Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 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 November 2, 2015, there were 26,891,502 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

  
ITEM 1.  

FINANCIAL STATEMENTS (Unaudited):

  
 

Consolidated Statements of Financial Position as of September 30, 2015 and December 31, 2014

     3   
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2015 and 2014

     4   
 

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

     5   
 

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

     5   
 

Consolidated Statements of Cash Flows for the nine months ended September 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 share data)

 

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

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair value $7,993,004 and $8,652,913)

   $ 7,689,551      $ 8,225,050   

Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $5,188,738 and $4,694,716)

     5,334,656        4,921,807   

Equity securities, at fair value
(Cost $769,033 and $739,384)

     1,410,636        1,516,978   

Mortgage loans on real estate, net of allowance

     3,444,403        3,359,586   

Policy loans

     406,728        405,979   

Investment real estate, net of accumulated depreciation of $206,129 and $193,611

     539,571        479,062   

Short-term investments

     494,496        431,000   

Other invested assets

     186,123        220,255   
  

 

 

   

 

 

 

Total investments

     19,506,164        19,559,717   
  

 

 

   

 

 

 

Cash and cash equivalents

     169,473        209,455   

Investments in unconsolidated affiliates

     342,841        311,779   

Accrued investment income

     182,181        185,943   

Reinsurance recoverables

     410,913        428,654   

Prepaid reinsurance premiums

     70,981        56,019   

Premiums due and other receivables

     301,847        280,587   

Deferred policy acquisition costs

     1,289,127        1,253,544   

Property and equipment, net

     122,016        110,794   

Current tax receivable

     —          8,669   

Other assets

     141,587        137,856   

Separate account assets

     894,890        1,001,515   
  

 

 

   

 

 

 

Total assets

   $ 23,432,020      $ 23,544,532   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,816,934      $ 2,770,232   

Annuity

     1,061,183        1,006,748   

Accident and health

     66,997        58,364   

Policyholders’ account balances

     10,669,681        10,781,285   

Policy and contract claims

     1,269,929        1,297,708   

Unearned premium reserve

     822,640        755,051   

Other policyholder funds

     343,068        344,090   

Liability for retirement benefits

     186,548        195,712   

Notes payable

     126,145        108,177   

Current tax liability

     7,608        —     

Deferred tax liabilities, net

     226,894        287,175   

Other liabilities

     494,469        498,528   

Separate account liabilities

     894,890        1,001,515   
  

 

 

   

 

 

 

Total liabilities

     18,986,986        19,104,585   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value, - Authorized 50,000,000, Issued 30,832,449 and 30,832,449, Outstanding 26,891,502 and 26,871,942 shares

     30,832        30,832   

Additional paid-in capital

     13,215        9,248   

Accumulated other comprehensive income

     376,041        490,782   

Retained earnings

     4,115,757        3,998,642   

Treasury stock, at cost

     (102,082     (101,941
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,433,763        4,427,563   

Noncontrolling interest

     11,271        12,384   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,445,034        4,439,947   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 23,432,020      $ 23,544,532   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

3


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three months ended September 30,     Nine months ended September 30,  
     2015     2014     2015     2014  
           (As Adjusted)           (As Adjusted)  

PREMIUMS AND OTHER REVENUE

        

Premiums

        

Life

   $ 78,397      $ 79,492      $ 225,550      $ 224,165   

Annuity

     43,514        34,661        110,045        148,250   

Accident and health

     45,638        53,454        148,610        164,169   

Property and casualty

     291,486        279,429        849,876        820,953   

Other policy revenues

     60,271        55,255        175,392        167,041   

Net investment income

     184,482        236,489        597,357        697,604   

Net realized investment gains (losses)

     7,528        (649     63,598        27,548   

Other-than-temporary impairments

     (19,407     (1,608     (22,904     (3,045

Other income

     7,950        9,647        26,408        26,707   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     699,859        746,170        2,173,932        2,273,392   
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

        

Policyholder benefits

        

Life

     94,087        83,740        273,275        257,505   

Annuity

     54,720        43,893        145,237        180,372   

Claims incurred

        

Accident and health

     46,236        33,193        110,289        109,859   

Property and casualty

     179,699        180,413        583,871        563,650   

Interest credited to policyholders’ account balances

     57,509        83,746        202,477        258,952   

Commissions for acquiring and servicing policies

     111,618        97,608        308,290        299,992   

Other operating expenses

     121,498        118,002        368,159        357,043   

Change in deferred policy acquisition costs

     (12,168     10,800        (5,092     10,854   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     653,199        651,395        1,986,506        2,038,227   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     46,660        94,775        187,426        235,165   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

        

Current

     30,037        25,104        76,546        59,337   

Deferred

     (11,903     3,431        2,488        9,759   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision for federal income taxes

     18,134        28,535        79,034        69,096   

Equity in earnings of unconsolidated affiliates

     16,339        3,576        73,385        12,181   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     44,865        69,816        181,777        178,250   

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

     2,852        2,877        1,729        1,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American National

   $ 42,013      $ 66,939      $ 180,048      $ 176,367   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

        

Earnings per share

        

Basic

   $ 1.56      $ 2.50      $ 6.70      $ 6.58   

Diluted

     1.56        2.49        6.68        6.55   

Cash dividends to common stockholders

     0.80        0.77        2.34        2.31   

Weighted average common shares outstanding

     26,899,683        26,805,535        26,865,359        26,800,835   

Weighted average common shares outstanding and dilutive potential common shares

     26,963,635        26,911,507        26,945,386        26,919,414   

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended September 30,     Nine months ended September 30,  
     2015     2014     2015     2014  
           (As Adjusted)           (As Adjusted)  

Net income

   $ 44,865      $ 69,816      $ 181,777      $ 178,250   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Change in net unrealized gain (losses) on securities

     (70,900     (17,708     (117,203     89,051   

Foreign currency transaction and translation adjustments

     (1,437     (476     (2,087     (577

Defined pension benefit plan adjustment

     1,517        718        4,549        2,152   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (70,820     (17,466     (114,741     90,626   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     (25,955     52,350        67,036        268,876   

Less: Comprehensive income attributable to noncontrolling interest

     2,852        2,877        1,729        1,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to American National

   $ (28,807   $ 49,473      $ 65,307      $ 266,993   
  

 

 

   

 

 

   

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited and in thousands)

 

     Nine months ended September 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

     3,032        1,635   

Amortization of restricted stock

     935        2,577   
  

 

 

   

 

 

 

Balance at end of the period

     13,215        8,862   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance as of January 1,

     490,782        413,712   

Other comprehensive income (loss)

     (114,741     90,626   
  

 

 

   

 

 

 

Balance at end of the period

     376,041        504,338   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     3,998,642        3,836,112   

Net income attributable to American National

     180,048        176,367   

Cash dividends to common stockholders

     (62,933     (62,113
  

 

 

   

 

 

 

