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 June 30, 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 August 3, 2015, there were 26,894,169 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 June 30, 2015 and December 31, 2014

     3   
 

Consolidated Statements of Operations for the three and six months ended June 30, 2015 and 2014

     4   
 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2015 and 2014

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2015 and 2014

     5   
 

Consolidated Statements of Cash Flows for the six months ended June 30, 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   

 

2


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

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

 

     June 30,
2015
    December 31,
2014
 
           (As Adjusted)  

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair Value $8,184,118 and $8,652,913)

   $ 7,834,732      $ 8,225,050   

Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $4,974,683 and $4,694,716)

     5,131,957        4,921,807   

Equity securities, at fair value
(Cost $759,975 and $739,384)

     1,516,244        1,516,978   

Mortgage loans on real estate, net of allowance

     3,311,017        3,359,586   

Policy loans

     405,400        405,979   

Investment real estate, net of accumulated
depreciation of $200,652 and $193,611

     514,497        479,062   

Short-term investments

     430,242        431,000   

Other invested assets

     228,087        220,255   
  

 

 

   

 

 

 

Total investments

     19,372,176        19,559,717   
  

 

 

   

 

 

 

Cash and cash equivalents

     158,981        209,455   

Investments in unconsolidated affiliates

     318,216        311,779   

Accrued investment income

     176,295        185,943   

Reinsurance recoverables

     409,514        428,654   

Prepaid reinsurance premiums

     66,879        56,019   

Premiums due and other receivables

     315,970        280,587   

Deferred policy acquisition costs

     1,264,148        1,253,544   

Property and equipment, net

     119,514        110,794   

Current tax receivable

     —          8,669   

Other assets

     143,230        137,856   

Separate account assets

     974,233        1,001,515   
  

 

 

   

 

 

 

Total assets

   $ 23,319,156      $ 23,544,532   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,795,388      $ 2,770,232   

Annuity

     1,035,475        1,006,748   

Accident and health

     67,882        58,364   

Policyholders’ account balances

     10,475,859        10,781,285   

Policy and contract claims

     1,280,923        1,297,708   

Unearned premium reserve

     802,725        755,051   

Other policyholder funds

     354,334        344,090   

Liability for retirement benefits

     190,387        195,712   

Notes payable

     122,464        108,177   

Current tax liability

     6,792        —     

Deferred tax liabilities, net

     277,220        287,175   

Other liabilities

     440,248        498,528   

Separate account liabilities

     974,233        1,001,515   
  

 

 

   

 

 

 

Total liabilities

     18,823,930        19,104,585   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value, - Authorized 50,000,000,
Issued 30,832,449 and 30,832,449,
Outstanding 26,894,169 and 26,871,942 shares

     30,832        30,832   

Additional paid-in capital

     12,898        9,248   

Accumulated other comprehensive income

     446,861        490,782   

Retained earnings

     4,095,306        3,998,642   

Treasury stock, at cost

     (101,805     (101,941
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,484,092        4,427,563   

Noncontrolling interest

     11,134        12,384   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,495,226        4,439,947   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 23,319,156      $ 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 June 30,     Six months ended June 30,  
     2015     2014     2015     2014  
           (As Adjusted)           (As Adjusted)  

PREMIUMS AND OTHER REVENUE

        

Premiums

        

Life

   $ 75,071      $ 72,678      $ 147,153      $ 144,673   

Annuity

     25,088        46,653        66,531        113,589   

Accident and health

     51,135        55,379        102,972        110,715   

Property and casualty

     281,909        270,916        558,390        541,524   

Other policy revenues

     57,597        55,859        115,121        111,786   

Net investment income

     203,662        242,292        412,875        461,115   

Net realized investment gains

     16,768        1,751        56,070        28,197   

Other-than-temporary impairments

     (3,472     (462     (3,497     (1,437

Other income

     9,748        9,720        18,458        17,060   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     717,506        754,786        1,474,073        1,527,222   
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

        

Policyholder benefits

        

Life

     91,184        82,485        179,188        173,765   

Annuity

     36,150        59,027        90,517        136,479   

Claims incurred

        

Accident and health

     32,256        32,737        64,053        76,666   

Property and casualty

     211,920        204,725        404,172        383,237   

Interest credited to policyholders’ account balances

     69,215        91,794        144,968        175,206   

Commissions for acquiring and servicing policies

     103,557        103,949        196,672        202,384   

Other operating expenses

     123,203        120,517        246,661        239,041   

Change in deferred policy acquisition costs

     614        (6,370     7,076        54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     668,099        688,864        1,333,307        1,386,832   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     49,407        65,922        140,766        140,390   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision for federal income taxes

        

Current

     10,955        23,106        26,543        36,887   

Deferred

     4,093        (1,323     14,391        7,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision for federal income taxes

     15,048        21,783        40,934        44,691   

Equity in earnings of unconsolidated affiliates, net of tax

     300        12,797        37,080        12,735   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     34,659        56,936        136,912        108,434   

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

     (394     (238     (1,123     (994
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American National

   $ 35,053      $ 57,174      $ 138,035      $ 109,428   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

        

Earnings per share

        

Basic

   $ 1.30      $ 2.13      $ 5.14      $ 4.08   

Diluted

     1.30        2.11        5.12        4.06   

Cash dividends to common stockholders

     0.77        0.77        1.54        1.54   

Weighted average common shares outstanding

     26,877,833        26,802,896        26,847,936        26,799,648   

Weighted average common shares outstanding and dilutive potential common shares

     26,952,107        26,926,351        26,941,477        26,924,629   

See accompanying notes to the consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended June 30,     Six months ended June 30,  
     2015     2014     2015     2014  
           (As Adjusted)           (As Adjusted)  

Net income

   $ 34,659      $ 56,936      $ 136,912      $ 108,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Change in net unrealized gain (losses) on securities

     (54,139     72,925        (46,303     106,759   

Foreign currency transaction and translation adjustments

     1,188        865        (650     (101

Defined pension benefit plan adjustment

     1,589        717        3,032        1,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (51,362     74,507        (43,921     108,092   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     (16,703     131,443        92,991        216,526   

Less: Comprehensive income (loss) attributable to noncontrolling interest

     (394     (238     (1,123     (994
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to American National

   $ (16,309   $ 131,681      $ 94,114      $ 217,520   
  

 

 

   

 

 

   

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited and in thousands)

 

     Six months ended June 30,  
     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

     2,997        1,621   

Amortization of restricted stock

     653        2,081   
  

 

 

   

 

 

 

Balance at end of period

     12,898        8,352   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance as of January 1,

     490,782        413,712   

Other comprehensive income (loss)

