     —           —           —     

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

     —           (743      —     

Net change included in interest credited

     —           —           1,196   

Purchases, sales and settlements or maturities

        

Purchases

     —           3,763         —     

Sales

     (61      —           —     

Settlements or maturities

     (10      (4,463      —     

Premiums less benefits

     —           —           (971

Gross transfers into Level 3

     —           —           —     

Gross transfers out of Level 3

     —           —           —     
  

 

 

    

 

 

    

 

 

 

Ending balance March 31, 2015

$ 65,299    $ 188,006    $ 208,412   
  

 

 

    

 

 

    

 

 

 

Beginning balance, 2014

$ 48,304    $ 164,753    $ 148,435   

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

  (12,194   —        —     

Net fair value change included in realized gains (losses)

  13,056      —        —     

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

  —        2,112      —     

Net change included in interest credited

  —        —        2,896   

Purchases, sales and settlements or maturities

Purchases

  —        4,673      —     

Sales

  (37,188   —        —     

Settlements or maturities

  (5   (25,391   —     

Premiums less benefits

  —        —        3,860   

Gross transfers into Level 3

  —        —        —     

Gross transfers out of Level 3

  —        —        —     
  

 

 

    

 

 

    

 

 

 

Ending balance March 31, 2014

$ 11,973    $ 146,147    $ 155,191   
  

 

 

    

 

 

    

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gains (losses) of $(3,309,000) and $(11,397,000) relating to assets still held at March 31, 2015 and 2014, respectively.

There were no transfers between fair value hierarchies during the three months ended March 31, 2015 or 2014.

 

23


Table of Contents

Note 10 – Deferred Policy Acquisition Costs

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

 

     Life     Annuity     Accident
& Health
    Property &
Casualty
    Total  

Beginning balance, 2015

   $ 711,469      $ 382,441      $ 47,784      $ 111,850      $ 1,253,544   

Additions

     25,038        8,955        3,954        55,595        93,542   

Amortization

     (17,624     (20,429     (5,079     (56,872     (100,004

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

     (2,883     (11,165     —          —          (14,048
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

  4,531      (22,639   (1,125   (1,277   (20,510
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2015

$ 716,000    $ 359,802    $ 46,659    $ 110,573    $ 1,233,034   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Note 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 “Policy and contract claims” in the consolidated statements of financial position and is 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 and 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):

 

     Three months ended March 31,  
     2015      2014  

Unpaid claims balance, beginning

   $ 1,132,395       $ 1,096,301   

Less reinsurance recoverables

     245,906         215,161   
  

 

 

    

 

 

 

Net beginning balance

  886,489      881,140   
  

 

 

    

 

 

 

Incurred related to

Current

  239,128      229,727   

Prior years

  (12,100   (11,369
  

 

 

    

 

 

 

Total incurred claims

  227,028      218,358   
  

 

 

    

 

 

 

Paid claims related to

Current

  98,382      94,693   

Prior years

  124,534      121,876   
  

 

 

    

 

 

 

Total paid claims

  222,916      216,569   
  

 

 

    

 

 

 

Net balance

  890,601      882,929   

Plus reinsurance recoverables

  236,370      214,505   
  

 

 

    

 

 

 

Unpaid claims balance, ending

$ 1,126,971    $ 1,097,434   
  

 

 

    

 

 

 

The net and gross reserve calculations have shown favorable development 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 $12,100,000 during the first three months of 2015 and $11,369,000 during the first three months of 2014.

 

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Table of Contents

Note 12 – Federal Income Taxes

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

 

     Three months ended March 31,  
     2015     2014  
                  (As Adjusted)  
     Amount      Rate     Amount      Rate  

Income tax on pre-tax income

   $ 31,976         35.0   $ 26,064         35.0

Tax-exempt investment income

     (1,879      (2.1     (1,553      (2.1

Dividend exclusion

     (2,083      (2.3     (1,888      (2.5

Miscellaneous tax credits, net

     (1,931      (2.1     (1,551      (2.1

Low income housing tax credit expense

     1,264         1.4        1,421         1.9   

Other items, net

     (1,461      (1.6     415         0.6   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 25,886      28.3 $ 22,908      30.8
  

 

 

    

 

 

   

 

 

    

 

 

 

American National made payments of $370,000 and $808,300 during the three months ended March 31, 2015 and 2014, respectively.

Management believes that a sufficient level of taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of March 31, 2015 and 2014. There are no ordinary loss tax carryforwards that will expire by December 31, 2015.

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 2015 or 2014 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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Note 13 – Accumulated Other Comprehensive Income (Loss)

The components of and changes in the accumulated other comprehensive income (“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, 2015

   $ 568,151       $ (76,074    $ (1,295    $ 490,782   

Amounts reclassified from AOCI (net of tax benefit $7,502 and expense $777)

     (21,184      1,443         —           (19,741

Unrealized holding gains arising during the period (net of tax expense $23,320)

     40,024               40,024   

Unrealized adjustment to DAC (net of tax benefit $4,917)

     (9,131            (9,131

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $1,009)

     (1,873            (1,873

Foreign currency adjustment (net of tax expense $990)

           (1,838      (1,838
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at March 31, 2015

$ 575,987    $ (74,631 $ (3,133 $ 498,223   
  

 

 

    

 

 

    

 

 

    

 

 

 

Beginning balance, 2014

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

Amounts reclassified from AOCI (net of tax benefit $7,289 and expense $386)

  (13,536   717      —        (12,819

Unrealized holding gains arising during the period (net of tax expense $32,171)

  59,745      59,745   

Unrealized adjustment to DAC (net of tax benefit $3,351)

  (9,287   (9,287

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $1,663)

  (3,088   (3,088

Foreign currency adjustment (net of tax benefit $520)

  (966   (966
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at March 31, 2014

$ 491,771    $ (43,167 $ (1,307 $ 447,297   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 14 – Stockholders’ Equity and Noncontrolling Interests

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

 

     March 31,
2015
     December 31,
2014
 

Common stock

     

Shares issued

     30,832,449         30,832,449   

Treasury shares

     (3,935,467      (3,960,507
  

 

 

    

 

 

 