Balance at end of the period

     4,115,757        3,950,366   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (101,941     (97,441

Purchase of treasury shares

     (141     (4,500
  

 

 

   

 

 

 

Balance at end of the period

     (102,082     (101,941
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     12,384        12,757   

Contributions

     32        478   

Distributions

     (2,874     (2,839

Gain attributable to noncontrolling interest

     1,729        1,883   
  

 

 

   

 

 

 

Balance at end of the period

     11,271        12,279   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 4,445,034      $ 4,404,736   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Nine months ended September 30,  
     2015     2014  
           (As Adjusted)  

OPERATING ACTIVITIES

    

Net income

   $ 181,777      $ 178,250   

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

    

Net realized investment gains

     (63,598     (27,548

Other-than-temporary impairments

     22,904        3,045   

Amortization of premiums, discounts and loan origination fees

     2,043        6,316   

Net capitalized interest on policy loans and mortgage loans

     (23,300     (23,988

Depreciation

     32,665        26,421   

Interest credited to policyholders’ account balances

     202,477        258,952   

Charges to policyholders’ account balances

     (175,392     (167,041

Deferred federal income tax expense

     2,488        9,759   

Equity in earnings of unconsolidated affiliates

     (73,385     (12,181

Distributions from equity method investments

     549        679   

Changes in

    

Policyholder liabilities

     155,778        166,392   

Deferred policy acquisition costs

     (5,092     10,854   

Reinsurance recoverables

     17,741        4,218   

Premiums due and other receivables

     (21,814     (15,189

Prepaid reinsurance premiums

     (14,962     2,188   

Accrued investment income

     3,763        (3,729

Current tax receivable/payable

     16,277        14,104   

Liability for retirement benefits

     (9,164     (17,453

Other, net

     7,361        (40,979
  

 

 

   

 

 

 

Net cash provided by operating activities

     259,116        373,070   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     906,026        442,748   

Available-for-sale securities

     380,287        705,681   

Investment real estate

     14,247        45,843   

Mortgage loans

     632,309        421,023   

Policy loans

     42,309        41,331   

Other invested assets

     25,070        34,537   

Disposals of property and equipment

     1,397        2,571   

Distributions from unconsolidated affiliates

     122,162        49,403   

Payment for the purchase/origination of

    

Held-to-maturity securities

     (360,768     (356,452

Available-for-sale securities

     (883,242     (883,346

Investment real estate

     (58,536     (28,865

Mortgage loans

     (718,410     (444,140

Policy loans

     (18,747     (21,721

Other invested assets

     (31,078     (14,376

Additions to property and equipment

     (28,931     (13,038

Contributions to unconsolidated affiliates

     (90,222     (40,333

Change in short-term investments

     (63,495     149,043   

Other, net

     17,021        3,834   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (112,601     93,743   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     941,340        783,255   

Policyholders’ account withdrawals

     (1,080,029     (1,162,898

Change in notes payable

     17,967        (4,500

Dividends to stockholders

     (62,933     (62,113

Payments to noncontrolling interest

     (2,842     (2,361
  

 

 

   

 

 

 

Net cash used in financing activities

     (186,497     (448,617
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (39,982     18,196   

Beginning of the period

     209,455        117,946   
  

 

 

   

 

 

 

End of the period

   $ 169,473      $ 136,142   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Operations

American National Insurance Company and its consolidated subsidiaries (collectively “American National” or “the Company”) offer a broad spectrum of insurance products, including individual and group life insurance, annuities, health insurance, and property and casualty insurance. Business is conducted in all 50 states, the District of Columbia and Puerto Rico.

Note 2 – Summary of Significant Accounting Policies and Practices

The consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and are reported in U.S. currency. American National consolidates entities that are wholly-owned and those in which American National owns less than 100% but controls, as well as variable interest entities in which American National is the primary beneficiary. Intercompany balances and transactions with consolidated entities have been eliminated. Investments in unconsolidated affiliates are accounted for using the equity method of accounting. Certain amounts in prior years have been reclassified to conform to current year presentation.

The interim consolidated financial statements and notes herein are unaudited and reflect all adjustments which management considers necessary for the fair presentation of the interim consolidated statements of financial position, operations, comprehensive income, changes in stockholders’ equity, and cash flows.

The interim consolidated financial statements and notes should be read in conjunction with the annual consolidated financial statements and notes thereto included in American National’s Annual Report on Form 10-K as of and for the year ended December 31, 2014. The consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

The preparation of the consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported consolidated financial statement balances. Actual results could differ from those estimates.

Note 3 – Recently Issued Accounting Pronouncements

Adoption of New Accounting Standards

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 as of 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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Table of Contents

Note 3 – Recently Issued Accounting Pronouncements – (Continued)

 

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

 

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

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 September 30, 2014

        

Provision for federal income taxes, current

   $ 23,639       $ 25,104       $ 1,465   

Provision for federal income taxes, deferred

     3,110         3,431         321   

Equity in earnings of unconsolidated affiliates

     2,735         3,576         841   

Net Income attributable to American National

     67,884         66,939         (945

Nine months ended September 30, 2014

        

Provision for federal income taxes, current

   $ 55,690       $ 59,337       $ 3,647   

Provision for federal income taxes, deferred

     9,974         9,759         (215

Equity in earnings of unconsolidated affiliates

     10,405         12,181         1,776   

Net Income attributable to American National

     178,023         176,367         (1,656

American National held investments in Qualified Affordable Housing Projects totaling $40,579,000 and $32,778,000 as of September 30, 2015 and December 31, 2014, respectively. For the nine months ended September 30, 2015 and September 30, 2014, American National recognized tax credits and other tax benefits of $6,672,000 and $5,817,000, respectively, and amortized cost of $5,834,000 and $4,033,000, relating to these investments. At September 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

   $  8,251         4,148         1,314         726         1,078       $ 15,517   

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 generally 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. In August 2015, the effective date of the guidance was deferred one year and is now 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):

 

     September 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

   $ 324,191       $ 26,068       $ —         $ 350,259   

Foreign governments

     4,111         975         —           5,086   

Corporate debt securities

     7,055,332         344,616         (90,276      7,309,672   

Residential mortgage-backed securities

     288,223         22,236         (913      309,546   

Collateralized debt securities

     1,928         127         —           2,055   

Other debt securities

     15,766         620         —           16,386   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,689,551         394,642         (91,189      7,993,004   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,025         814         —           24,839   

U.S. states and political subdivisions

     925,948         34,206         (1,834      958,320   

Foreign governments

     5,000         1,929         —           6,929   

Corporate debt securities

     4,196,262         160,179         (51,382      4,305,059   

Residential mortgage-backed securities

     28,452         1,648         (259      29,841   

Collateralized debt securities

     9,051         658         (41      9,668   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,188,738         199,434         (53,516      5,334,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     755,546         655,360         (23,857      1,387,049   

Preferred stock

     13,487         10,100         —           23,587   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     769,033         665,460         (23,857      1,410,636   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

   $ 13,647,322       $ 1,259,536       $ (168,562    $ 14,738,296   
  

 

 

    

 

 

    

 

 

    

 

 

 
     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   

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):

 

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

Due in one year or less

   $ 394,934       $ 401,042       $ 357,147       $ 361,475   

Due after one year through five years

     2,348,115         2,535,513         1,015,790         1,083,981   

Due after five years through ten years

     4,556,548         4,641,818         3,208,405         3,267,070   

Due after ten years

     384,104         409,531         602,396         617,155   

Without single maturity date

     5,850         5,100         5,000         4,975   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,689,551       $ 7,993,004       $ 5,188,738       $ 5,334,656   
  

 

 

    

 

 

    

 

 

    

 

 

 

Actual maturities differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Residential and commercial mortgage-backed securities, which are not due at a single maturity, have been allocated to their respective categories based on the year of final contractual maturity.