     (43,921     108,092   
  

 

 

   

 

 

 

Balance at end of the period

     446,861        521,804   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     3,998,642        3,836,112   

Net income attributable to American National

     138,035        109,428   

Cash dividends to common stockholders

     (41,371     (41,421
  

 

 

   

 

 

 

Balance at end of the period

     4,095,306        3,904,119   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (101,941     (97,441

Reinsurance (purchase) of treasury shares

     136        (4,354
  

 

 

   

 

 

 

Balance at end of the period

     (101,805     (101,795
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     12,384        12,757   

Contributions

     27        255   

Distributions

     (154     (5

Loss attributable to noncontrolling interest

     (1,123     (994

Cumulative tax adjustment

     —          (507
  

 

 

   

 

 

 

Balance at end of the period

     11,134        11,506   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 4,495,226      $ 4,374,818   
  

 

 

   

 

 

 

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)

 

     Six months ended June 31,  
     2015     2014  
           (As Adjusted)  

OPERATING ACTIVITIES

    

Net income

   $ 136,912      $ 108,434   

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

    

Net realized investment gains

     (56,070     (28,197

Other-than-temporary impairments

     3,497        1,437   

Amortization of premiums, discounts and loan origination fees

     1,098        5,636   

Net capitalized interest on policy loans and mortgage loans

     (15,668     (16,268

Depreciation

     18,669        12,874   

Interest credited to policyholders’ account balances

     144,968        175,206   

Charges to policyholders’ account balances

     (115,121     (111,786

Deferred federal income tax expense

     14,391        7,804   

Equity in earnings of unconsolidated affiliates

     (37,080     (12,735

Distributions from equity method investments

     359        23,132   

Changes in

    

Policyholder liabilities

     107,256        163,271   

Deferred policy acquisition costs

     7,076        54   

Reinsurance recoverables

     19,140        1,023   

Premiums due and other receivables

     (35,837     (12,235

Prepaid reinsurance premiums

     (10,860     3,278   

Accrued investment income

     9,648        (565

Current tax receivable/payable

     15,461        617   

Liability for retirement benefits

     (5,325     (15,164

Other, net

     (62,163     (49,949
  

 

 

   

 

 

 

Net cash provided by operating activities

     140,351        255,867   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     619,477        344,981   

Available-for-sale securities

     303,836        514,707   

Investment real estate

     13,413        25,278   

Mortgage loans

     399,600        299,528   

Policy loans

     28,702        28,171   

Other invested assets

     12,332        31,849   

Disposals of property and equipment

     817        1,012   

Distributions from unconsolidated affiliates

     79,514        1,150   

Payment for the purchase/origination of

    

Held-to-maturity securities

     (205,446     (218,764

Available-for-sale securities

     (600,818     (655,266

Investment real estate

     (25,985     (10,593

Mortgage loans

     (358,011     (314,774

Policy loans

     (11,859     (12,542

Other invested assets

     (25,386     (8,623

Additions to property and equipment

     (17,614     (8,128

Contributions to unconsolidated affiliates

     (55,550     (14,907

Change in short-term investments

     758        153,878   

Other, net

     13,879        (2,022
  

 

 

   

 

 

 

Net cash provided by investing activities

     171,659        154,935   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     461,687        528,732   

Policyholders’ account withdrawals

     (796,960     (880,194

Change in notes payable

     14,287        (1,399

Dividends to stockholders

     (41,371     (41,421

Proceeds from (payments to) noncontrolling interest

     (127     250   
  

 

 

   

 

 

 

Net cash used in financing activities

     (362,484     (394,032
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (50,474     16,770   

Beginning of the period

     209,455        117,946   
  

 

 

   

 

 

 

End of period

   $ 158,981      $ 134,716   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

6


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 affiliate’s 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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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  

Investment 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
     As Reported      As Adjusted      Effect of Change  

Three months ended June 30, 2014

        

Provision for federal income taxes, current

   $ 22,345       $ 23,106       $ 761   

Provision for federal income taxes, deferred

     (787      (1,323      (536

Equity in earnings of unconsolidated affiliates, net of tax

     12,659         12,797         138   

Net Income attributable to American National

     57,261         57,174         (87

Six months ended June 30, 2014

        

Provision for federal income taxes, current

   $ 34,705       $ 36,887       $ 2,182   

Provision for federal income taxes, deferred

     8,340         7,804         (536

Equity in earnings of unconsolidated affiliates, net of tax

     11,800         12,735         935   

Net Income attributable to American National

     110,139         109,428         (711

American National held investments in Qualified Affordable Housing Projects totaling $33,304,000 and $27,595,000 as of June 30, 2015 and December 31, 2014, respectively. For the six month periods ending June 30, 2015 and June 30, 2014, American National recognized tax credits and other tax benefits of $4,427,000 and $3,164,000, respectively, and amortized cost of $3,889,000 and $2,560,000, relating to these investments. At June 30, 2015 American National had commitments to provide additional funding to these investments during the following fiscal years as follows (in thousands):

 

Expected year of payment    2015      2016      2017      2018      2019      Total  

Equity commitments

   $  16,470         4,148         1,314         726         1,078       $ 23,736   

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, 2017 and is to be applied retrospectively. The Company is evaluating the impact of adoption, which 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.

In May 2015, the FASB issued guidance to expand the disclosures that an insurance entity must provide about its short duration contracts. The additional disclosure about the liability for unpaid claims and claim adjustment expenses is intended to increase the transparency of significant estimates made in the measuring of those liabilities. It will also provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims. The amended guidance is effective for annual reporting periods beginning after December 15, 2015 and for interim reporting periods beginning after December 15, 2016. The impact of the adoption is not expected to be material to the Company’s financial statements.