Outstanding shares

  26,896,982      26,871,942   

Restricted shares

  (142,667   (142,667
  

 

 

    

 

 

 

Unrestricted outstanding shares

  26,754,315      26,729,275   
  

 

 

    

 

 

 

Stock-based compensation

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

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

 

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

Outstanding at December 31, 2014

     54,930      $ 114.86         142,667       $ 107.39         128,214      $ 95.82   

Granted

     —          —           —           —           83,093        104.75   

Exercised

     —          —           —           —           (69,761     90.43   

Forfeited

     —          —           —           —           —          —     

Expired

     (800     116.48         —           —           —          —     
  

 

 

      

 

 

       

 

 

   

Outstanding at March 31, 2015

  54,130    $ 114.83      142,667    $ 107.39      141,546    $ 103.73   
  

 

 

      

 

 

       

 

 

   

 

     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     1.46         3.99         2.34   

Exercisable shares

     53,947         N/A         —     

Weighted-average exercise price

   $ 114.83       $ 107.39       $ 103.72   

Weighted-average exercise price exercisable shares

     114.86         N/A         N/A   

Compensation expense (credits)

        

Three months ended March 31, 2015

   $ (77,000    $ 377,000       $ 3,180,000   

Three months ended March 31, 2014

     (9,000      505,000         4,814,000   

Fair value of liability award

        

March 31, 2015

   $ 32,000         N/A       $ 16,867,000   

December 31, 2014

     167,000         N/A         16,301,000   

 

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Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)

 

The SARs give the holder the right to cash compensation based on the difference between the stock price on the grant date and the stock price on the exercise date. The SARs vest at a rate of 20% per year for five years and expire five years after vesting.

RSU awards allow the recipient of the awards to settle the vested RSUs in either shares of American National’s common stock or cash. RSUs vest after a three-year graded vesting requirement or over a shorter period as a result of death, disability or retirement after age 65.

RS Awards entitle the participant to full dividend and voting rights. Each award has the value of one share of restricted stock and vests 10 years from the grant date. Unvested shares are restricted as to disposition, and are subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years, and these awards feature a graded vesting schedule in the case of the retirement of an award holder. Restricted stock for 350,334 shares has been granted at an exercise price of zero, of which 142,667 shares are unvested.

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:

 

     Three months ended March 31,  
     2015      2014  
            (As Adjusted)  

Weighted average shares outstanding

     26,818,215         26,792,281   

Incremental shares from RS awards and RSUs

     146,135         132,871   
  

 

 

    

 

 

 

Total shares for diluted calculations

  26,964,350      26,925,152   
  

 

 

    

 

 

 

Net income attributable to American National (in thousands)

$ 102,982    $ 52,254   

Basic earnings per share

$ 3.84    $ 1.95   

Diluted earnings per share

  3.82      1.94   

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 March 31, 2015 and December 31, 2014, American National Insurance Company’s statutory capital and surplus was $2,934,396,000 and $2,879,154,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2015 and December 31, 2014, substantially above their authorized control level RBC.

 

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Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)

 

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 $64,991,000 and $59,732,000 at March 31, 2015 and 2014, respectively. Additionally, 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.

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

 

     March 31, 2015      December 31, 2014  

Statutory capital and surplus

     

Life insurance entities

   $ 1,946,457       $ 1,904,128   

Property and casualty insurance entities

     996,996         984,155   
     Three months ended March 31,  
     2015      2014  

Statutory net income

     

Life insurance entities

   $ 46,094       $ 55,054   

Property and casualty insurance entities

     15,048         23,176   

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by statutory regulations. The restrictions require life insurance companies to maintain minimum amounts of capital and surplus, and in the absence of special approval, limit the payment of dividends to the greater of 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 $287,915,000 during 2015, 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.

 

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Note 14 – Stockholders’ Equity and Noncontrolling Interests – (Continued)

 

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 March 31, 2015 and December 31, 2014.

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 $4,929,000 and $5,634,000 at March 31, 2015 and December 31, 2014, respectively.

Note 15 – Segment Information

Management organizes the business into five operating segments:

 

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

 

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

 

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

 

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

 

    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 from 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.

 

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Note 15 – Segment Information – (Continued)

 

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

 

     Three months ended March 31,  
     2015      2014  

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

     

Life

   $ 8,199       $ (1,822

Annuity

     17,113         17,705   

Health

     7,543         (546

Property and Casualty

     10,222         29,512   

Corporate and Other

     48,282         29,619   
  

 

 

    

 

 

 

Total

$ 91,359    $ 74,468   
  

 

 

    

 

 

 

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at March 31, 2015, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $612,798,000 of which $475,647,000 is expected to be funded in 2015 with the remainder funded in 2016 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 March 31, 2015 and December 31, 2014, the outstanding letters of credit were $12,214,000, and there were no borrowings on this facility to meet liquidity requirements. 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 March 31, 2015, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $211,247,000.

Litigation

American National and certain subsidiaries, in common with the insurance industry in general, are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information

 

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Note 16 – Commitments and Contingencies – (Continued)

 

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.

Note 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):

 

               Amount due to/(from) American
National
 
         Dollar Amount of Transactions    

Related Party

  

Financial Statement Line Impacted

  Three months ended March 31,     March 31,
2015
    December 31,
2014
 
     2015     2014      

Gal-Tex Hotel Corporation

   Mortgage loan on real estate   $ 323      $ 300      $ 6,185      $ 6,508   

Gal-Tex Hotel Corporation

   Net investment income     116        139        37        39   

Greer, Herz & Adams, LLP

   Other operating expenses     1,964        2,854        (316     (309

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National holds a first mortgage loan originated in 1999, with an interest rate of 7.25% 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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Table of Contents

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

Set forth on the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three months ended March 31, 2015 and 2014 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 2014 Annual Report on Form 10-K filed with the SEC on February 27th, 2015, and they include among others:

 

    Economic & Investment 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;

 

    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;

 

    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;

 

    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;

 

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Table of Contents
    Litigation and Regulation Risk Factors

 

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

 

    significant changes in 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 and Puerto Rico.

General Trends

American National had no material changes to the general trends, as discussed in the MD&A included in our 2014 Annual Report on Form 10-K filed with the SEC on February 27, 2015.

