Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2016

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.    Yes  x    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).    Yes  x    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    Smaller reporting company   ¨
Non-accelerated filer   ¨    Accelerated filer   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

As of May 02, 2016, there were 26,914,218 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION   
ITEM 1.  

FINANCIAL STATEMENTS (Unaudited):

  
 

Consolidated Statements of Financial Position as of March 31, 2016 and December 31, 2015

     3   
 

Consolidated Statements of Operations for the three months ended March 31, 2016 and 2015

     4   
 

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2016 and 2015

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2016 and 2015

     5   
 

Consolidated Statements of Cash Flows for the three months ended March 31, 2016 and 2015

     6   
 

Notes to the Unaudited Consolidated Financial Statements

     7   
ITEM 2.  

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

     32   
ITEM 3.  

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     49   
ITEM 4.  

CONTROLS AND PROCEDURES

     49   
  PART II – OTHER INFORMATION      50   
ITEM 1.  

LEGAL PROCEEDINGS

     50   
ITEM 1A.  

RISK FACTORS

     50   
ITEM 2.  

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     50   
ITEM 3.  

DEFAULTS UPON SENIOR SECURITIES

     50   
ITEM 4.  

MINE SAFETY DISCLOSURES

     50   
ITEM 5.  

OTHER INFORMATION

     50   
ITEM 6.  

EXHIBIT INDEX

     51   

 

2


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited and in thousands, except share data)

 

     March 31,     December 31,  
     2016     2015  

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost (Fair value $7,863,320 and $7,755,553)

   $ 7,567,273      $ 7,609,420   

Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $5,600,875 and $5,427,831)

     5,776,762        5,483,916   

Equity securities, at fair value (Cost $808,650 and $810,826)

     1,510,495        1,514,979   

Mortgage loans on real estate, net of allowance

     3,693,211        3,483,280   

Policy loans

     405,604        407,491   

Investment real estate, net of accumulated depreciation of $217,103 and $212,139

     584,459        581,255   

Short-term investments

     312,306        460,612   

Other invested assets

     170,031        173,042   
  

 

 

   

 

 

 

Total investments

     20,020,141        19,713,995   
  

 

 

   

 

 

 

Cash and cash equivalents

     148,945        190,237   

Investments in unconsolidated affiliates

     410,045        379,348   

Accrued investment income

     170,609        177,474   

Reinsurance recoverables

     386,533        413,881   

Prepaid reinsurance premiums

     65,825        77,907   

Premiums due and other receivables

     290,347        285,446   

Deferred policy acquisition costs

     1,297,799        1,324,669   

Property and equipment, net

     119,522        120,680   

Current tax receivable

     16,868        4,091   

Other assets

     141,502        140,788   

Separate account assets

     899,750        918,446   
  

 

 

   

 

 

 

Total assets

   $ 23,967,886      $ 23,746,962   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,863,567      $ 2,853,962   

Annuity

     1,161,836        1,113,057   

Accident and health

     63,260        65,034   

Policyholders’ account balances

     10,952,355        10,829,173   

Policy and contract claims

     1,282,734        1,280,011   

Unearned premium reserve

     808,506        812,977   

Other policyholder funds

     311,747        305,836   

Liability for retirement benefits

     202,014        207,635   

Notes payable

     135,975        128,436   

Deferred tax liabilities, net

     251,350        219,295   

Other liabilities

     509,184        550,629   

Separate account liabilities

     899,750        918,446   
  

 

 

   

 

 

 

Total liabilities

     19,442,278        19,284,491   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value, - Authorized 50,000,000, Issued 30,832,449 and 30,832,449 Outstanding 26,914,218 and 26,894,456 shares

     30,832        30,832   

Additional paid-in capital

     15,740        13,689   

Accumulated other comprehensive income

     406,460        352,620   

Retained earnings

     4,164,969        4,157,184   

Treasury stock, at cost

     (101,781     (102,043
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,516,220        4,452,282   

Noncontrolling interest

     9,388        10,189   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,525,608        4,462,471   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 23,967,886      $ 23,746,962   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three months ended March 31,  
     2016     2015  

PREMIUMS AND OTHER REVENUE

    

Premiums

    

Life

   $ 75,117      $ 72,082   

Annuity

     70,208        41,443   

Accident and health

     42,313        51,837   

Property and casualty

     303,361        276,481   

Other policy revenues

     64,347        57,524   

Net investment income

     196,054        209,213   

Net realized investment gains

     9,062        39,302   

Other-than-temporary impairments

     (3,476     (25

Other income

     7,984        8,710   
  

 

 

   

 

 

 

Total premiums and other revenues

     764,970        756,567   
  

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

    

Policyholder benefits

    

Life

     100,771        88,004   

Annuity

     81,247        54,367   

Claims incurred

    