 

8


Table of Contents

Note 4 – Investment in Securities

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

 

     June 30, 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

   $ 306,665       $ 23,704       $ (97    $ 330,272   

Foreign governments

     4,122         916         —           5,038   

Corporate debt securities

     7,204,630         357,262         (53,315      7,508,577   

Residential mortgage-backed securities

     301,196         21,202         (1,237      321,161   

Commercial mortgage-backed securities

     —           —           —           —     

Collateralized debt securities

     1,931         151         —           2,082   

Other debt securities

     16,188         800         —           16,988   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,834,732         404,035         (54,649      8,184,118   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,038         771         (1      24,808   

U.S. states and political subdivisions

     880,206         26,476         (8,018      898,664   

Foreign governments

     5,000         1,827         —           6,827   

Corporate debt securities

     4,024,062         161,807         (27,367      4,158,502   

Residential mortgage-backed securities

     32,313         1,718         (506      33,525   

Collateralized debt securities

     9,064         693         (126      9,631   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     4,974,683         193,292         (36,018      5,131,957   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     744,742         759,886         (13,854      1,490,774   

Preferred stock

     15,233         10,238         (1      25,470   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     759,975         770,124         (13,855      1,516,244   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

   $ 13,569,390       $ 1,367,451       $ (104,522    $ 14,832,319   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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):

 

     June 30, 2015  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 633,129       $ 643,485       $ 351,266       $ 358,911   

Due after one year through five years

     2,043,445         2,233,333         895,628         960,265   

Due after five years through ten years

     4,780,423         4,906,961         3,156,290         3,235,340   

Due after ten years

     371,884         395,314         566,499         572,479   

Without single maturity date

     5,851         5,025         5,000         4,962   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,834,732       $ 8,184,118       $ 4,974,683       $ 5,131,957   
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30,      Six months ended June 30,  
     2015      2014      2015      2014  

Proceeds from sales of available-for-sale securities

   $ 23,894       $ 54,802       $ 39,476       $ 136,466   

Gross realized gains

     7,226         4,823         14,009         24,765   

Gross realized losses

     (65      (2      (65      (2,123

Gains and losses are determined using specific identification of the securities sold. During the six months ended June 30, 2015 there were no bonds transferred from held-to-maturity to available-for-sale. During the six months ended June 30, 2014 bonds with a carrying value of $44,781,000, were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ creditworthiness became evident. Unrealized gains of $1,301,000 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):

 

     Six months ended June 30,  
     2015      2014  

Bonds available-for-sale

   $ (69,817    $ 115,275   

Equity securities

     (21,325      89,286   
  

 

 

    

 

 

 

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

     (91,142      204,561   

Adjustments for

     

Deferred policy acquisition costs

     17,680         (30,837

Participating policyholders’ interest

     2,722         (10,378

Deferred federal income tax expense

     24,437         (56,587
  

 

 

    

 

 

 

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

   $ (46,303    $ 106,759   
  

 

 

    

 

 

 

 

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):

 

     June 30, 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

   $ (43   $ 2,480       $ (54   $ 116       $ (97   $ 2,596   

Corporate debt securities

     (37,141     1,472,709         (16,174     176,016         (53,315     1,648,725   

Residential mortgage-backed securities

     (337     20,801         (900     17,080         (1,237     37,881   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (37,521     1,495,990         (17,128     193,212         (54,649     1,689,202   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (1     3,922         —          —           (1     3,922   

U.S. states and political subdivisions

     (7,653     328,492         (365     2,636         (8,018     331,128   

Corporate debt securities

     (23,866     1,192,265         (3,501     51,336         (27,367     1,243,601   

Residential mortgage-backed securities

     (275     10,954         (231     7,085         (506     18,039   

Collateralized debt securities

     (119     2,060         (7     306         (126     2,366   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (31,914     1,537,693         (4,104     61,363         (36,018     1,599,056   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (13,850     86,894         (4     22         (13,854     86,916   

Preferred stock

     —          —           (1     —           (1     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (13,850     86,894         (5     22         (13,855     86,916   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (83,285   $ 3,120,577       $ (21,237   $ 254,597       $ (104,522   $ 3,375,174   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     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 June 30, 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:

 

     June 30, 2015     December 31, 2014  

AAA

     5.3     5.0

AA

     12.4        12.8   

A

     39.5        39.4   

BBB

     39.6        39.5   

BB and below

     3.2        3.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

     June 30, 2015     December 31, 2014  

Consumer goods

     20.5     20.4

Energy and utilities

     14.5        13.3   

Financials

     19.6        19.1   

Healthcare

     15.5        14.0   

Industrials

     8.2        8.4   

Information technology

     16.3        16.2   

Other

     5.4        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 location of the underlying collateral. The distribution based on carrying amount of mortgage loans by location are as follows:

 

     June 30, 2015     December 31, 2014  

East North Central

     19.7     19.4

East South Central

     5.3        5.0   

Mountain

     11.9        11.0   

Pacific

     9.5        10.8   

South Atlantic

     21.0        21.9   

West South Central

     26.3        24.9   

Other

     6.3        7.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

As of June 30, 2015, American National had foreclosed on two loans with a recorded investment of $19,328,000; there were no loans foreclosed for the same period in 2014. American National sold one commercial loan with a recorded investment of $2,702,000 resulting in a realized loss of $1,602,000 for the six months ended June 30, 2015. No loans were sold in the same period in 2014.

 

12


Table of Contents

Note 5 – Mortgage Loans – (Continued)

 

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

 

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

June 30, 2015

              

Industrial

   $ —        $ —        $ —        $ —        $ 718,732      $ 718,732        21.7

Office

     —          —            —          1,195,041        1,195,041        35.9   

Retail

     —          —          —          —          579,299        579,299        17.3   

Other

     —          —          —          —          831,352        831,352        25.1   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ —        $ —        $ —        $ —        $ 3,324,424        3,324,424        100.0 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

Allowance for loan losses

               (13,407  
            

 

 

   

Mortgage loans on real estate, net of allowance

             $ 3,311,017     
            

 

 

   

December 31, 2014

              

Industrial

   $ —        $ —        $ —        $ —        $ 702,541      $ 702,541        20.9

Office

     —          —          19,327        19,327        1,201,833        1,221,160        36.1   

Retail

     —          —          —          —          615,813        615,813        18.1   

Other

     —          —          —          —          837,932        837,932        24.9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ —        $ —        $ 19,327      $ 19,327      $ 3,358,119      $ 3,377,446        100.0 % 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

     

 

 

 

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 $557,000 and $658,000 and unamortized origination fees of $17,463,000 and $15,659,000 at June 30, 2015 and December 31, 2014, respectively. No unearned income is included in these amounts.

Allowance for Credit Losses

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.