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 2014 Annual Report on Form 10-K filed with the SEC on February 27, 2015. There have been no material changes in accounting policies since December 31, 2014.

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 March 31,         
     2015      2014      Change  

Premiums and other revenues

        

Premiums

   $ 441,843       $ 464,875       $ (23,032

Other policy revenues

     57,524         55,927         1,597   

Net investment income

     209,213         218,823         (9,610

Realized investments gains (losses), net

     39,277         25,471         13,806   

Other income

     8,710         7,340         1,370   
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

  756,567      772,436      (15,869
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

Policyholder benefits

  142,371      168,732      (26,361

Claims incurred

  224,049      222,441      1,608   

Interest credited to policyholders’ account balances

  75,753      83,412      (7,659

Commissions for acquiring and servicing policies

  93,115      98,435      (5,320

Other operating expenses

  123,458      118,524      4,934   

Change in deferred policy acquisition costs (1)

  6,462      6,424      38   
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

  665,208      697,968      (32,760
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

$ 91,359    $ 74,468    $ 16,891   
  

 

 

    

 

 

    

 

 

 

 

(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.

Consolidated earnings increased during the three months ended March 31, 2015 compared to 2014 primarily due to higher realized investment gains from the sale of certain real estate properties.

Life

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

 

     Three months ended March 31,        
     2015     2014     Change  

Premiums and other revenues

      

Premiums

   $ 72,082      $ 71,995      $ 87   

Other policy revenues

     54,426        51,609        2,817   

Net investment income

     57,614        57,358        256   

Other income

     423        337        86   
  

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

  184,545      181,299      3,246   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

Policyholder benefits

  88,004      91,280      (3,276

Interest credited to policyholders’ account balances

  15,788      15,745      43   

Commissions for acquiring and servicing policies

  27,316      29,463      (2,147

Other operating expenses

  52,652      51,816      836   

Change in deferred policy acquisition costs (1)

  (7,414   (5,183   (2,231
  

 

 

   

 

 

   

 

 

 

Total benefits and expenses

  176,346      183,121      (6,775
  

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

$ 8,199    $ (1,822 $ 10,021   
  

 

 

   

 

 

   

 

 

 

 

(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 months ended March 31, 2015 compared to 2014 primarily due to lower policyholder benefits and an increase in other policy revenues.

 

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Premiums and other revenues

Premiums increased during the three months ended March 31, 2015 compared to 2014 due to the growth of our traditional life insurance business, although premiums on new policies sold decreased slightly.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies. The increase during the three months ended March 31, 2015 compared to 2014 in other policy revenue is partially attributable to an increase in surrender charges on interest sensitive life policies.

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 sold by an insurance company during the period (in thousands):

 

     Three months ended March 31,         
     2015      2014      Change  

Whole life

   $ 7,096       $ 6,728       $ 368   

Term life

     7,102         7,521         (419

Universal life

     8,393         8,830         (437
  

 

 

    

 

 

    

 

 

 

Total recurring

$ 22,591    $ 23,079    $ (488
  

 

 

    

 

 

    

 

 

 

Single and excess

$ 351    $ 455    $ (104

Credit life

  959      903      56   

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 first three months of 2015 compared to 2014. Term and Universal Life sales were lower this year partially offset by higher sales of Whole Life products.

Benefits, losses and expenses

Policyholder benefits decreased during the three months ended March 31, 2015 compared to 2014 primarily due to more normalized claim activity in 2015 when compared to a higher volume of claims, including claims over $500,000, in 2014.

Commissions decreased during the three months ended March 31, 2015 compared to 2014, primarily due to the portion of commissions being paid on renewal premiums, which carry a lower commission rate, being larger.

The following table presents the components of the change in DAC (in thousands):

 

     Three months ended March 31,         
     2015      2014      Change  

Acquisition cost capitalized

   $ 25,038       $ 23,288       $ 1,750   

Amortization of DAC

     (17,624      (18,105      481   
  

 

 

    

 

 

    

 

 

 

Change in DAC

$ 7,414    $ 5,183    $ 2,231   
  

 

 

    

 

 

    

 

 

 

 

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Policy in-force information

The following table summarizes changes in the Life segment’s in-force amounts (in thousands):

 

     March 31,
2015
     December 31,
2014
     Change  

Life insurance in-force

        

Traditional life

   $ 60,551,271       $ 59,409,750       $ 1,141,521   

Interest-sensitive life

     26,306,063         26,166,314         139,749   
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

$ 86,857,334    $ 85,576,064    $ 1,281,270   
  

 

 

    

 

 

    

 

 

 

The following table summarizes changes in the Life segment’s number of policies in-force:

 

     March 31,
2015
     December 31,
2014
     Change  

Number of policies in-force

        

Traditional life

     1,931,306         1,949,119         (17,813

Interest-sensitive life

     207,514         205,805         1,709   
  

 

 

    

 

 

    

 

 

 

Total number of policies

  2,138,820      2,154,924      (16,104
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the three months ended March 31, 2015 compared to 2014, while the total number of policies decreased for the same period, reflecting the transition to fewer but larger face amount policies.

Annuity

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

 

     Three months ended March 31,         
     2015      2014      Change  

Premiums and other revenues

        

Premiums

   $ 41,443       $ 66,936       $ (25,493

Other policy revenues

     3,098         4,318         (1,220

Net investment income

     119,662         130,314         (10,652

Other income

     870         —           870   
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

  165,073      201,568      (36,495
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

Policyholder benefits

  54,367      77,452      (23,085

Interest credited to policyholders’ account balances

  59,965      67,667      (7,702

Commissions for acquiring and servicing policies

  9,105      13,564      (4,459

Other operating expenses

  13,049      17,784      (4,735

Change in deferred policy acquisition costs (1)

  11,474      7,396      4,078   
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

  147,960      183,863      (35,903
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

$ 17,113    $ 17,705    $ (592
  

 

 

    

 

 

    

 

 

 

 

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

Earnings for the first quarter decreased slightly as lower premiums reflected the challenges of the continued low interest rate environment. This was largely offset by items that fluctuate with changes in premium, such as policyholder benefits, commissions and allocated expenses. Net investment income declined due to maturing bonds and mortgage loans being replaced by new investments purchased with lower interest yields and lower account values.