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

 

     Three months ended September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  

Proceeds from sales of available-for-sale securities

   $ 8,876       $ 2,671       $ 48,352       $ 139,137   

Gross realized gains

     3,982         228         17,991         24,994   

Gross realized losses

     —           —           (65      (2,123

Gains and losses are determined using specific identification of the securities sold. During the nine months ended September 30, 2015 and 2014, bonds with a carrying value of $171,000 and $44,781,000, respectively, were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ creditworthiness became evident. An unrealized loss of $53,000 and an unrealized gain of $1,301,000 were established in 2015 and 2014, respectively following the transfer at fair value.

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

 

     Nine months ended September 30,  
     2015      2014  

Bonds available-for-sale

   $ (81,173    $ 82,701   

Equity securities

     (135,991      79,211   
  

 

 

    

 

 

 

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

     (217,164      161,912   

Adjustments for

     

Deferred policy acquisition costs

     30,491         (17,175

Participating policyholders’ interest

     7,222         (8,526

Deferred federal income tax benefit (expense)

     62,248         (47,160
  

 

 

    

 

 

 

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

   $ (117,203    $ 89,051   
  

 

 

    

 

 

 

 

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):

 

     September 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

   $ —        $ —         $ —        $ —         $ —        $ —     

Corporate debt securities

     (62,176     1,484,022         (28,100     205,613         (90,276     1,689,635   

Residential mortgage-backed securities

     (146     21,304         (767     16,697         (913     38,001   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (62,322     1,505,326         (28,867     222,310         (91,189     1,727,636   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     —          3,876         —          —           —          3,876   

U.S. states and political subdivisions

     (1,758     172,536         (76     2,059         (1,834     174,595   

Corporate debt securities

     (43,045     1,195,908         (8,337     62,378         (51,382     1,258,286   

Residential mortgage-backed securities

     (82     13,772         (177     6,217         (259     19,989   

Collateralized debt securities

     (36     1,986         (5     292         (41     2,278   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (44,921     1,388,078         (8,595     70,946         (53,516     1,459,024   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (23,857     112,392         —          —           (23,857     112,392   

Preferred stock

     —          —           —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (23,857     112,392         —          —           (23,857     112,392   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (131,100   $ 3,005,796       $ (37,462   $ 293,256       $ (168,562   $ 3,299,052   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     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 September 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 Standard & Poor’s and Moody’s ratings, are shown below:

 

     September 30, 2015     December 31, 2014  

AAA

     5.4     5.0

AA

     12.2        12.8   

A

     38.1        39.4   

BBB

     41.3        39.5   

BB and below

     3.0        3.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

     September 30, 2015     December 31, 2014  

Consumer goods

     21.4     20.4

Energy and utilities

     10.8        13.3   

Financials

     19.1        19.1   

Healthcare

     14.9        14.0   

Industrials

     8.1        8.4   

Information technology

     17.3        16.2   

Other

     8.4        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:

 

     September 30, 2015     December 31, 2014  

East North Central

     18.8     19.4

East South Central

     4.4        5.0   

Mountain

     12.3        11.0   

Pacific

     10.0        10.8   

South Atlantic

     19.7        21.9   

West South Central

     29.2        24.9   

Other

     5.6        7.0   
  

 

 

   

 

 

 

Total

     100.0 %      100.0 % 
  

 

 

   

 

 

 

As of September 30, 2015, American National had foreclosed on two loans with a recorded investment of $19,328,000, and there was one loan in the process of foreclosure with a recorded investment of $2,450,000. There were two loans in the process of foreclosure with a recorded investment of $15,945,000 as of September 30, 2014. American National sold one loan with a recorded investment of $2,702,000 resulting in a realized loss of $1,602,000 for the nine months ended September 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 loans is shown below (in thousands):

 

     30-59 Days      60-89 Days      More Than                    Total  
     Past Due      Past Due      90 Days      Total      Current      Amount     Percent  

September 30, 2015

                   

Industrial

   $ —         $ —         $ —         $ —         $ 705,260       $ 705,260        20.4

Office

     —           —           8,228         8,228         1,267,942         1,276,170        37.2   

Retail

     —           —           5,005         5,005         807,829         812,834        23.7   

Other

     —           —           —           —           662,908         662,908        18.7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ —         $ —         $ 13,233       $ 13,233       $ 3,443,939         3,457,172        100.0 % 
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (12,769  
                 

 

 

   

Total, net of allowance

                  $ 3,444,403     
                 

 

 

   

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  
                 

 

 

   

Total, net of allowance

                  $ 3,359,586     
                 

 

 

   

Total mortgage loans are net of unamortized discounts of $505,000 and $658,000 and unamortized origination fees of $19,333,000 and $15,659,000 at September 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 the borrowers. 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 mortgage loans is shown below (in thousands):

 

     Nine months ended September 30,  
     Collectively      Individually  
     Evaluated      Evaluated  
     for Impairment      for Impairment  

Beginning balance, 2015

   $  12,277      $ 5,583   

Change in allowance

     (1,688      (3,403
  

 

 

    

 

 

 

Ending balance, 2015

   $ 10,589       $ 2,180   
  

 

 

    

 

 

 

At September 30, 2015 and December 31, 2014, the recorded investment for loans collectively evaluated for impairment was $3,405,419,000 and $3,321,241,000, respectively. The recorded investment for loans individually evaluated for impairment was $51,752,000 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):

 

     September 30, 2015      September 30, 2014  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  
     Investment      Recognized      Investment      Recognized  

Three months ended

           

With an allowance recorded

           

Office

   $ 18,014       $ 555       $ 27,564       $ 547   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,014       $ 555       $ 27,564       $ 547   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 26,639       $ 422       $ 26,941       $ 431   

Industrial

     —           —           2,702         36   

Retail

     8,812         134         851         11   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,451       $ 556       $ 30,494       $ 478   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended

           

With an allowance recorded

           

Office

   $ 18,116       $ 1,016       $ 29,421       $ 1,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 18,116       $ 1,016       $ 29,421       $ 1,663   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 26,326       $ 1,262       $ 27,019       $ 1,298   

Industrial

     —           —           2,721         110   

Retail

     8,895         410         1,149         16   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,221       $ 1,672       $ 30,889       $ 1,424   
  

 

 

    

 

 

    

 

 

    

 

 

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

With an allowance recorded

           

Office

   $ 16,275       $ 17,961       $ 26,563       $ 31,653   

Retail

     —           —           —           493   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 16,275       $ 17,961       $ 26,563       $ 32,146   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance recorded

           

Office

   $ 26,695       $ 26,695       $ 26,941       $ 26,941   

Industrial

     —           —           2,702         2,702   

Retail

     8,782         8,782         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 35,477       $ 35,477       $ 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 (in thousands, except number of contracts):

 

     Nine months ended September 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

     2       $ 12,211       $ 12,211         3       $ 34,400       $ 30,996   

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.