Accident and health

     32,292        31,797   

Property and casualty

     211,958        192,252   

Interest credited to policyholders’ account balances

     76,527        75,753   

Commissions for acquiring and servicing policies

     112,884        93,115   

Other operating expenses

     130,376        123,458   

Change in deferred policy acquisition costs

     (4,593     6,462   
  

 

 

   

 

 

 

Total benefits, losses and expenses

     741,462        665,208   
  

 

 

   

 

 

 

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

     23,508        91,359   
  

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

    

Current

     (4,714     35,392   

Deferred

     644        10,298   
  

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

     (4,070     45,690   

Equity in earnings of unconsolidated affiliates

     937        56,584   
  

 

 

   

 

 

 

Net income

     28,515        102,253   

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

     (801     (729
  

 

 

   

 

 

 

Net income attributable to American National

   $ 29,316      $ 102,982   
  

 

 

   

 

 

 

Amounts available to American National common stockholders

    

Earnings per share

    

Basic

   $ 1.09      $ 3.84   

Diluted

     1.09        3.82   

Cash dividends to common stockholders

     0.80        0.77   

Weighted average common shares outstanding

     26,909,511        26,818,215   

Weighted average common shares outstanding and dilutive potential common shares

     26,965,967        26,964,350   

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2016     2015  

Net income

   $   28,515      $ 102,253   

Other comprehensive income, net of tax

    

Change in net unrealized gains on securities

     51,973        7,836   

Foreign currency transaction and translation adjustments

     (12     (1,838

Defined benefit pension plan adjustment

     1,879        1,443   
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     53,840        7,441   
  

 

 

   

 

 

 

Total comprehensive income

     82,355        109,694   

Less: Comprehensive loss attributable to noncontrolling interest

     (801     (729
  

 

 

   

 

 

 

Total comprehensive income attributable to American National

   $ 83,156      $ 110,423   
  

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2016     2015  

Common Stock

    

Balance at beginning and end of the period

   $ 30,832      $ 30,832   
  

 

 

   

 

 

 

Additional Paid-In Capital

    

Balance as of January 1,

     13,689        9,248   

Reissuance of treasury shares

     1,841        1,978   

Amortization of restricted stock

     210        377   
  

 

 

   

 

 

 

Balance at end of the period

     15,740        11,603   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance as of January 1,

     352,620        490,782   

Other comprehensive income

     53,840        7,441   
  

 

 

   

 

 

 

Balance at end of the period

     406,460        498,223   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     4,157,184        3,998,644   

Net income attributable to American National

     29,316        102,982   

Cash dividends to common stockholders

     (21,531     (20,711
  

 

 

   

 

 

 

Balance at end of the period

     4,164,969        4,080,915   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (102,043     (101,941

Reissuance of treasury shares

     262        243   
  

 

 

   

 

 

 

Balance at end of the period

     (101,781     (101,698
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     10,189        12,384   

Contributions

     —          24   

Net loss attributable to noncontrolling interest

     (801     (729
  

 

 

   

 

 

 

Balance at end of the period

     9,388        11,679   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 4,525,608      $ 4,531,554   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2016     2015  

OPERATING ACTIVITIES

    

Net income

   $ 28,515      $ 102,253   

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

    

Net realized investment gains

     (9,062     (39,302

Other-than-temporary impairments

     3,476        25   

Amortization of premiums, discounts and loan origination fees

     161        977   

Net capitalized interest on policy loans and mortgage loans

     (6,820     (7,708

Depreciation

     12,752        10,896   

Interest credited to policyholders’ account balances

     76,527        75,753   

Charges to policyholders’ account balances

     (64,347     (57,524

Deferred federal income tax expense

     644        10,298   

Equity in earnings of unconsolidated affiliates

     (937     (56,584

Distributions from equity method investments

     317        199   

Changes in

    

Policyholder liabilities

     54,761        57,193   

Deferred policy acquisition costs

     (4,593     6,462   

Reinsurance recoverables

     27,348        12,782   

Premiums due and other receivables

     (5,108     (15,042

Prepaid reinsurance premiums

     12,082        838   

Accrued investment income

     6,865        1,606   

Current tax receivable/payable

     (12,777     32,873   

Liability for retirement benefits

     (5,621     4,348   

Other, net

     16,628        (17,609
  

 

 

   

 

 

 

Net cash provided by operating activities

     130,811        122,734   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     116,940        319,361   

Available-for-sale securities

     120,761        120,746   

Investment real estate

     —          10,821   

Mortgage loans

     125,983        167,304   

Policy loans

     13,610        13,929   

Other invested assets

     4,592        6,080   

Disposals of property and equipment

     8,349        800   

Distributions from unconsolidated affiliates

     4,972        24,465   

Payment for the purchase/origination of

    