 

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Premiums and other revenues

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

 

     Three months ended March 31,         
     2015      2014      Change  

Fixed deferred annuity

   $ 47,559       $ 95,457       $ (47,898

Equity-indexed deferred annuity

     52,147         50,585         1,562   

Single premium immediate annuity

     49,610         86,008         (36,398

Variable deferred annuity

     26,463         34,540         (8,077
  

 

 

    

 

 

    

 

 

 

Total premium and deposits

  175,779      266,590      (90,811

Less: Policy deposits

  134,336      199,654      (65,318
  

 

 

    

 

 

    

 

 

 

Total earned premiums

$ 41,443    $ 66,936    $ (25,493
  

 

 

    

 

 

    

 

 

 

We monitor account values and changes in those values as a key indicator of performance in our Annuity segment.

Shown below are the changes in account values (in thousands):

 

     Three months ended March 31,  
     2015      2014  

Fixed deferred and equity-indexed annuity

     

Account value, beginning of period

   $ 8,873,397       $ 9,355,946   

Net inflows

     84,013         104,238   

Surrenders

     (333,931      (343,084

Fees

     (1,573      (2,856

Interest credited

     58,328         67,460   
  

 

 

    

 

 

 

Account value, end of period

$ 8,680,234    $ 9,181,704   
  

 

 

    

 

 

 

Single premium immediate annuity

Reserve, beginning of period

$ 1,274,664    $ 1,144,616   

Net inflows

  12,880      43,404   

Interest and mortality

  14,377      7,491   
  

 

 

    

 

 

 

Reserve, end of period

$ 1,301,921    $ 1,195,511   
  

 

 

    

 

 

 

Variable deferred annuity

Account value, beginning of period

$ 494,516    $ 489,305   

Net inflows

  25,551      34,253   

Surrenders

  (52,014   (40,321

Fees

  (1,429   (1,411

Change in market value and other

  30,663      6,665   
  

 

 

    

 

 

 

Account value, end of period

$ 497,287    $ 488,491   
  

 

 

    

 

 

 

Deferred and single premium immediate annuity sales decreased during the three months ended March 31, 2015 compared to 2014 due to the benchmark 10 year treasury yield being 50-100 basis points lower in 2015 and accordingly, less attractive interest crediting rates.

Variable deferred annuity net inflows decreased during the three months ended March 31, 2015 compared to 2014. These products have no guaranteed minimum withdrawal benefits. Our total direct exposure on the guaranteed minimum death benefits associated with these products was $0.9 million and $1.4 million as of March 31, 2015 and 2014, respectively. Reinsurance, from reinsurers rated “A” or higher by A.M. Best, reduced the net exposure to $0.2 million and $0.3 million, as of March 31, 2015 and 2014, respectively.

 

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Table of Contents

Benefits, losses and expenses

Policyholder benefits consist of annuity payments and reserve increases for SPIA contracts. Reserve increases are highly correlated to the sales volume of SPIA contracts. Sales and benefits decreased for the three months ended March 31, 2015 compared to 2014, driven primarily by the continued low interest rate environment.

Commissions decreased during the three months ended March 31, 2015 compared to 2014 as a result of decreased annuity sales.

Other operating expenses decreased during the three months ended March 31, 2015 compared to 2014 due to lower legal fees in 2015.

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 shows the components of the change in DAC (in thousands):

 

     Three months ended March 31,         
     2015      2014      Change  

Acquisition cost capitalized

   $ 8,955       $ 12,521       $ (3,566

Amortization of DAC

     (20,429      (19,917      (512
  

 

 

    

 

 

    

 

 

 

Change in DAC

$ (11,474 $ (7,396 $ (4,078
  

 

 

    

 

 

    

 

 

 

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 emerging experience. For example, if experienced surrenders in the year are higher than what was projected in last year’s DAC calculation, then DAC amortization will tend to increase relative to gross margins. The ratios for the three months ended March 31, 2015 and 2014 were 39.7% and 38.0%, respectively.

Options and Derivatives

The following table reflects the incremental impact of option return to net investment income, and the impact of the equity-indexed annuity embedded derivatives to interest credited to policyholder’s account balances (in thousands):

 

     Three months ended March 31,         
     2015      2014      Change  

Net investment income

        

Without option return

   $ 118,837       $ 126,727       $ (7,890

Option return

     825         3,587         (2,762

Interest credited to policy account balances

        

Without embedded derivatives

     58,958         65,184         (6,226

Equity-indexed annuity embedded derivatives

     1,007         2,483         (1,476

Net investment income without option return decreased during the three months ended March 31, 2015 compared to 2014, primarily due to a lower net investment portfolio yield and aggregate account values.

The option return, as well as the related equity-indexed annuity embedded derivatives, decreased during the three months ended March 31, 2015 compared to 2014, due to the relative change in the S&P 500 Index during the respective periods. These option returns correlate to the 0.4% and 1.3% change in the S&P 500 Index during the three months ended March 31, 2015 and 2014, respectively.

 

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Health

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

 

     Three months ended March 31,         
     2015      2014      Change  

Premiums and other revenues

        

Premiums

   $ 51,837       $ 55,336       $ (3,499

Net investment income

     2,653         2,938         (285

Other income

     4,569         4,613         (44
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

  59,059      62,887      (3,828
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

Claims incurred

  31,797      43,929      (12,132

Commissions for acquiring and servicing policies

  7,191      8,073      (882

Other operating expenses

  11,403      11,200      203   

Change in deferred policy acquisition costs (1)

  1,125      231      894   
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

  51,516      63,433      (11,917
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

$ 7,543    $ (546 $ 8,089   
  

 

 

    

 

 

    

 

 

 

 

(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 months ended March 31, 2015 compared to 2014, due to a decrease in claims incurred, partially offset by a decrease in premiums earned. Claims incurred decreased in 2015 as the volume and average claim size both decreased. The quarter ended March 31, 2014 included a $4.0 million charge relating to now settled reinsurance litigation.