 

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Table of Contents

Note 6 – Investment Real Estate

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

 

     September 30, 2015     December 31, 2014  

Industrial

     11.2     13.0

Office

     33.4        25.0   

Retail

     40.0        44.1   

Other

     15.4        17.9   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     September 30, 2015     December 31, 2014  

East North Central

     12.3     4.5

East South Central

     3.8        4.6   

Mountain

     8.0        9.6   

Pacific

     6.1        7.1   

South Atlantic

     10.9        12.2   

West South Central

     53.0        55.6   

Other

     5.9        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):

 

     September 30, 2015      December 31, 2014  

Investment real estate

   $ 165,685       $ 140,032   

Short-term investments

     1         1   

Cash and cash equivalents

     3,204         2,495   

Accrued investment income

     339         683   

Other receivables

     7,095         7,999   

Other assets

     6,316         8,483   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 182,640       $ 159,693   
  

 

 

    

 

 

 

Notes payable

   $ 126,145       $ 108,177   

Other liabilities

     11,102         8,954   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 137,247       $ 117,131   
  

 

 

    

 

 

 

 

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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 $32,277,000 and $15,016,000 at September 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, $29,265,000 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 carrying amount and maximum exposure to loss relating to unconsolidated VIEs follows (in thousands):

 

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

Investment in unconsolidated affiliates

   $ 220,223       $ 220,223       $ 157,620       $ 157,620   

Mortgage loans

     212,972         212,972         172,408         172,408   

Accrued investment income

     778         778         721         721   

As of September 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):

 

          September 30, 2015      December 31, 2014  

Derivatives Not Designated

as Hedging Instruments

  

Location in the Consolidated
Statements of Financial Position

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

Equity-indexed options

   Other invested assets      454       $ 1,249,300       $ 141,385         436       $ 1,095,300       $ 189,449   

Equity-indexed embedded derivative

   Policyholders’ account balances      48,923         1,005,100         207,302         42,287         961,300         208,187   

 

          Gains (Losses) Recognized
in Income on Derivatives
 

Derivatives Not Designated

as Hedging Instruments

  

Location in the Consolidated

Statements of Operations

   Three months ended September 30,     Nine months ended September 30,  
      2015     2014     2015     2014  

Equity-indexed options

   Net investment income    $ (33,682   $ 6,562      $ (34,646   $ 29,011   

Equity-indexed embedded derivative

   Interest credited to policyholders’ account balances      16,780        (1,762     19,997        (16,484

 

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 September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  

Bonds

   $ 138,707       $ 148,715       $ 421,543       $ 450,110   

Equity securities

     9,353         8,146         27,869         26,488   

Mortgage loans

     50,681         51,652         149,682         159,010   

Real estate

     13,555         14,245         11,949         11,347   

Options

     (33,682      6,562         (34,646      29,011   

Other invested assets

     5,868         7,169         20,960         21,638   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 184,482       $ 236,489       $ 597,357       $ 697,604   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  

Bonds

   $ (34    $ 1,925       $ 10,063       $ 21,837   

Equity securities

     7,669         229         44,579         10,293   

Mortgage loans

     639         (1,551      (94      (5,424

Real estate

     (739      (1,242      9,094         1,787   

Other invested assets

     (7      (10      (44      (945
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,528       $ (649    $ 63,598       $ 27,548   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  

Bonds

   $ (286    $ —         $ (286    $ (41

Equity securities

     (19,121      (1,608      (22,618      (3,004
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (19,407    $ (1,608    $ (22,904    $ (3,045
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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):

 

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

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 7,689,551       $ 7,993,004       $ 8,225,050       $ 8,652,913   

Fixed maturity securities, bonds available-for-sale

     5,334,656         5,334,656         4,921,807         4,921,807   

Equity securities

     1,410,636         1,410,636         1,516,978         1,516,978   

Equity-indexed options

     141,385         141,385         189,449         189,449   

Mortgage loans on real estate, net of allowance

     3,444,403         3,670,607         3,359,586         3,618,944   

Policy loans

     406,728         406,728         405,979         405,979   

Short-term investments

     494,496         494,496         431,000         431,000   

Separate account assets

     894,890         894,890         1,001,515         1,001,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 19,816,745       $ 20,346,402       $ 20,051,364       $ 20,738,585   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,711,223       $ 8,711,223       $ 8,894,747       $ 8,894,747   

Embedded derivative liability for equity-indexed contracts

     207,302         207,302         208,187         208,187   

Notes payable

     126,145         126,145         108,177         108,177   

Separate account liabilities

     894,890         894,890         1,001,515         1,001,515   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 9,939,560       $ 9,939,560       $ 10,212,626       $ 10,212,626   
  

 

 

    

 

 

    

 

 

    

 

 

 

Summary

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

 

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

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

 

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Table of Contents

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

 

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

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

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

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

For securities priced using a quote from an independent broker, such as the equity options and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received from an independent broker. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is performed quarterly.

Equity Securities—For publicly-traded equity securities, prices are received from a nationally recognized pricing service that are based on observable market transactions, and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, an estimate of fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. These estimates are disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services regularly.

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

Embedded Derivative—The embedded derivative liability for equity-indexed contracts is measured at fair value and is recalculated each reporting period using equity option pricing models. To validate the assumptions used to price the embedded derivative liability, American National measures and compares embedded derivative returns against the returns of equity options held to hedge the liability cash flows.