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):

 

     Six months ended June 30,  
     Collectively
Evaluated
for Impairment
     Individually
Evaluated
for Impairment
 

Beginning balance, 2015

   $  12,277       $ 5,583   

Change in allowance

     (1,049      (3,404
  

 

 

    

 

 

 

Ending balance, 2015

   $ 11,228       $ 2,179   
  

 

 

    

 

 

 

At June 30, 2015 and December 31, 2014, the recorded investment for loans collectively evaluated for impairment was $3,298,423,000 and $3,321,241,000, respectively, and the recorded investment for loans individually evaluated for impairment was $26,001,000 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):

 

     June 30, 2015      June 30, 2014  
     Average
Recorded
Investment
     Interest
Income
Recognized
     Average
Recorded
Investment
     Interest
Income
Recognized
 
Three months ended            

With an allowance recorded

           

Office

   $ —         $ —         $ 11,763       $ 209   

Industrial

     —           —           —           —     

Retail

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 11,763       $ 209   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 20,996       $ 340       $ 6,256       $ 85   

Industrial

     —           —           7,877         144   

Retail

     2,503         88         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 23,499       $ 428       $ 14,133       $ 229   
  

 

 

    

 

 

    

 

 

    

 

 

 
Six months ended            

With an allowance recorded

           

Office

   $ —         $ —         $ 11,763       $ 207   

Industrial

     —           —           —           —     

Retail

     —           —           —           20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 11,763       $ 227   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 20,996       $ 681       $ 18,649       $ 288   

Industrial

     —           —           10,598         173   

Retail

     5,032         177         1,280         6   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,028       $ 858       $ 30,527       $ 467   
  

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 2015      December 31, 2014  
     Recorded
Investment
     Unpaid
Principal
Balance
     Recorded
Investment
     Unpaid
Principal
Balance
 

With an allowance recorded

           

Office

   $ —         $ —         $ 26,563       $ 31,653   

Industrial

     —           —           —           —     

Retail

     —           —           —           493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 26,563       $ 32,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

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

Industrial

     —           —           2,702         2,702   

Retail

     5,005         5,005         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,001       $ 26,001       $ 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:

 

     Six months ended June 30,  
     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         2       $ 19,836       $ 19,836   

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.

 

14


Table of Contents

Note 6 – Investment Real Estate

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

 

     June 30, 2015     December 31, 2014  

Industrial

     11.9     13.0

Office

     29.8        25.0   

Retail

     42.1        44.1   

Other

     16.2        17.9   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     June 30, 2015     December 31, 2014  
  

 

 

   

 

 

 

East North Central

     8.3     4.5

East South Central

     4.1        4.6   

Mountain

     8.4        9.6   

Pacific

     6.5        7.1   

South Atlantic

     11.5        12.2   

West South Central

     55.0        55.6   

Other

     6.2        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):

 

     June 30, 2015      December 31, 2014  

Investment real estate

   $ 161,744       $ 140,032   

Short-term investments

     1         1   

Cash and cash equivalents

     3,118         2,495   

Accrued investment income

     170         683   

Other receivables

     8,176         7,999   

Other assets

     6,142         8,483   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 179,351       $ 159,693   
  

 

 

    

 

 

 

Notes payable

   $ 122,464       $ 108,177   

Other liabilities

     10,629         8,954   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 133,093       $ 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 $32,358,000 and $15,016,000 at June 30, 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 0.5%, and two notes with adjusted LIBOR plus LIBOR margin. Of the long-term notes payable, $24,937,000 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):

 

     June 30, 2015      December 31, 2014  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 202,818       $ 202,818       $ 157,620       $ 157,620   

Mortgage loans

     202,864         202,864         172,408         172,408   

Accrued investment income

     868         868         721         721   

As of June 30, 2015, a real estate investment with a carrying value of $4,028,000 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):

 

Derivatives Not Designated
as Hedging Instruments

 

Location in the

Consolidated
Statements of

Financial Position

  June 30, 2015     December 31, 2014  
    Number of
Instruments
    Notional
Amounts
    Estimated
Fair Value
    Number of
Instruments
    Notional
Amounts
    Estimated
Fair Value
 

Equity-indexed options

  Other invested assets     456      $ 1,189,400      $ 183,963        436      $ 1,095,300      $ 189,449   

Equity-indexed embedded
derivative

  Policyholders’ account balances     46,307        931,300        208,827        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 June 30,     Six months ended June 30,  
      2015     2014     2015     2014  

Equity-indexed options

   Net investment income    $ (2,095   $ 18,464      $ (964   $ 22,449   

Equity-indexed embedded
derivative

   Interest credited to policyholders’ account balances      4,413        (11,826     3,217        (14,722

 

16


Table of Contents

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

Net investment income is shown below (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  

Bonds

   $ 139,095       $ 149,879       $ 282,836       $ 301,395   

Equity securities

     10,049         9,258         18,516         18,342   

Mortgage loans

     49,502         55,904         99,001         107,358   

Real estate

     147         2,073         (1,606      (2,898

Options

     (2,095      18,464         (964      22,449   

Other invested assets

     6,964         6,714         15,092         14,469   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 203,662       $ 242,292       $ 412,875       $ 461,115   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  

Bonds

   $ 8,799       $ 3,293       $ 10,097       $ 19,912   

Equity securities

     8,283         3,533         36,910         10,064   

Mortgage loans

     (209      (3,145      (733      (3,873

Real estate

     (78      (1,934      9,833         3,029   

Other invested assets

     (27      4         (37      (935
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,768       $ 1,751       $ 56,070       $ 28,197   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  

Bonds

   $ —         $ —         $ —         $ (41

Equity securities

     (3,472      (462      (3,497      (1,396
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (3,472    $ (462    $ (3,497    $ (1,437
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

Note 9 – Fair Value of Financial Instruments

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

 

     June 30, 2015      December 31, 2014  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

   $ 7,834,732       $ 8,184,118       $ 8,225,050       $ 8,652,913   

Fixed maturity securities, bonds available-for-sale

     5,131,957         5,131,957         4,921,807         4,921,807   

Equity securities

     1,516,244         1,516,244         1,516,978         1,516,978   

Equity-indexed options

     183,963         183,963         189,449         189,449   

Mortgage loans on real estate, net of allowance

     3,311,017         3,524,217         3,359,586         3,618,944   

Policy loans

     405,400         405,400         405,979         405,979   

Short-term investments

     430,242         430,242         431,000         431,000   

Separate account assets

     974,233         974,233         1,001,515         1,001,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,787,788       $ 20,350,374       $ 20,051,364       $ 20,738,585   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,557,961       $ 8,557,961       $ 8,894,747       $ 8,894,747   

Embedded derivative liability for

           

equity-indexed contracts

     208,827         208,827         208,187         208,187   

Notes payable

     122,464         122,464         108,177         108,177   

Separate account liabilities

     974,233         974,233         1,001,515         1,001,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 9,863,485       $ 9,863,485       $ 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.

 

18


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.

 

19


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 June 30, 2015 and December 31, 2014, the one year implied volatility used to estimate embedded derivative value was 16.5% 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 such that they cannot be separated from the policy contracts and the unpredictable timing of repayments and the fact 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.