Premiums and other revenues

Health earned premiums for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,  
     2015     2014  

Medicare Supplement

   $ 19,863         38.3   $ 21,993         39.7

Medical expense

     4,572         8.8        6,221         11.2   

Group health

     9,370         18.1        10,239         18.5   

Credit accident and health

     3,270         6.3        3,737         6.8   

MGU

     5,301         10.2        5,250         9.5   

Supplemental Insurance

     7,880         15.2        6,159         11.2   

All other

     1,581         3.1        1,737         3.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 51,837      100.0 $ 55,336      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Earned premiums decreased during the three months ended March 31, 2015 compared to 2014 primarily due to the continued contraction of the closed medical expense blocks of business and fewer Medicare Supplement contract sales which is partially attributable to continued changes in the healthcare insurance marketplace.

 

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The number of in-force certificates and policies as of the dates indicated are as follows:

 

     Three months ended March 31,  
     2015     2014  

Medicare Supplement

     36,878         6.1     39,017         6.0

Medical expense

     3,027         0.5        4,046         0.6   

Group

     16,856         2.8        16,340         2.5   

Credit accident and health

     216,684         35.7        229,686         35.4   

MGU

     226,361         37.3        249,607         38.5   

Supplemental Insurance

     67,124         11.1        65,911         10.2   

All other

     40,346         6.5        44,348         6.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

  607,276      100.0   648,955      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total in-force policies decreased during the three months ended March 31, 2015 compared to 2014, primarily due to a decrease in the MGU line and credit accident and health business. Credit accident and health decreased due to contraction in that market as distributors continued to shift their marketing emphasis to property and casualty products.

Benefits, losses and expenses

Claims incurred decreased as the volume of claims and the average claims size declined. The quarter ended March 31, 2014 included a $4.0 million charge relating to now settled reinsurance litigation.

Change in Deferred Policy Acquisition Costs

The following table presents the components of the change in DAC (in thousands):

 

     Three months ended March 31,         
     2015      2014      Change  

Acquisition cost capitalized

   $ 3,954       $ 4,288       $ (334

Amortization of DAC

     (5,079      (4,519      (560
  

 

 

    

 

 

    

 

 

 

Change in DAC

$ (1,125 $ (231 $ (894
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Property and Casualty

Property and Casualty results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,        
     2015     2014     Change  

Premiums and other revenues

      

Net premiums written

   $ 286,944      $ 276,988      $ 9,956   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

$ 276,481    $ 270,608    $ 5,873   

Net investment income

  14,406      15,183      (777

Other income

  1,140      1,254      (114
  

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

  292,027      287,045      4,982   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

Claims incurred

  192,252      178,512      13,740   

Commissions for acquiring and servicing policies

  49,503      47,333      2,170   

Other operating expenses

  38,773      27,708      11,065   

Change in deferred policy acquisition costs (1)

  1,277      3,980      (2,703
  

 

 

   

 

 

   

 

 

 

Total benefits and expenses

  281,805      257,533      24,272   
  

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

$ 10,222    $ 29,512    $ (19,290
  

 

 

   

 

 

   

 

 

 

Loss ratio

  69.5   66.0   3.5   

Underwriting expense ratio

  32.4      29.4      3.0   
  

 

 

   

 

 

   

 

 

 

Combined ratio

  101.9   95.4   6.5   
  

 

 

   

 

 

   

 

 

 

Impact of catastrophe events on combined ratio

  4.5      5.1      (0.6
  

 

 

   

 

 

   

 

 

 

Combined ratio without impact of catastrophe events

  97.4   90.3   (7.1
  

 

 

   

 

 

   

 

 

 

Gross catastrophe losses

$ 12,630    $ 13,060    $ (430

Net catastrophe losses

  12,485      13,639      (1,154

 

(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.

Property and Casualty results decreased during the three months ended March 31, 2015 compared to 2014 due to increased claims and other operating expenses.

Premiums and other revenues

Net premiums written and earned increased during the three months ended March 31, 2015 compared to 2014 due to continued changes to improve rate adequacy in our homeowners and commercial lines.

Benefits, losses and expenses

Claims incurred increased during the three months ended March 31, 2015 compared to 2014, as a result of increases in non-catastrophe losses.

Operating expenses increased during the three months ended March 31, 2015 compared to 2014 as a result of costs related to growth initiatives and technology enhancements.

Products

Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 56.4% of net premiums written (ii) Commercial products, which focus primarily on agricultural and other markets, representing 35.2% of net premiums written and (iii) Credit-related property insurance products, which are marketed to and through financial institutions and retailers, representing 8.4% of net premiums written.

 

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Personal Products

Personal Products results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,     Change  
     2015     2014    

Net premiums written

      

Auto

   $ 103,675      $ 102,110      $ 1,565   

Homeowner

     47,722        48,499        (777

Other Personal

     10,525        9,584        941   
  

 

 

   

 

 

   

 

 

 

Total net premiums written

$ 161,922    $ 160,193    $ 1,729   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

Auto

$ 98,993    $ 98,857    $ 136   

Homeowner

  54,692      54,340      352   

Other Personal

  9,886      8,792      1,094   
  

 

 

   

 

 

   

 

 

 

Total net premiums earned

$ 163,571    $ 161,989    $ 1,582   
  

 

 

   

 

 

   

 

 

 

Loss ratio

Auto

  76.6   69.8   6.8   

Homeowner

  62.2      68.5      (6.3

Other Personal

  75.0      40.0      35.0   

Personal line loss ratio

  71.7   67.8   3.9   

Combined Ratio

Auto

  101.9   89.5   12.4   

Homeowner

  89.7      89.5      0.2   

Other Personal

  101.7      55.3      46.4   

Personal line combined ratio

  97.8   87.6   10.2   

Personal Automobile: Net premiums written and earned increased in our personal automobile line during the three months ended March 31, 2015 compared to 2014, primarily due to improved rate adequacy. The loss and combined ratio increased during the three months ended March 31, 2015 compared to 2014, primarily due to an increase in non-catastrophe winter weather claim activity compared to the prior year.

Homeowners: Net premiums written decreased during the three months ended March 31, 2015 compared to 2014, primarily due to decreased writings in higher risk areas. The loss ratio decreased during the three months ended March 31, 2015 compared to 2014 due to a decline in weather-related losses and a larger share of policies being in areas with less catastrophe risk.