 

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 September 30, 2015 and December 31, 2014, the one year implied volatility used to estimate embedded derivative value was 20.1% 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 September 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

   $ 350,259       $ —         $ 350,259       $ —     

Foreign governments

     5,086         —           5,086         —     

Corporate debt securities

     7,309,672         —           7,261,358         48,314   

Residential mortgage-backed securities

     309,546         —           308,605         941   

Collateralized debt securities

     2,055         —           2,055         —     

Other debt securities

     16,386         —           12,530         3,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,993,004         —           7,939,893         53,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,839         —           24,839         —     

U.S. states and political subdivisions

     958,320         —           955,825         2,495   

Foreign governments

     6,929         —           6,929         —     

Corporate debt securities

     4,305,059         —           4,298,265         6,794   

Residential mortgage-backed securities

     29,841         —           28,038         1,803   

Collateralized debt securities

     9,668         —           7,769         1,899   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,334,656         —           5,321,665         12,991   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,387,049         1,387,049         —           —     

Preferred stock

     23,587         23,587         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,410,636         1,410,636         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     141,385         —           —           141,385   

Mortgage loans on real estate

     3,670,607         —           3,670,607         —     

Policy loans

     406,728         —           —           406,728   

Short-term investments

     494,496         —           494,496         —     

Separate account assets

     894,890         —           894,890         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,346,402       $ 1,410,636       $ 18,321,551       $ 614,215   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,711,223       $ —         $ —         $ 8,711,223   

Embedded derivative liability for equity-indexed contracts

     207,302         —           —           207,302   

Notes payable

     126,145         —           —           126,145   

Separate account liabilities

     894,890         —           894,890         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 9,939,560       $ —         $ 894,890       $ 9,044,670   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Beginning balance, 2015

   $ 67,200      $ 183,963      $ 208,827      $ 64,433      $ 189,449      $ 208,187   

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

     150        —          —          (18     —          —     

Net fair value change included in realized gains (losses)

     —          —          —          —          —          —     

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

     —          (34,643     —          —          (39,266     —     

Net change included in interest credited

     —          —          (16,780     —          —          (19,997

Purchases, sales and settlements or maturities

            

Purchases

     —          5,725        —          —          15,313        —     

Sales

     120        (11,160     —          (1     (11,160     —     

Settlements or maturities

     (1     (2,500     —          (343     (12,951     —     

Premiums less benefits

     —          —          15,255        —          —          19,112   

Gross transfers into Level 3

     —          —          —          3,398        —          —     

Gross transfers out of Level 3

     (54,478     —          —          (54,478     —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance September 30, 2015

   $ 12,991      $ 141,385      $ 207,302      $ 12,991      $ 141,385      $ 207,302   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2014

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

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

     138        —          —          (11,735     —          —     

Net fair value change included in realized gains (losses)

     —          —          —          13,056        —          —     

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

     —          4,998        —          —          23,788        —     

Net change included in interest credited

     —          —          1,762        —          —          16,484   

Purchases, sales and settlements or maturities

            

Purchases

     —          3,655        —          —          12,345        —     

Sales

     (120     —          —          (37,670     —          —     

Settlements or maturities

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

Premiums less benefits

     —          —          3,737        —          —          26,841   

Gross transfers into Level 3

     30,199        —          —          30,199        —          —     

Gross transfers out of Level 3

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance September 30, 2014

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized losses of $51,875,000 relating to assets still held at September 30, 2015 and gains of $7,395,000 at September 30 2014, respectively.

The transfers into Level 3 during the nine months ended September 30, 2015 and the three and nine months ended September 30, 2014, were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The 2015 transfers out of Level 3 were securities being priced by a third-party service at the end of the period, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2.

 

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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

     81,568        42,264        15,869        175,006        314,707   

Amortization

     (60,998     (57,412     (18,195     (173,010     (309,615

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

     7,742        22,749        —          —          30,491   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     28,312        7,601        (2,326     1,996        35,583   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2015

   $ 739,781      $ 390,042      $ 45,458      $ 113,846      $ 1,289,127   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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):

 

     Nine months ended September 30,  
     2015      2014  

Unpaid claims balance, beginning

   $ 1,132,394       $ 1,096,299   

Less reinsurance recoverables

     245,906         215,161   
  

 

 

    

 

 

 

Net beginning balance

     886,488         881,138   
  

 

 

    

 

 

 

Incurred related to

     

Current

     705,988         706,824   

Prior years

     (7,835      (29,044
  

 

 

    

 

 

 

Total incurred claims

     698,153         677,780   
  

 

 

    

 

 

 

Paid claims related to

     

Current

     414,287         410,077   

Prior years

     284,732         252,082   
  

 

 

    

 

 

 

Total paid claims

     699,019         662,159   
  

 

 

    

 

 

 

Net balance

     885,622         896,759   

Plus reinsurance recoverables

     215,464         235,485   
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,101,086       $ 1,132,244   
  

 

 

    

 

 

 

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 $7,835,000 during the first nine months of 2015 and $29,044,000 during the first nine months of 2014, reflecting lower-than-anticipated losses in the workers compensation, commercial auto, and personal auto liability lines of business.

 

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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 September 30,     Nine months ended September 30,  
     2015     2014     2015     2014  
                 (As Adjusted)                 (As Adjusted)  
     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  

Income tax on pre-tax income

   $ 22,050        35.0   $ 33,171        35.0   $ 91,284        35.0   $ 82,308        35.0

Tax-exempt investment income

     (1,863     (3.0     (1,742     (1.8     (5,688     (2.2     (4,897     (2.1

Dividend exclusion

     (1,841     (2.9     (1,700     (1.8     (5,788     (2.2     (5,253     (2.2

Miscellaneous tax credits, net

     (2,256     (3.6     (2,658     (2.8     (6,728     (2.6     (5,873     (2.5

Low income housing tax credit expense

     1,307        2.1        1,786        1.9        3,792        1.5        3,432        1.5   

Other items, net

     737        1.2        (322     (0.3     2,162        0.8        (621     (0.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 18,134        28.8   $ 28,535        30.2   $ 79,034        30.3   $ 69,096        29.4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

American National made income tax payments of $52,106,000 and $41,121,000 during the nine months ended September 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 September 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 $8,221 and expense $2,449)

     (15,268      4,549         —           (10,719

Unrealized holding losses arising during the period (net of tax benefit $67,787)

     (125,888            (125,888

Unrealized adjustment to DAC (net of tax expense $11,232)

     19,259               19,259   

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax expense $2,528)

     4,694               4,694   

Foreign currency adjustment (net of tax benefit $1,124)

           (2,087      (2,087
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at September 30, 2015

   $ 450,948       $ (71,525    $ (3,382    $ 376,041   
  

 

 

    

 

 

    

 

 

    

 

 

 

Beginning balance, 2014

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

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

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

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

     121,782               121,782   

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

     (10,650            (10,650

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

     (5,542            (5,542

Foreign currency adjustment (net of tax benefit $311)

           (577      (577
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at September 30, 2014

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

 

 

    

 

 

    

 

 

    

 

 

 

 

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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:

 

     September 30,      December 31,  
     2015      2014  

Common stock

     

Shares issued

     30,832,449         30,832,449   

Treasury shares

     (3,940,947      (3,960,507
  

 

 

    

 

 

 

Outstanding shares

     26,891,502         26,871,942   

Restricted shares

     (76,000      (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         (66,667     103.58         (72,093     90.85   

Forfeited

     —          —           —          —           (281     105.02   

Expired

     (16,646     114.57         —          —           —          —     
  

 

 

      

 

 

      

 

 

   

Outstanding at September 30, 2015

     38,168      $ 115.11         76,000      $ 110.73         138,933      $ 103.73   
  

 

 

      

 

 

      

 

 

   

 

     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     1.44         3.71         1.95   

Exercisable shares

     38,154         N/A         N/A   

Weighted-average exercise price

   $ 115.11       $ 110.73       $ 103.73   

Weighted-average exercise price exercisable shares

     115.12         N/A         N/A   

Compensation expense (credit)

        

Three months ended September 30, 2015

   $ (14,000    $ 282,000       $ 1,114,000   

Three months ended September 30, 2014

     (19,000      496,000         522,000   

Nine months ended September 30, 2015

     (82,000      935,000         5,421,000   

Nine months ended September 30, 2014

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

Fair value of liability award

        

September 30, 2015

   $ 27,000         N/A       $ 19,134,000   

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.