 

20


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 June 30, 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

   $ 330,272       $ —         $ 330,272       $ —     

Foreign governments

     5,038         —           5,038         —     

Corporate debt securities

     7,508,577         —           7,453,341         55,236   

Residential mortgage-backed securities

     321,161         —           320,215         946   

Collateralized debt securities

     2,082         —           —           2,082   

Other debt securities

     16,988         —           12,682         4,306   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     8,184,118         —           8,121,548         62,570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,808         —           24,808         —     

U.S. states and political subdivisions

     898,664         —           896,164         2,500   

Foreign governments

     6,827         —           6,827         —     

Corporate debt securities

     4,158,502         —           4,097,421         61,081   

Residential mortgage-backed securities

     33,525         —           31,719         1,806   

Collateralized debt securities

     9,631         —           7,818         1,813   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,131,957         —           5,064,757         67,200   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,490,774         1,490,774         —           —     

Preferred stock

     25,470         25,470         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,516,244         1,516,244         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     183,963         —           —           183,963   

Mortgage loans on real estate

     3,524,217         —           3,524,217         —     

Policy loans

     405,400         —           —           405,400   

Short-term investments

     430,242         —           430,242         —     

Separate account assets

     974,233         —           974,233         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,350,374       $ 1,516,244       $ 18,114,997       $ 719,133   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,557,961       $ —         $ —         $ 8,557,961   

Embedded derivative liability for equity-indexed contracts

     208,827         —           —           208,827   

Notes payable

     122,464         —           —           122,464   

Separate account liabilities

     974,233         —           974,233         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 9,863,485       $ —         $ 974,233       $ 8,889,252   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


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 June 30,     Six months ended June 30,  
     Assets     Liability     Assets     Liability  
     Investment
Securities
    Equity-
Indexed
Options
    Embedded
Derivative
    Investment
Securities
    Equity-
Indexed
Options
    Embedded
Derivative
 

Beginning balance, 2015

   $  65,299      $ 188,006      $ 208,412      $ 64,433      $ 189,449      $ 208,187   

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

     (1,105     —          —          (168     —          —     

Net fair value change included in realized gains (losses)

     —          —          —          —          —          —     

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

     —          (3,880     —          —          (4,623     —     

Net change included in interest credited

     —          —          (4,413     —          —          (3,217

Purchases, sales and settlements or maturities

            

Purchases

     —          5,825        —          —          9,588        —     

Sales

     (60     —          —          (121     —          —     

Settlements or maturities

     (332     (5,988     —          (342     (10,451     —     

Premiums less benefits

     —          —          4,828        —          —          3,857   

Gross transfers into Level 3

     3,398        —          —          3,398        —          —     

Gross transfers out of Level 3

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance June 30, 2015

   $ 67,200      $ 183,963      $ 208,827      $ 67,200      $ 183,963      $ 208,827   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2014

   $ 11,973      $ 146,147      $ 155,191      $ 48,304      $ 164,753      $ 148,435   

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

     321        —          —          (11,873     —          —     

Net fair value change included in realized gains (losses)

     —          —          —          13,056        —          —     

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

     —          16,678        —          —          18,790        —     

Net change included in interest credited

     —          —          11,826        —          —          14,722   

Purchases, sales and settlements or maturities

            

Purchases

     —          4,017        —          —          8,690        —     

Sales

     (362     —          —          (37,550     —          —     

Settlements or maturities

     —          (2,981     —          (5     (28,372     —     

Premiums less benefits

     —          —          19,244        —          —          23,104   

Gross transfers into Level 3

     —          —          —          —          —          —     

Gross transfers out of Level 3

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance June 30, 2014

   $ 11,932      $ 163,861      $ 186,261      $ 11,932      $ 163,861      $ 186,261   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gains (losses) of $(10,602,000) and $3,641,000 relating to assets still held at June 30, 2015 and 2014, respectively.

The transfers during the three and six months ended June 30, 2015 into Level 3 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. There were no transfers between fair value hierarchies during the three or six months ended June 30, 2014.

 

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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

     53,632        20,233        7,041        114,951        195,857   

Amortization

     (38,567     (41,763     (8,778     (113,825     (202,933

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

     4,689        12,991        —          —          17,680   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     19,754        (8,539     (1,737     1,126        10,604   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2015

   $ 731,223      $ 373,902      $ 46,047      $ 112,976      $ 1,264,148   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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):

 

     Six months ended June 30,  
     2015      2014  

Unpaid claims balance, beginning

   $ 1,132,394       $ 1,096,301   

Less reinsurance recoverables

     245,906         215,161   
  

 

 

    

 

 

 

Net beginning balance

     886,488         881,140   
  

 

 

    

 

 

 

Incurred related to

     

Current

     485,872         472,008   

Prior years

     (14,189      (10,860
  

 

 

    

 

 

 

Total incurred claims

     471,683         461,148   
  

 

 

    

 

 

 

Paid claims related to

     

Current

     246,056         224,618   

Prior years

     208,300         199,925   
  

 

 

    

 

 

 

Total paid claims

     454,356         424,543   
  

 

 

    

 

 

 

Net balance

     903,815         917,745   

Plus reinsurance recoverables

     222,376         228,340   
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,126,191       $ 1,146,085   
  

 

 

    

 

 

 

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 $14,189,000 during the first six months of 2015 and $10,860,000 during the first six months of 2014, reflecting lower-than-anticipated losses on illnesses.

 

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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 June 30,     Six months ended June 30,  
     2015     2014     2015     2014  
                 (As Adjusted)                 (As Adjusted)  
     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  

Income tax on pre-tax income

   $ 17,292        35.0   $ 23,073        35.0   $ 49,268        35.0   $ 49,137        35.0

Tax-exempt investment income

     (1,946     (3.9     (1,602     (2.4     (3,825     (2.7     (3,155     (2.2

Dividend exclusion

     (1,864     (3.8     (1,665     (2.5     (3,947     (2.8     (3,553     (2.5

Miscellaneous tax credits, net

     (2,541     (5.1     (1,664     (2.5     (4,472     (3.2     (3,215     (2.3

Low income housing tax credit expense

     1,221        2.5        225        0.4        2,485        1.8        1,646        1.2   

Other items, net

     2,886        5.8        3,416        5.2        1,425        1.0        3,831        2.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 15,048        30.5   $ 21,783        33.2   $ 40,934        29.1   $ 44,691        31.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

American National made payments of $25,080,000 and $30,913,000 during the six months ended June 30, 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 June 30, 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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Table of Contents

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 $12,334 and expense $1,633)

     (22,905      3,032         —           (19,873

Unrealized holding losses arising during the period (net of tax benefit $19,566)

     (36,337            (36,337

Unrealized adjustment to DAC (net of tax expense $6,510)

     11,170               11,170   

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax expense $953)

     1,769               1,769   

Foreign currency adjustment (net of tax benefit $350)