Other Personal: These products include watercraft, rental-owner and umbrella coverages for individuals seeking to protect their personal property and liability not covered within their homeowner and auto policies. The loss ratio increased during the three months ended March 31, 2015 compared to 2014, due to increased claim activity on several lines of business with low per policy premium.

 

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Commercial Products

Commercial Products results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,        
     2015     2014     Change  

Net premiums written

      

Other Commercial

   $ 44,013      $ 40,504      $ 3,509   

Agribusiness

     30,280        29,236        1,044   

Auto

     26,535        25,173        1,362   
  

 

 

   

 

 

   

 

 

 

Total net premiums written

$ 100,828    $ 94,913    $ 5,915   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

Other Commercial

$ 36,378    $ 33,393    $ 2,985   

Agribusiness

  29,240      28,998      242   

Auto

  21,235      19,048      2,187   
  

 

 

   

 

 

   

 

 

 

Total net premiums earned

$ 86,853    $ 81,439    $ 5,414   
  

 

 

   

 

 

   

 

 

 

Loss ratio

Other Commercial

  67.2   75.4   (8.2

Agribusiness

  87.5      78.6      8.9   

Auto

  73.3      67.5      5.8   

Commercial line loss ratio

  75.5   74.7   0.8   

Combined ratio

Other Commercial

  96.2   109.4   (13.2

Agribusiness

  126.3      120.5      5.8   

Auto

  99.1      86.4      12.7   

Commercial line combined ratio

  107.0   108.0   (1.0

Other Commercial: Net premiums written and earned increased during the three months ended March 31, 2015 compared to 2014, primarily due to increased premium per policy in the workers’ compensation and business owners’ lines. Decreases in the loss and combined ratios for the three months ended March 31, 2015 compared to 2014 are primarily due to adverse case reserve development on workers compensation claims in 2014 not recurring in the current quarter.

Agricultural Business: Our agricultural business product allows policyholders to customize and cover their agriculture exposure using a package policy which includes coverage for residences and household contents, farm buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased during the three months ended March 31, 2015 compared to 2014 primarily as a result of improved rate adequacy. The loss and combined ratio increased during the three months ended March 31, 2015 compared to March 31, 2014 primarily due to an increase in claims related to severe winter weather in the Northeast as well as an increase in average severity of fire losses.

Commercial Automobile: Net premiums written and earned increased during the three months ended March 31, 2015 compared to 2014, primarily due to improved rate adequacy. The loss and combined ratios increased during the three months ended March 31, 2015 compared to 2014 primarily due to an increase in overall average severity of losses.

 

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Credit Products

Credit-related property product results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,        
     2015     2014     Change  

Net premiums written

   $ 24,194      $ 21,882      $ 2,312   

Net premiums earned

     26,057        27,180        (1,123

Loss ratio

     36.0     29.1     6.9

Combined ratio

     107.5     103.5     4.0

Credit-related property products are offered on automobiles, furniture and appliances in connection with the financing of those items. These policies pay an amount if the insured property is lost or damaged and the amount paid is not directly related to an event affecting the consumer’s ability to pay the debt.

Net written premiums increased during the three months ended March 31, 2015 compared to 2014 primarily due to increases in our Guaranteed Auto Protection (GAP) and Collateral Protection business. Net earned premiums have decreased primarily due to an ongoing shift from our GAP Insurance product to a GAP Waiver product.

The loss and combined ratios increased during the three months ended March 31, 2015 compared to 2014 primarily due to an increase in claims in our collateral protection business.

Corporate and Other

Corporate and Other segment financial results for the periods indicated were as follows (in thousands):

 

     Three months ended March 31,         
     2015      2014      Change  

Other revenues

        

Net investment income

   $ 14,878       $ 13,030       $ 1,848   

Realized investments gains, net

     39,277         25,471         13,806   

Other Income

     1,708         1,136         572   
  

 

 

    

 

 

    

 

 

 

Total other revenues

  55,863      39,637      16,226   
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

Commissions

  —        2      (2

Other operating expenses

  7,581      10,016      (2,435
  

 

 

    

 

 

    

 

 

 

Total benefits, losses and expenses

  7,581      10,018      (2,437
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

$ 48,282    $ 29,619    $ 18,663   
  

 

 

    

 

 

    

 

 

 

Earnings increased during the three months ended March 31, 2015 compared to 2014 primarily due to an increase in realized investment gains. The increase in realized gains is attributable to the sale of common stock and the sale of investment real estate property. Other operating expenses decreased due to changes in the levels of allocations amongst segments.

Investments

We manage our investment portfolio to optimize the rate of return commensurate with sound and prudent asset selection and to maintain a well-diversified portfolio. Our investment operations are regulated primarily by the state insurance departments where we or our insurance subsidiaries are domiciled. Investment activities, including setting investment policies and defining acceptable risk levels, are subject to oversight by our Board of Directors, which is assisted by our Finance Committee and Management Risk Committee.

Our insurance and annuity products are primarily supported by investment-grade bonds, and to a lesser extent collateralized mortgage obligations and commercial mortgage loans. We purchase fixed maturity securities and designate them as either held-to-maturity or available-for-sale considering our estimated future cash flow needs.

 

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We also monitor the composition of our fixed maturity securities classified as held-to-maturity and available-for-sale and adjust the mix within the portfolio as investments mature or new investments are purchased.

We invest in commercial mortgage loans when the yield and credit risk compare favorably with fixed maturity securities. Individual residential mortgage loans including sub-prime or Alt A mortgage loans have not been and are not expected to be part of our investment portfolio. We invest in real estate and equity securities based on a risk and reward analysis where we believe there are opportunities for enhanced returns.