RS awards entitle the participant to full dividend and voting rights. Each RS share awarded 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 76,000 shares are unvested.

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.

Earnings per share

Basic earnings per share were calculated using a weighted average number of shares outstanding. Diluted earnings per share include RS and RSU award shares.

 

     Three months ended September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  
            (As Adjusted)             (As Adjusted)  

Weighted average shares outstanding

     26,899,683         26,805,535         26,865,359         26,800,835   

Incremental shares from RS awards and RSUs

     63,952         105,972         80,027         118,579   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shares for diluted calculations

     26,963,635         26,911,507         26,945,386         26,919,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to American National (in thousands)

   $ 42,013       $ 66,939       $ 180,048       $ 176,367   

Basic earnings per share

   $ 1.56       $ 2.50       $ 6.70       $ 6.58   

Diluted earnings per share

     1.56         2.49         6.68         6.55   

Statutory Capital and Surplus

Risk Based Capital (“RBC”) is a measure 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, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level at least 200% of the authorized control level RBC are required to take certain actions. At September 30, 2015 and December 31, 2014, American National Insurance Company’s statutory capital and surplus was $2,924,950,000 and $2,879,154,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at September 30, 2015 and December 31, 2014, substantially above 200% of the authorized control level.

 

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Table of Contents

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

 

American National and its 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 $66,042,000 and $60,732,000 at September 30, 2015 and September 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 of our life and property and casualty insurance entities in accordance with statutory accounting practices are shown below (in thousands):

 

     September 30, 2015      December 31, 2014  

Statutory capital and surplus

     

Life insurance entities

   $ 1,927,011       $ 1,904,128   

Property and casualty insurance entities

     1,006,622         984,155   

 

     Three months ended September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  

Statutory net income

           

Life insurance entities

   $ 21,990       $ 43,447       $ 101,232       $ 139,564   

Property and casualty insurance entities

     29,253         22,718         43,190         44,852   

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 the prior year’s statutory net income from operations, or 10% of prior year statutory surplus. 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 September 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 $4,521,000 and $5,634,000 at September 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, multiple-line, and independent agents as well as 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 Form 10-K. All revenues and expenses 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 of the operating segments.

 

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Table of Contents

Note 15 – Segment Information – (Continued)

 

The following summarizes the results of operations measured as the income from continuing operations before federal income taxes, and equity in earnings (losses) of unconsolidated affiliates by operating segments (in thousands):

 

     Three months ended September 30,      Nine months ended September 30,  
     2015      2014      2015      2014  

Life

   $ 10,193       $ 10,794       $ 25,523       $ 22,076   

Annuity

     4,433         24,366         38,668         70,415   

Health

     (11,178      9,304         1,725         19,579   

Property and Casualty

     33,980         30,088         42,758         59,790   

Corporate and Other

     9,232         20,223         78,752         63,305   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 46,660       $ 94,775       $ 187,426       $ 235,165   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at September 30, 2015, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $765,008,000 of which $513,149,000 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 September 30, 2015 and December 31, 2014, the outstanding letters of credit were $12,214,000, respectively, and there were no borrowings on this facility. This facility expires on October 30, 2016. American National expects it will be renewed on substantially equivalent terms upon expiration.

Guarantees

American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on the bank loan, American National would be obligated to pay off the loans. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of September 30, 2015, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $208,696,000.

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 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):

 

    

Financial Statement Line Impacted

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

Related Party

      2015      2014       

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 986       $ 917       $ 5,522      $ 6,508   

Gal-Tex Hotel Corporation

   Net investment income      330         399         33        39   

Greer, Herz & Adams, LLP

   Other operating expenses      6,011         8,037         (366     (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 and nine months ended September 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 1A, Risk Factors, in our 2014 Annual Report on Form 10-K filed with the SEC on February 27, 2015, and they include among others:

 

    Economic & Investment Risk Factors

 

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

 

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

 

    lack of liquidity for certain of our investments;

 

    risk of investment losses and defaults;

 

    Operational Risk Factors

 

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

 

    potential ineffectiveness of our risk management policies and procedures;

 

    changes in our experience related to deferred policy acquisition costs;

 

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

 

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

 

    Catastrophic Event Risk Factors

 

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

 

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

 

    Marketplace Risk Factors

 

    the highly competitive nature of the insurance and annuity business;

 

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

 

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

 

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Table of Contents
    Litigation and Regulation Risk Factors

 

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

 

    significant changes in government regulation;

 

    changes in tax law;

 

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

 

    Reinsurance and Counterparty Risk Factors

 

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

 

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

 

    Other Risk Factors

 

    potentially adverse rating agency actions; and

 

    control of our company by a small number of stockholders.

Overview

Chartered in 1905, we are a diversified insurance and financial services company offering a broad spectrum of insurance products in all 50 states, the District of Columbia, and Puerto Rico. Our headquarters are in Galveston, Texas.

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
September 30,
          Nine months ended
September 30,
        
     2015     2014     Change     2015     2014      Change  

Premiums and other revenues

             

Premiums

   $ 459,035      $ 447,036      $ 11,999      $ 1,334,081      $ 1,357,537       $ (23,456

Other policy revenues

     60,271        55,255        5,016        175,392        167,041         8,351   

Net investment income

     184,482        236,489        (52,007     597,357        697,604         (100,247

Realized investments gains (losses), net

     (11,879     (2,257     (9,622     40,694        24,503         16,191   

Other income

     7,950        9,647        (1,697     26,408        26,707         (299
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total premiums and other revenues

     699,859        746,170        (46,311     2,173,932        2,273,392         (99,460
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Benefits, losses and expenses

             

Policyholder benefits

     148,807        127,633        21,174        418,512        437,877         (19,365

Claims incurred

     225,935        213,606        12,329        694,160        673,509         20,651   

Interest credited to policyholders’ account balances

     57,509        83,746        (26,237     202,477        258,952         (56,475

Commissions for acquiring and servicing policies

     111,618        97,608        14,010        308,290        299,992         8,298   

Other operating expenses

     121,498        118,002        3,496        368,159        357,043         11,116   

Change in deferred policy acquisition costs (1)

     (12,168     10,800        (22,968     (5,092     10,854         (15,946
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Total benefits and expenses

     653,199        651,395        1,804        1,986,506        2,038,227         (51,721
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 46,660      $ 94,775      $ (48,115   $ 187,426      $ 235,165       $ (47,739
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 and nine months ended September 30, 2015 compared to 2014 primarily due to a decrease in net investment income, which exceeded the decrease in the related interest credited to policyholders’ account balances. Additionally, earnings for the three months ended September 30, 2015 decreased due to a loss in our health segment.