           (650      (650
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2015

   $ 521,848       $ (73,042    $ (1,945    $ 446,861   
  

 

 

    

 

 

    

 

 

    

 

 

 

Beginning balance, 2014

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

Amounts reclassified from AOCI (net of tax benefit $9,225 and expense $772)

     (17,133      1,434         —           (15,699

Unrealized holding gains arising during the period (net of tax expense $80,821)

     150,098               150,098   

Unrealized adjustment to DAC (net of tax benefit $11,377)

     (19,460            (19,460

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $3,632)

     (6,746            (6,746

Foreign currency adjustment (net of tax benefit $54)

           (101      (101
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2014

   $ 564,696       $ (42,450    $ (442    $ 521,804   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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:

 

     June 30,
2015
     December 31,
2014
 

Common stock

     

Shares issued

     30,832,449         30,832,449   

Treasury shares

     (3,938,280      (3,960,507
  

 

 

    

 

 

 

Outstanding shares

     26,894,169         26,871,942   

Restricted shares

     (78,667      (142,667
  

 

 

    

 

 

 

Unrestricted outstanding shares

     26,815,502         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. Incentive awards under this plan are made to officers meeting established performance objectives. All awards are subject to review and approval, both at the time of setting applicable performance objectives and at 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 are 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

     (116     73.97         (64,000     102.60         (70,494     90.56   

Forfeited

     —          —           —          —           (198     —     

Expired

     (15,196     115.10         —          —           —          —     
  

 

 

      

 

 

      

 

 

   

Outstanding at June 30, 2015

     39,618      $ 114.88         78,667      $ 111.28         140,615      $ 103.73   
  

 

 

      

 

 

      

 

 

   

 

     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     1.64         3.86         2.16   

Exercisable shares

     39,604         N/A         —     

Weighted-average exercise price

   $ 114.88       $ 111.28       $ 103.73   

Weighted-average exercise price exercisable shares

     114.90         N/A         N/A   

Compensation expense (credits)

        

Three months ended June 30, 2015

   $ 10,000       $ 276,000       $ 1,127,000   

Three months ended June 30, 2014

     (4,000      1,576,000         465,000   

Six months ended June 30, 2015

     (67,000      653,000         4,307,000   

Six months ended June 30, 2014

     (13,000      2,081,000         668,000   

Fair value of liability award

        

June 30, 2015

   $ 41,000         N/A       $ 18,012,000   

December 31, 2014

     167,000         N/A         16,301,000   

 

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Table of Contents

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 awards for 350,334 shares have been granted at an exercise price of zero, of which 78,667 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 June 30,      Six months ended June 30,  
     2015      2014      2015      2014  
            (As Adjusted)             (As Adjusted)  

Weighted average shares outstanding

     26,877,833         26,802,896         26,847,936         26,799,648   

Incremental shares from RS awards and RSUs

     74,274         123,455         93,541         124,981   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shares for diluted calculations

     26,952,107         26,926,351         26,941,477         26,924,629   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to American National (in thousands)

   $ 35,053       $ 57,174       $ 138,035       $ 109,428   

Basic earnings per share

   $ 1.30       $ 2.13       $ 5.14       $ 4.08   

Diluted earnings per share

     1.30         2.11         5.12         4.06   

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 June 30, 2015 and December 31, 2014, American National Insurance Company’s statutory capital and surplus was $2,960,102,000 and $2,879,154,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at June 30, 2015 and December 31, 2014, substantially above their authorized control level RBC.

 

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Table of Contents

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 $64,225,000 and $58,560,000 at June 30, 2015 and June 30, 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):

 

                   June 30, 2015      December 31, 2014  

Statutory capital and surplus

           

Life insurance entities

         $ 1,976,079       $ 1,904,128   

Property and casualty insurance entities

           993,086         984,155   
     Three months ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  

Statutory net income

           

Life insurance entities

   $ 33,147       $ 41,064       $ 79,241       $ 96,118   

Property and casualty insurance entities

     (1,111      (1,045      13,937         22,134   

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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Table of Contents

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 June 30, 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 $4,384,000 and $5,634,000 at June 30, 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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Table of Contents

Note 15 – Segment Information – (Continued)

 

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

 

     Three months ended June 30,      Six months ended June 30,  
     2015      2014      2015      2014  

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

           

Life

   $ 7,131       $ 13,104       $ 15,330       $ 11,282   

Annuity

     17,122         28,344         34,235         46,049   

Health

     5,360         10,821         12,903         10,275   

Property and Casualty

     (1,444      190         8,778         29,702   

Corporate and Other

     21,238         13,463         69,520         43,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 49,407       $ 65,922       $ 140,766       $ 140,390   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at June 30, 2015, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $675,294,000 of which $403,319,000 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 June 30, 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 June 30, 2015, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $210,436,000.

Litigation

American National and certain subsidiaries, in common with the insurance industry in general, are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information presently available, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position, liquidity or results of operations; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future.

 

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Note 16 – Commitments and Contingencies – (Continued)

 

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 significant related party transactions is shown below (in thousands):

 

          Dollar Amount of Transactions      Amount due to (from) American
National
 
          Six months ended June 30,      June 30,
2015
    December 31,
2014
 

Related Party

  

Financial Statement Line Impacted

   2015      2014       

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 651       $ 606       $ 5,857      $ 6,508   

Gal-Tex Hotel Corporation

   Net investment income      226         272         35        39   

Greer, Herz & Adams, LLP

   Other operating expenses      4,012         5,709         (347     (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, LLP.: Irwin M. Herz, Jr. is an American National advisory director and a Partner with Greer, Herz & Adams, LLP., which serves as American National’s General Counsel.

 

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

Set forth on the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three months ended June 30, 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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    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 June 30,           Six months ended June 30,         
     2015      2014     Change     2015      2014      Change  

Premiums and other revenues

               

Premiums

   $ 433,203       $ 445,626      $ (12,423   $ 875,046       $ 910,501       $ (35,455

Other policy revenues

     57,597         55,859        1,738        115,121         111,786         3,335   

Net investment income

     203,662         242,292        (38,630     412,875         461,115         (48,240

Realized investments gains (losses), net

     13,296         1,289        12,007        52,573         26,760         25,813   

Other income

     9,748         9,720        28        18,458         17,060         1,398   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     717,506         754,786        (37,280     1,474,073         1,527,222         (53,149
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

               

Policyholder benefits

     127,334         141,512        (14,178     269,705         310,244         (40,539

Claims incurred

     244,176         237,462        6,714        468,225         459,903         8,322   

Interest credited to policyholders’ account balances

     69,215         91,794        (22,579     144,968         175,206         (30,238

Commissions for acquiring and servicing policies

     103,557         103,949        (392     196,672         202,384         (5,712

Other operating expenses

     123,203         120,517        2,686        246,661         239,041         7,620   

Change in deferred policy acquisition costs (1)

     614         (6,370     6,984        7,076         54         7,022   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     668,099         688,864        (20,765     1,333,307         1,386,832         (53,525
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 49,407       $ 65,922      $ (16,515   $ 140,766       $ 140,390       $ 376   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(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 decreased during the three months ended June 30, 2015 compared to 2014 primarily due to a decrease in net investment income, which outpaced the decrease in the related interest credited, partially offset by an increase in realized investment gains. Consolidated earnings increased during the six months ended June 30, 2015 compared to 2014 primarily due to an increase in realized investment gains partially offset by a decrease in net investment income.