The following summarizes the carrying values of our invested assets (other than investments in unconsolidated affiliates) by asset class (in thousands, except percentages):

 

     March 31, 2015     December 31, 2014  
     Amount      Percent     Amount      Percent  

Bonds held-to-maturity, at amortized cost

   $ 7,969,007         40.7   $ 8,225,050         42.0

Bonds available-for-sale, at fair value

     5,070,780         25.9        4,921,807         25.2   

Equity securities, at fair value

     1,521,619         7.8        1,516,978         7.8   

Mortgage loans on real estate, net of allowance

     3,344,260         17.1        3,359,586         17.2   

Policy loans

     406,394         2.1        405,979         2.1   

Investment real estate, net of accumulated depreciation

     501,992         2.6        479,062         2.4   

Short-term investments

     520,333         2.7        431,000         2.2   

Other invested assets

     216,981         1.1        220,255         1.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

$ 19,551,366      100.0 $ 19,559,717      100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The decrease in our total investments at March 31, 2015 as compared to December 31, 2014 was primarily a result of lower policyholders’ account balances.

Bonds—We allocate most of our fixed maturity securities to support our insurance business. At March 31, 2015, our fixed maturity securities had an estimated fair value of $13.6 billion, which was $0.8 billion, or 6.2%, above amortized cost. At December 31, 2014, our fixed maturity securities had an estimated fair value of $13.6 billion, which was $0.7 billion, or 5.1%, above amortized cost. Fixed maturity securities’ estimated fair value, due in one year or less, decreased to $1.1 billion as of March 31, 2015 from $1.3 billion as of December 31, 2014, primarily as a result of maturities.

The following table identifies the total bonds by credit quality rating, using both Standard & Poor’s and Moody’s ratings (in thousands, except percentages):

 

     March 31, 2015      December 31, 2014  
     Amortized
Cost
     Estimated
Fair Value
     % of Fair
Value
     Amortized
Cost
     Estimated
Fair Value
     % of Fair
Value
 

AAA

   $ 652,979       $ 696,276         5.1       $ 637,613       $ 676,728         5.0   

AA

     1,563,576         1,661,751         12.3         1,647,110         1,733,484         12.8   

A

     5,064,309         5,411,127         39.9         5,060,934         5,348,438         39.4   

BBB

     4,998,603         5,296,804         39.1         5,121,394         5,363,342         39.5   

BB and below

     486,136         487,184         3.6         452,715         452,728         3.3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

$ 12,765,603    $ 13,553,142      100.0    $ 12,919,766    $ 13,574,720      100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mortgage Loans—We invest in commercial mortgage loans that are diversified by property-type and geography to support our insurance business. Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. Mortgage loans are carried at outstanding principal balances, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of allowances. The weighted average coupon yield on the principal funded for mortgage loans was 4.3% and 4.9% at March 31, 2015 and December 31, 2014, respectively. It is likely that the weighted average yield on funded mortgage loans will decline as loans mature and new loans are originated with lower rates in the current interest rate environment.

 

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Equity Securities—Our equity portfolio is in companies publicly traded on national U.S. stock exchanges; the cost and estimated fair value of the equity securities are as follows (in thousands):

 

     Cost      Unrealized
Gains
     Unrealized
Losses
    Fair Value      % of Fair
Value
 

March 31, 2015

             

Common stock

   $ 736,727       $ 766,362       $ (13,233   $ 1,489,856         97.9   

Preferred stock

     19,733         12,031         (1     31,763         2.1   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 756,460    $ 778,393    $ (13,234 $ 1,521,619      100.0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

December 31, 2014

Common stock

$ 719,651    $ 774,650    $ (7,176 $ 1,487,125      98.0   

Preferred stock

  19,733      10,121      (1   29,853      2.0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Total

$ 739,384    $ 784,771    $ (7,177 $ 1,516,978      100.0   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Investment Real Estate—We invest in commercial real estate where positive cash flows and/or appreciation in value is expected. Real estate may be owned directly by our insurance companies or non-insurance affiliates or indirectly in joint ventures with real estate developers or investors we determine share our perspective regarding risk and return relationships. The carrying value of real estate is stated at cost, less accumulated depreciation and valuation allowances, if any. Depreciation is provided over the estimated useful lives of the properties.

Short-Term Investments—Short-term investments are primarily commercial paper rated A2/P2 or better by Standard & Poor’s and Moody’s, respectively. The amount fluctuates depending on the available long-term investment opportunities and our liquidity needs, including mortgage investment-funding commitments.

Policy Loans—For certain life insurance products, policyholders may borrow funds using the policy’s cash value as collateral. The maximum amount of the policy loan depends upon the policy’s surrender value. As of March 31, 2015, we had $406.4 million in policy loans with a loan to surrender value of 57.7%, and at March 31, 2014, we had $406.0 million in policy loans with a loan to surrender value of 57.6%. Interest rates on policy loans primarily range from 3.0% to 12.0% per annum. Policy loans may be repaid at any time by the policyholder and have priority to any claims on the policy. If the policyholder fails to repay the policy loan, funds are withdrawn from the policy’s benefits.

Net Investment Income and Net Realized Gains (Losses)

Net investment income decreased $9.6 million during the three months ended March 31, 2015, primarily from decreased interest rates on bonds and mortgage loans of $9.7 million and decreased option income of $2.9 million due to smaller gains on the S&P index, partially offset by improvement in real estate income.

Interest income on mortgage loans is accrued on the principal amount of the loan at the contractual interest rate. Accretion of discounts is recorded using the effective yield method. Interest income, accretion of discounts and prepayment fees are reported in net investment income. Interest is not accrued on loans generally more than 90 days past due or when the collection of interest is not considered probable. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in net investment income in the period received.

Net realized gains increased $12.9 million during the three months ended March 31, 2015 compared to 2014. Other-than-temporary impairment on investment securities decreased $1.0 million during the three months ended March 31, 2015 compared to 2014.

 

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Net Unrealized Gains and Losses

The net unrealized gains on available-for-sale securities at March 31, 2015 and December 31, 2014 were $1.04 billion and $1.01 billion, respectively. Unrealized gains or losses on available-for-sale securities are recognized as other comprehensive income or loss which has no impact on earnings. The gross unrealized gains of available-for-sale securities increased $32.4 million to $1.06 billion during the three months ended March 31, 2015, resulting from increases in the value of bonds and equity securities. The gross unrealized losses of available-for-sale securities changed favorably by $2.2 million, going from $24.9 million at December 31, 2014 to $22.8 million at March 31, 2015. The gross unrealized gains of held-to-maturity securities increased $65.6 million to $542.5 million and gross unrealized losses decreased from $48.9 million at December 31, 2014 to $29.1 million in March 31, 2015.