Life

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

 

     Three months ended
September 30,
           Nine months ended
September 30,
       
     2015     2014      Change     2015     2014     Change  

Premiums and other revenues

             

Premiums

   $ 78,397      $ 79,492       $ (1,095   $ 225,550      $ 224,165      $ 1,385   

Other policy revenues

     57,127        51,751         5,376        165,727        155,355        10,372   

Net investment income

     54,904        57,598         (2,694     168,890        172,633        (3,743

Other income

     189        338         (149     1,219        1,027        192   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     190,617        189,179         1,438        561,386        553,180        8,206   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

             

Policyholder benefits

     94,087        83,740         10,347        273,275        257,505        15,770   

Interest credited to policyholders’ account balances

     12,851        16,649         (3,798     42,751        48,265        (5,514

Commissions for acquiring and servicing policies

     30,297        30,239         58        90,145        91,971        (1,826

Other operating expenses

     48,694        47,622         1,072        150,262        149,136        1,126   

Change in deferred policy acquisition costs (1)

     (5,505     135         (5,640     (20,570     (15,773     (4,797
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     180,424        178,385         2,039        535,863        531,104        4,759   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 10,193      $ 10,794       $ (601   $ 25,523      $ 22,076      $ 3,447   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 slightly during the three months ended September 30, 2015 compared to 2014 primarily due to lower investment income and higher policy benefits. Earnings increased during the nine months ended September 30, 2015 compared to 2014 primarily due to increases in premiums on traditional products and other policy revenues.

Premiums and other revenues

Premiums decreased during the three months ended September 30, 2015 compared to 2014 primarily due to higher ceded reinsurance premiums attributable to the mix of business. Premiums increased during the nine months ended September 30, 2015 compared to 2014 due to higher premiums on traditional business offset by higher reinsurance premiums on universal life.

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 nine months ended September 30, 2015 compared to 2014 is attributable to an increase in mortality charges resulting from an increase in insurance in-force.

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
September 30,
            Nine months ended
September 30,
        
     2015      2014      Change      2015      2014      Change  

Whole life

   $ 6,096       $ 5,970       $ 126       $ 19,808       $ 19,387       $ 421   

Term life

     7,313         6,902         411         22,011         22,049         (38

Universal life

     8,704         8,211         493         26,805         26,022         783   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total recurring

   $ 22,113       $ 21,083       $ 1,030       $ 68,624       $ 67,458       $ 1,166   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Single and excess

   $ 633       $ 532       $ 101       $ 1,546       $ 1,466       $ 80   

Credit life

     1,064         1,046         18         3,106         2,978         128   

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 and nine months ended September 30, 2015 compared to 2014 primarily driven by increased Indexed Universal life policy sales.

Benefits, losses and expenses

Policyholder benefits increased during the nine months ended September 30, 2015 compared to 2014 primarily due to an increase in claims.

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

 

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

 

     Three months ended
September 30,
           Nine months ended
September 30,
       
     2015     2014     Change      2015     2014     Change  

Acquisition cost capitalized

   $ 27,936      $ 26,271      $ 1,665       $ 81,568      $ 77,261      $ 4,307   

Amortization of DAC

     (22,431     (26,406     3,975         (60,998     (61,488     490   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 5,505      $ (135   $ 5,640       $ 20,570      $ 15,773      $ 4,797   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Policy in-force information

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

 

     September 30,
2015
     December 31,
2014
     Change  

Life insurance in-force

        

Traditional life

   $ 63,079,770       $ 59,409,750       $ 3,670,020   

Interest-sensitive life

     26,656,749         26,166,314         490,435   
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 89,736,519       $ 85,576,064       $ 4,160,455   
  

 

 

    

 

 

    

 

 

 

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

 

     September 30,
2015
     December 31,
2014
     Change  

Number of policies in-force

        

Traditional life

     1,903,744         1,949,119         (45,375

Interest-sensitive life

     211,118         205,805         5,313   
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,114,862         2,154,924         (40,062
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the nine months ended September 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
September 30,
          Nine months ended
September 30,
       
     2015     2014     Change     2015      2014     Change  

Premiums and other revenues

             

Premiums

   $ 43,514      $ 34,661      $ 8,853      $ 110,045       $ 148,250      $ (38,205

Other policy revenues

     3,144        3,504        (360     9,665         11,686        (2,021

Net investment income

     84,036        128,890        (44,854     316,903         404,347        (87,444

Other income

     1,036        (1     1,037        2,918         (1     2,919   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total premiums and other revenues

     131,730        167,054        (35,324     439,531         564,282        (124,751
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Benefits, losses and expenses

             

Policyholder benefits

     54,720        43,893        10,827        145,237         180,372        (35,135

Interest credited to policyholders’ account balances

     44,658        67,097        (22,439     159,726         210,687        (50,961

Commissions for acquiring and servicing policies

     20,918        10,787        10,131        41,372         37,358        4,014   

Other operating expenses

     13,383        12,465        918        39,380         43,394        (4,014

Change in deferred policy acquisition costs (1)

     (6,382     8,446        (14,828     15,148         22,056        (6,908
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total benefits and expenses

     127,297        142,688        (15,391     400,863         493,867        (93,004
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 4,433      $ 24,366      $ (19,933   $ 38,668       $ 70,415      $ (31,747
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(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 and nine months ended September 30, 2015 compared to 2014 primarily due to the decrease in net investment income. Net investment income declined primarily due to unrealized losses in income on over-the-counter-equity-indexed option derivatives.