Life

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

 

     Three months ended June 30,           Six months ended June 30,        
     2015     2014     Change     2015     2014     Change  

Premiums and other revenues

            

Premiums

   $ 75,071      $ 72,678      $ 2,393      $ 147,153      $ 144,673      $ 2,480   

Other policy revenues

     54,174        51,995        2,179        108,600        103,604        4,996   

Net investment income

     56,372        57,677        (1,305     113,986        115,035        (1,049

Other income

     607        352        255        1,030        689        341   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     186,224        182,702        3,522        370,769        364,001        6,768   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

            

Policyholder benefits

     91,184        82,485        8,699        179,188        173,765        5,423   

Interest credited to policyholders’ account balances

     14,112        15,871        (1,759     29,900        31,616        (1,716

Commissions for acquiring and servicing policies

     32,532        32,269        263        59,848        61,732        (1,884

Other operating expenses

     48,916        49,698        (782     101,568        101,514        54   

Change in deferred policy acquisition costs (1)

     (7,651     (10,725     3,074        (15,065     (15,908     843   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     179,093        169,598        9,495        355,439        352,719        2,720   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 7,131      $ 13,104      $ (5,973   $ 15,330      $ 11,282      $ 4,048   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

 

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Earnings decreased during the three months ended June 30, 2015 compared to 2014 primarily due to an increase in policyholder benefits. Earnings increased during the six months ended June 30, 2015 compared to 2014 primarily due to increases in premiums on traditional products and other policy revenues on interest-sensitive products.

Premiums and other revenues

Premiums increased during the three and six months ended June 30, 2015 compared to 2014 due to the growth of our traditional insurance business.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies. The increase in other policy revenue during the three and six months ended June 30, 2015 compared to 2014 is 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 June 30,            Six months ended June 30,         
     2015      2014      Change     2015      2014      Change  

Whole life

   $ 6,616       $ 6,689       $ (73   $ 13,712       $ 13,417       $ 295   

Term life

     7,596         7,626         (30     14,698         15,147         (449

Universal life

     9,708         8,981         727        18,101         17,811         290   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total recurring

   $ 23,920       $ 23,296       $ 624      $ 46,511       $ 46,375       $ 136   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Single and excess

   $ 562       $ 479       $ 83      $ 913       $ 935       $ (22

Credit life

     1,082         1,029         53        2,042         1,932         110   

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 increased during the three months ended June 30, 2015 compared to 2014 primarily driven by increased Indexed Universal Life sales. For the six months ended June 30, 2015, total recurring life sales remained relatively constant with 2014.

Benefits, losses and expenses

Policyholder benefits increased during the six months ended June 30, 2015 compared to 2014 primarily due to an increase in reserves.

Commissions were relatively flat during the three months ended June 30, 2015 compared to 2014. Commissions decreased during the six months ended June 30, 2015 compared to 2014 primarily due to the portion of commissions being paid on renewal premiums, which carry a lower commission rate.

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

 

     Three months ended June 30,           Six months ended June 30,        
     2015     2014     Change     2015     2014     Change  

Acquisition cost capitalized

   $ 28,594      $ 27,702      $ 892      $ 53,632      $ 50,990      $ 2,642   

Amortization of DAC

     (20,943     (16,977     (3,966     (38,567     (35,082     (3,485
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 7,651      $ 10,725      $ (3,074   $ 15,065      $ 15,908      $ (843
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Policy in-force information

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

 

     June 30,
2015
     December 31,
2014
     Change  

Life insurance in-force

        

Traditional life

   $ 61,927,193       $ 59,409,750       $ 2,517,443   

Interest-sensitive life

     26,556,767         26,166,314         390,453   
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 88,483,960       $ 85,576,064       $ 2,907,896   
  

 

 

    

 

 

    

 

 

 

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

 

     June 30,
2015
     December 31,
2014
     Change  

Number of policies in-force

        

Traditional life

     1,914,036         1,949,119         (35,083

Interest-sensitive life

     209,661         205,805         3,856   
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,123,697         2,154,924         (31,227
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the six months ended June 30, 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 June 30,            Six months ended June 30,         
     2015      2014      Change     2015      2014      Change  

Premiums and other revenues

                

Premiums

   $ 25,088       $ 46,653       $ (21,565   $ 66,531       $ 113,589       $ (47,058

Other policy revenues

     3,423         3,864         (441     6,521         8,182         (1,661

Net investment income

     113,205         145,143         (31,938     232,867         275,457         (42,590

Other income

     1,012         —           1,012        1,882         —           1,882   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     142,728         195,660         (52,932     307,801         397,228         (89,427
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

                

Policyholder benefits

     36,150         59,027         (22,877     90,517         136,479         (45,962

Interest credited to policyholders’ account balances

     55,103         75,923         (20,820     115,068         143,590         (28,522

Commissions for acquiring and servicing policies

     11,349         13,007         (1,658     20,454         26,571         (6,117

Other operating expenses

     12,948         13,145         (197     25,997         30,929         (4,932

Change in deferred policy acquisition costs (1)

     10,056         6,214         3,842        21,530         13,610         7,920   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     125,606         167,316         (41,710     273,566         351,179         (77,613
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 17,122       $ 28,344       $ (11,222   $ 34,235       $ 46,049       $ (11,814
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(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 decreased during the three and six months ended June 30, 2015 compared to 2014 as a decrease in premiums reflected the challenges of the continued low interest rate environment. This was partially 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 a decrease in interest yields and account values, as well as a decrease in option return relative to the related embedded derivative.