Held-to-maturity securities

     (80,091     (85,733

Available-for-sale securities

     (325,867     (236,077

Investment real estate

     (9,710     (16,533

Mortgage loans

     (332,093     (155,138

Policy loans

     (5,868     (6,134

Other invested assets

     (5,294     (3,729

Additions to property and equipment

     (13,442     (13,580

Contributions to unconsolidated affiliates

     (40,351     (24,668

Change in short-term investments

     148,306        (89,333

Other, net

     90        12,301   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (269,113     44,882   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     435,506        212,245   

Policyholders’ account withdrawals

     (324,504     (406,870

Change in notes payable

     7,539        8,258   

Dividends to stockholders

     (21,531     (20,711

Proceeds from noncontrolling interest

     —          24   
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     97,010        (207,054

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (41,292     (39,438

Beginning of the period

     190,237        209,455   
  

 

 

   

 

 

 

End of the period

   $ 148,945      $ 170,017   
  

 

 

   

 

 

 

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, 2015. 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 February 2015, the FASB issued guidance amending 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. We adopted the standard on its required effective date of January 1, 2016. The adoption of this standard did not have a material impact to the Company’s financial statements.

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 guidance. For those contracts which are impacted, the transaction price is attributed to the underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. The guidance is effective for reporting periods beginning after December 15, 2017 and is to be applied retrospectively. The Company is evaluating the impact of adoption, which is not expected to be material to the Company’s financial statements.

 

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Table of Contents

Note 3 – Recently Issued Accounting Pronouncements – (Continued)

 

In May 2015, the FASB issued guidance to expand the disclosures an insurance entity would provide about its short duration contracts. The 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 is also intended to provide 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 guidance affects disclosures only and will not impact the Company’s financial statements.

In January 2016, the FASB issued guidance that will change certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance requires that equity investments be measured at fair value and that changes in fair value are recognized in net income. It also simplifies the impairment assessment of equity investments and eliminates the disclosure requirements for methods and significant assumptions used to estimate fair value of financial instruments that are measured at amortized cost on the balance sheet. The amended guidance is effective for reporting periods beginning after December 15, 2017. The Company is evaluating the impact of the adoption and assessing its potential impact on the Company’s financial statements.

In February 2016, the FASB issued guidance that will require most leases to be recognized on the statement of financial position. The guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of the identified property, plant, or equipment for a period of time in exchange for consideration. The accounting applied by a lessor remains largely unchanged. The amended guidance is effective for annual periods beginning after December 15, 2018, and interim periods within those annual periods. The Company is evaluating the impact of the adoption, which is not expected to be material to the Company’s financial statements.

 

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Note 4 – Investment in Securities

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

 

     March 31, 2016  
     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

   $ 321,746       $ 27,475       $ (298   $ 348,923   

Foreign governments

     4,090         949         —          5,039   

Corporate debt securities

     6,958,916         360,442         (113,137     7,206,221   

Residential mortgage-backed securities

     265,889         21,046         (734     286,201   

Collateralized debt securities

     1,297         92         —          1,389   

Other debt securities

     15,335         212         —          15,547   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     7,567,273         410,216         (114,169     7,863,320   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     24,221         813         (7     25,027   

U.S. states and political subdivisions

     946,797         53,300         (240     999,857   

Foreign governments

     5,000         1,918         —          6,918   

Corporate debt securities

     4,594,317         185,932         (68,981     4,711,268   

Residential mortgage-backed securities

     23,377         2,412         (165     25,624   

Collateralized debt securities

     7,163         909         (4     8,068   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     5,600,875         245,284         (69,397     5,776,762   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     787,663         717,630         (23,842     1,481,451   

Preferred stock

     20,987         8,057         —          29,044   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     808,650         725,687         (23,842     1,510,495   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,976,798       $ 1,381,187       $ (207,408   $ 15,150,577   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

     December 31, 2015  
     Cost or
Amortized Cost
     Gross Unrealized
Gains
     Gross Unrealized
(Losses)
    Fair Value  

Fixed maturity securities, bonds held-to-maturity

          

U.S. states and political subdivisions

   $ 324,643       $ 22,318       $ (444   $ 346,517   

Foreign governments

     4,101         867         —          4,968   

Corporate debt securities

     6,985,844         263,927         (158,101     7,091,670   

Residential mortgage-backed securities

     277,135         18,351         (1,286     294,200   

Collateralized debt securities

     1,924         100         —          2,024   

Other debt securities

     15,773         401         —          16,174   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     7,609,420         305,964         (159,831     7,755,553   
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     24,024         702         (34     24,692   