Premiums and other revenues

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

 

     Three months ended
September 30,
           Nine months ended
September 30,
        
     2015      2014      Change     2015      2014      Change  

Fixed deferred annuity

   $ 253,175       $ 67,414       $ 185,761      $ 358,885       $ 261,123       $ 97,762   

Single premium immediate annuity

     48,740         40,996         7,744        128,593         171,244         (42,651

Equity-indexed deferred annuity

     120,040         67,524         52,516        254,832         185,602         69,230   

Variable deferred annuity

     23,717         24,514         (797     72,544         84,960         (12,416
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premium and deposits

     445,672         200,448         245,224        814,854         702,929         111,925   

Less: Policy deposits

     402,158         165,787         236,371        704,809         554,679         150,130   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 43,514       $ 34,661       $ 8,853      $ 110,045       $ 148,250       $ (38,205
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

We monitor account values or related changes as key indicators of performance in our Annuity segment. Shown below are the changes in account values and reserves (in thousands):

 

     Nine months ended
September 30,
 
     2015     2014  

Fixed deferred and equity-indexed annuity

    

Account value, beginning of period

   $ 8,883,398      $ 9,355,946   

Net inflows

     417,608        322,605   

Surrenders

     (718,819     (875,968

Fees

     (4,982     (7,174

Interest credited

     153,196        203,460   
  

 

 

   

 

 

 

Account value, end of period

   $ 8,730,401      $ 8,998,869   
  

 

 

   

 

 

 

Single premium immediate annuity

    

Reserve, beginning of period

   $ 1,283,712      $ 1,199,276   

Net inflows

     16,602        75,450   

Interest and mortality

     40,224        35,374   
  

 

 

   

 

 

 

Reserve, end of period

   $ 1,340,538      $ 1,310,100   
  

 

 

   

 

 

 

Variable deferred annuity

    

Account value, beginning of period

   $ 494,516      $ 489,305   

Net inflows

     70,999        83,843   

Surrenders

     (116,110     (95,054

Fees

     (4,211     (4,308

Change in market value and other

     (15,195     19,854   
  

 

 

   

 

 

 

Account value, end of period

   $ 429,999      $ 493,640   
  

 

 

   

 

 

 

Fixed deferred and equity-indexed annuity sales increased during the nine months ended September 30, 2015 compared to 2014. During the third quarter, the Company marketed enhanced annuity crediting rates for specific products, which were well received by the market and increased sales.

Single premium immediate annuity sales decreased during the nine months ended September 30, 2015 compared to 2014. Low interest rates challenge the attractiveness of single premium immediate annuity offerings relative to other products for many prospective customers.

Variable annuity premiums are similar for the three months ended September 30, 2015 comparable to 2014. These premiums are mostly renewal and first year deposits into group unallocated separate account funds with no minimum guarantees. A small proportion of the variable annuity premium is renewal deposits into a closed block of older retail variable annuities that do have guaranteed minimum death benefits, but with minimal risk exposure. Our total direct exposure on the guaranteed minimum death benefits associated with these products was $1.2 million as of September 30, 2015.

 

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Benefits, losses and expenses

Policyholder benefits consist of annuity payments and reserve increases for single premium immediate annuity contracts. Reserve increases are highly correlated to the sales volume of single premium immediate annuity contracts. Benefits decreased for the nine months ended September 30, 2015 compared to 2014, driven primarily by lower single premium annuity sales.

Commissions increased during the nine months ended September 30, 2015 compared to 2014 driven by the increase in fixed deferred and equity-indexed annuity sales.

Other operating expenses decreased during the nine months ended September 30, 2015 compared to 2014 due to expense management activities.

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
September 30,
           Nine months ended
September 30,
       
     2015     2014     Change      2015     2014     Change  

Acquisition cost capitalized

   $ 22,031      $ 12,219      $ 9,812       $ 42,264      $ 36,413      $ 5,851   

Amortization of DAC

     (15,649     (20,665     5,016         (57,412     (58,469     1,057   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 6,382      $ (8,446   $ 14,828       $ (15,148   $ (22,056   $ 6,908   
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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 nine months ended September 30, 2015 and 2014 were 42.7% and 33.8%, respectively. The 2014 ratio reflects the lower than projected surrenders in the second quarter of last year.

Options and Derivatives

The following table summarizes the incremental impact of the investment performance of equity-indexed options or “option return” on 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
September 30,
           Nine months ended
September 30,
        
     2015     2014      Change     2015     2014      Change  

Net investment income

              

Without option return

   $ 115,312      $ 122,684       $ (7,372   $ 349,009      $ 376,841       $ (27,832

Option return

     (31,276     6,206         (37,482     (32,106     27,506         (59,612

Interest credited to policy account balances

              

Without embedded derivatives

     60,264        65,333         (5,069     178,025        194,877         (16,852

Equity-indexed annuity embedded derivatives

     (15,606     1,764         (17,370     (18,299     15,810         (34,109

Net investment income without option return decreased during the three and nine months ended September 30, 2015 compared to 2014, primarily due to 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 nine months ended September 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 6.9% decrease and 0.6% increase in the S&P 500 Index during the three months ended September 30, 2015 and 2014, respectively. The nine month results correlate to the 6.7% decrease and 6.7% increase return in the S&P 500 index for 2015 and 2014, respectively.

 

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Table of Contents

Health

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

 

     Three months ended
September 30,
          Nine months ended
September 30,
       
     2015     2014     Change     2015      2014     Change  

Premiums and other revenues

             

Premiums

   $ 45,638      $ 53,454      $ (7,816   $ 148,610       $ 164,169      $ (15,559

Net investment income

     2,515        2,971        (456     7,760         8,806        (1,046

Other income

     3,554        5,075        (1,521     13,479         15,330        (1,851
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total premiums and other revenues

     51,707        61,500        (9,793     169,849         188,305        (18,456
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Benefits, losses and expenses

             

Claims incurred

     46,236        33,193        13,043        110,289         109,859        430   

Commissions for acquiring and servicing policies

     6,049        9,688        (3,639     21,195         27,031        (5,836

Other operating expenses

     10,011        10,009        2        34,314         32,701        1,613   

Change in deferred policy acquisition costs (1)

     589        (694     1,283        2,326         (865     3,191   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Total benefits and expenses

     62,885        52,196        10,689        168,124         168,726        (602
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income before other items and federal income taxes

   $ (11,178   $ 9,304      $ (20,482   $ 1,725       $ 19,579      $ (17,854
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

(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 September 30, 2015 compared to 2014, primarily due to an increase in claims retained by the company from a reinsurer that was unable to meet its contractual obligations. Earnings decreased during the nine months ended September 30, 2015 compared to 2014, primarily due to the reinsurer issue mentioned above but also reflecting lower premiums and claims in the closed medical blocks of business and Medicare Supplement products.

Premiums and other revenues

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

 

     Three months ended September 30,     Nine months ended September 30,  
     2015     2014     2015     2014  

Medicare Supplement

   $ 18,610         40.7   $ 21,060         39.4   $ 57,620         38.8   $ 64,413         39.2

Medical expense

     4,142         9.1       4,985         9.3       12,927         8.7       16,750         10.2  

Group health

     8,436         18.5       7,051         13.2       25,843         17.4       25,811         15.7  

Credit accident and health

     3,244         7.1       3,738         7.0       9,709         6.5       11,049         6.7  

MGU

     3,813         8.4       6,301         11.8       17,328         11.7       18,183         11.1  

Supplemental Insurance

     6,579         14.4       8,785         16.4       21,281         14.3       23,110         14.1  

All other

     814         1.8       1,534         2.9       3,902         2.6       4,853      <