 

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Premiums and other revenues

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

 

     Three months ended June 30,            Six months ended June 30,         
     2015      2014      Change     2015      2014      Change  

Fixed deferred annuity

   $ 58,151       $ 95,533       $ (37,382   $ 105,710       $ 193,709       $ (87,999

Single premium immediate annuity

     30,243         54,440         (24,197     79,853         130,248         (50,395

Equity-indexed deferred annuity

     82,645         67,342         15,303        134,792         118,078         16,714   

Variable deferred annuity

     22,364         25,906         (3,542     48,827         60,446         (11,619
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premium and deposits

     193,403         243,221         (49,818     369,182         502,481         (133,299

Less: Policy deposits

     168,315         196,568         (28,253     302,651         388,892         (86,241
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 25,088       $ 46,653       $ (21,565   $ 66,531       $ 113,589       $ (47,058
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

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):

 

     Six months ended June 30,  
     2015      2014  

Fixed deferred and equity-indexed annuity

     

Account value, beginning of period

   $ 8,873,398       $ 9,355,946   

Net inflows

     114,330         157,861   

Surrenders

     (557,427      (616,132

Fees

     (3,378      (5,234

Interest credited

     111,408         140,103   
  

 

 

    

 

 

 

Account value, end of period

   $ 8,538,331       $ 9,032,544   
  

 

 

    

 

 

 

Single premium immediate annuity

     

Reserve, beginning of period

   $ 1,274,664       $ 1,144,616   

Net inflows

     5,014         67,133   

Interest and mortality

     22,086         22,285   
  

 

 

    

 

 

 

Reserve, end of period

   $ 1,301,764       $ 1,234,034   
  

 

 

    

 

 

 

Variable deferred annuity

     

Account value, beginning of period

   $ 494,516       $ 489,305   

Net inflows

     47,649         59,974   

Surrenders

     (83,877      (71,185

Fees

     (2,845      (2,842

Change in market value and other

     (43,420      23,602   
  

 

 

    

 

 

 

Account value, end of period

   $ 412,023       $ 498,854   
  

 

 

    

 

 

 

Deferred and Single Premium Immediate Annuity sales decreased during the six months ended June 30, 2015 compared to 2014. Benchmark 10 year treasury yields were 50-100 basis points lower in the first quarter of 2015, leading to less attractive interest crediting rates.

Variable deferred annuity net inflows decreased during the six months ended June 30, 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 $0.7 million and $1.1 million as of June 30, 2015 and 2014, respectively. Reinsurance, from reinsurers rated “A” or higher by A.M. Best, reduced the net exposure to $0.2 million for June 30, 2015 and 2014.

 

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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 six months ended June 30, 2015 compared to 2014, driven primarily by the continued low interest rate environment.

Commissions decreased during the six months ended June 30, 2015 compared to 2014 consistent with decreased annuity sales.

Other operating expenses decreased during the six months ended June 30, 2015 compared to 2014 due to a decrease in independent contractor bonuses and lower production.

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 June 30,           Six months ended June 30,        
     2015     2014     Change     2015     2014     Change  

Acquisition cost capitalized

   $ 11,278      $ 11,673      $ (395   $ 20,233      $ 24,194      $ (3,961

Amortization of DAC

     (21,334     (17,887     (3,447     (41,763     (37,804     (3,959
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC

   $ (10,056   $ (6,214   $ (3,842   $ (21,530   $ (13,610   $ (7,920
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 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 six months ended June 30, 2015 and 2014 were 40.9% and 32.3%, respectively. The ratio for 2014 was lower than expected due to lower than projected surrenders in the second quarter of this year. The 2015 ratio is more in line with expectations.

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 June 30,            Six months ended June 30,         
     2015     2014      Change     2015     2014      Change  

Net investment income

              

Without option return

   $ 114,860      $ 127,430       $ (12,570   $ 233,697      $ 254,157       $ (20,460

Option return

     (1,655     17,713         (19,368     (830     21,300         (22,130

Interest credited to policy account balances

              

Without embedded derivatives

     58,803        64,360         (5,557     117,761        129,544         (11,783

Equity-indexed annuity embedded derivatives

     (3,700     11,563         (15,263     (2,693     14,046         (16,739

Net investment income without option return decreased during the three and six months ended June 30, 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 and six months ended June 30, 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 0.2% decrease and 4.7% increase in the S&P 500 Index during the three months ended June 30, 2015 and 2014, respectively. The six months ended decrease correlates to the 0.2% and 6.1% return in the S&P 500 index for 2015 and 2014, respectively. The equity-indexed embedded derivative return also decreased for the three and six months ended June 30, 2015 due to policy surrenders. When a policy surrenders, the policyholder forfeits a portion of interest that was previously expected to be credited to the policy.

 

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Table of Contents

Health

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

 

     Three months ended June 30,           Six months ended June 30,        
     2015      2014     Change     2015      2014     Change  

Premiums and other revenues

              

Premiums

   $ 51,135       $ 55,379      $ (4,244   $ 102,972       $ 110,715      $ (7,743

Net investment income

     2,592         2,897        (305     5,245         5,835        (590

Other income

     5,356         5,642        (286     9,925         10,255        (330
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total premiums and other revenues

     59,083         63,918        (4,835     118,142         126,805        (8,663
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Benefits, losses and expenses

              

Claims incurred

     32,256         32,737        (481     64,053         76,666        (12,613

Commissions for acquiring and servicing policies

     7,955         9,270        (1,315     15,146         17,343        (2,197

Other operating expenses

     12,900         11,492        1,408        24,303         22,692        1,611   

Change in deferred policy acquisition costs (1)

     612         (402     1,014        1,737         (171     1,908   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total benefits and expenses

     53,723         53,097        626        105,239         116,530        (11,291
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 5,360       $ 10,821      $ (5,461   $ 12,903       $ 10,275      $ 2,628   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(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 decreased during the three months ended June 30, 2015 compared to 2014, primarily due to a decrease in premiums. Earnings increased during the six months ended June 30, 2015 compared to 2014 primarily due to a decrease in claims incurred, partially offset by a decrease in premiums earned. Claims incurred in the first quarter of 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 June 30,     Six months ended June 30,  
     2015     2014     2015     2014  

Medicare Supplement

   $ 19,147         37.4   $ 21,360         38.6   $ 39,010         37.9   $ 43,353         39.2

Medical expense

     4,213         8.2        5,534         10.0        8,785         8.5        11,765         10.6   

Group health

     8,037         15.7        8,522         15.4        17,407         16.9        18,761         16.9   

Credit accident and health

     3,195         6.2        3,574         6.5        6,465         6.3        7,311         6.6   

MGU

     8,214         16.1        6,634         12.0        13,515         13.1        11,882         10.7   

Supplemental Insurance

     6,822         13.3        8,167         14.7        14,702         14.3        14,325         12.9   

All other

     1,507         3.1        1,588         2.8        3,088         3.0        3,318         3.1