The fair value of our investment securities is affected by various factors, including volatility of financial markets, changes in interest rates and fluctuations in credit spread. We have the ability and intent to hold those securities in unrealized loss positions until a market price recovery or maturity. Further, it is unlikely that we will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time.

Liquidity

Our liquidity requirements have been and are expected to continue to be met by funds from operations, comprised of premiums received from our customers and investment income. The primary use of cash has been and is expected to continue to be payment of policyholder benefits and claims incurred. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management considers our current liquidity position to be sufficient to meet anticipated demands over the next twelve months. Our contractual obligations are not expected to have a significant negative impact to cash flow from operations.

Changes in interest rates during 2015 and market expectations for potentially higher rates through 2016 will likely lead to increases in the volume of annuity contracts, which may be partially offset by increases in surrenders. Freezing our defined benefit pension plans will lessen the impact of changes in interest rates on our contributions to these plans and future contributions to our defined benefit plans may be smaller than historical contributions. A portion of the contributions will be used for the employer matching contributions to defined contribution retirement plans, which will provide employees with the potential to accumulate assets for retirement. No unusually large capital expenditures are expected in the next 12-24 months and we have paid dividends to stockholders for over 100 consecutive years and expect to continue this trend. There are no other known trends or uncertainties regarding product pricing, changes in product lines or rising costs, which would have a significant impact to cash flows from operations.

To ensure we will be able to continue to pay future commitments, the funds received as premium payments and deposits are invested in bonds and commercial mortgages. Funds are invested with the intent that income from the investments and proceeds from the maturities will meet our ongoing cash flow needs. We historically have not had to liquidate invested assets in order to cover cash flow needs. We believe our portfolio of highly liquid available-for-sale investment securities including equity securities is sufficient to meet future liquidity needs as necessary.

Our cash and cash equivalents and short-term investment position was $690.4 million at March 31, 2015 compared to $640.5 million at December 31, 2014, respectively. The increase relates to an increase in short-term investments partially offset by a decrease in cash and cash equivalents as we look to minimize purchases of long term bonds beyond those needed to manage our longer term life and annuity related policyholder liabilities.

A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flow from operations.

 

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Capital Resources

Our capital resources are summarized below (in thousands):

 

     March 31,
2015
     December 31,
2014
 

American National stockholders’ equity, excluding accumulated other comprehensive income, net of tax (“AOCI”)

   $ 4,021,652       $ 3,936,781   

AOCI

     498,223         490,782   
  

 

 

    

 

 

 

Total American National stockholders’ equity

$ 4,519,875    $ 4,427,563   
  

 

 

    

 

 

 

We have notes payable relating to borrowings by real estate joint ventures that we consolidate into our financial statements that are not part of our capital resources. The lenders for the notes payable have no recourse against us in the event of default by the joint ventures. Therefore, the liability we have for these notes payable is limited to our investment in the respective ventures, which totaled $14.0 million at March 31, 2015 and $15.0 million at December 31, 2014, respectively.

The changes in our capital resources are summarized below (in thousands):

 

     Three months ended
March 31, 2015
 

Net income attributable to American National

   $ 102,982   

Increase in net unrealized gains

     7,836   

Defined benefit pension plan adjustment

     1,443   

Dividends to shareholders

     (20,711

Other

     762   
  

 

 

 

Total

$ 92,312   
  

 

 

 

During the three months ended March 31, 2015, the change in our capital resources increased compared to March 31, 2014 primarily due to increased earnings in 2015 partially offset by a smaller increase in unrealized gains in 2015.

Statutory Capital and Surplus and Risk-based Capital

Statutory capital and surplus is the capital of our insurance companies reported in accordance with accounting practices prescribed or permitted by the applicable state insurance departments. 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 of at least 200% of the authorized control level RBC are required to take certain actions. At March 31, 2015 and December 31, 2014, American National Insurance Company’s statutory capital and surplus was $2,934,396,000 and $2,879,154,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2015 and December 31, 2014, substantially above their authorized control level RBC.

The achievement of long-term growth will require growth in American National Insurance Company’s and our insurance subsidiaries’ statutory capital and surplus. Our subsidiaries may obtain additional statutory capital through various sources, such as retained statutory earnings or equity contributions from us.

Contractual Obligations

Our future cash payments associated with claims and claims adjustment expenses, life, annuity and disability obligations, contractual obligations pursuant to operating leases for office space and equipment, and notes payable have not materially changed since December 31, 2014. We expect to have the capacity to pay our obligations as they come due.

 

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Off-Balance Sheet Arrangements

We have off-balance sheet arrangements relating to third-party marketing operation bank loans as discussed in Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements. We could be exposed to a liability for these loans, which are supported by the cash value of the underlying insurance contracts. The cash value of the life insurance policies is designed to always equal or exceed the balance of the loans. Accordingly, management does not foresee any loss related to these arrangements.

Related-Party Transactions

We have various agency, consulting and service arrangements with individuals and entities considered to be related parties. Each of these arrangements has been reviewed and approved by our Audit Committee, which retains final decision-making authority for these transactions. The amounts involved, both individually and in the aggregate, with these arrangements are not material to any segment or to our overall operations. For additional details see Note 17, Related Party Transactions, of the Notes to the Consolidated Financial Statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks have not changed materially from those disclosed in our 2014 Annual Report on Form 10-K filed with the SEC on February 27, 2015.

 

ITEM 4. CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act)) that are designed to ensure that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Corporate Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. The Company’s management, with the participation of the Company’s Chief Executive Officer and Corporate Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2015. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Corporate Chief Financial Officer concluded that, as of March 31, 2015, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.

Management has monitored the internal controls over financial reporting, including any material changes to the internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Information required for Item 1 is incorporated by reference to the discussion under the heading “Litigation” in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

 

ITEM 1A. RISK FACTORS

There have been no material changes with respect to the risk factors as previously disclosed in our 2014 Annual Report on Form 10-K filed with the SEC on February 27, 2015.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

 

ITEM 5. OTHER INFORMATION

None.

 

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ITEM 6. EXHIBITS

 

Exhibit
Number