U.S. states and political subdivisions

     933,958         39,808         (1,275     972,491   

Foreign governments

     5,000         1,733         —          6,733   

Corporate debt securities

     4,431,765         120,471         (107,614     4,444,622   

Residential mortgage-backed securities

     25,629         2,155         (420     27,364   

Collateralized debt securities

     7,455         629         (70     8,014   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     5,427,831         165,498         (109,413     5,483,916   
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     794,839         718,225         (22,035     1,491,029   

Preferred stock

     15,987         7,964         (1     23,950   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     810,826         726,189         (22,036     1,514,979   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,848,077       $ 1,197,651       $ (291,280   $ 14,754,448   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

9


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2016  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 301,205       $ 307,473       $ 223,697       $ 224,443   

Due after one year through five years

     3,097,258         3,297,275         1,318,208         1,393,884   

Due after five years through ten years

     3,937,641         4,014,344         3,466,832         3,535,364   

Due after ten years

     225,319         239,203         587,138         618,208   

Without single maturity date

     5,850         5,025         5,000         4,863   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,567,273       $ 7,863,320       $ 5,600,875       $ 5,776,762   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three months ended March 31,  
     2016      2015  

Proceeds from sales of available-for-sale securities

   $ 15,705       $ 15,582   

Gross realized gains

     5,067         6,783   

Gross realized losses

     124         —     

Gains and losses are determined using specific identification of the securities sold. During the three months ended March 31, 2016 and 2015 there were no bonds transferred from held-to-maturity to available-for-sale.

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

 

     Three months ended March 31,  
     2016      2015  

Bonds available-for-sale

   $ 119,802       $ 47,093   

Equity securities

     (2,308      (12,435
  

 

 

    

 

 

 

Change in net unrealized gains on securities during the year

     117,494         34,658   

Adjustments for

     

Deferred policy acquisition costs

     (31,463      (14,048

Participating policyholders’ interest

     (6,012      (2,882

Deferred federal income tax expense

     (28,046      (9,892
  

 

 

    

 

 

 

Change in net unrealized gains on securities, net of tax

   $ 51,973       $ 7,836   
  

 

 

    

 

 

 

 

10


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2016  
     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

   $ (298   $ 4,074       $ —        $ —         $ (298   $ 4,074   

Corporate debt securities

     (57,810     750,427         (55,327     332,409         (113,137     1,082,836   

Residential mortgage-backed securities

     (37     7,444         (697     14,030         (734     21,474   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (58,145     761,945         (56,024     346,439         (114,169     1,108,384   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (7     9,507         —          —           (7     9,507   

U.S. states and political subdivisions

     (234     6,800         (6     2,090         (240     8,890   

Corporate debt securities

     (47,354     756,561         (21,627     157,966         (68,981     914,527   

Residential mortgage-backed securities

     (10     1,745         (155     4,787         (165     6,532   

Collateralized debt securities

     —          51         (4     217         (4     268   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (47,605     774,664         (21,792     165,060         (69,397     939,724   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (23,842     132,434         —          —           (23,842     132,434   

Preferred stock

     —          —           —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (23,842     132,434         —          —           (23,842     132,434   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (129,592   $ 1,669,043       $ (77,816   $ 511,499       $ (207,408   $ 2,180,542   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     December 31, 2015  
     Less than 12 months      12 Months or more      Total  
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

  

U.S. states and political subdivisions

   $ (444   $ 19,412       $ —        $ —         $ (444   $ 19,412   

Corporate debt securities

     (93,285     1,912,178         (64,816     283,469         (158,101     2,195,647   

Residential mortgage-backed securities

     (449     21,275         (837     14,721         (1,286     35,996   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (94,178     1,952,865         (65,653     298,190         (159,831     2,251,055   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (34     18,802         —          —           (34     18,802   

U.S. states and political subdivisions

     (1,223     80,807         (52     2,569         (1,275     83,376   

Corporate debt securities

     (81,638     1,796,357         (25,976     90,784         (107,614     1,887,141   

Residential mortgage-backed securities

     (228     15,273         (192     4,984         (420     20,257   

Collateralized debt securities

     (66     2,115         (4     253         (70     2,368   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (83,189     1,913,354         (26,224     98,590         (109,413     2,011,944   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (22,035     136,694         —          —           (22,035     136,694   

Preferred stock

     —          —           (1     —           (1     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (22,035     136,694         (1     —           (22,036     136,694   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (199,402   $ 4,002,913       $ (91,878   $ 396,780       $ (291,280   $ 4,399,693   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

11


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

As of March 31, 2016, 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.

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

 

     March 31, 2016     December 31, 2015  

AAA

     5.4     5.4

AA

     11.7        12.0   

A

     35.5        36.5   

BBB

     44.3        43.3   

BB and below

     3.1        2.8   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

     March 31, 2016     December 31, 2015  

Consumer goods

     21.5     20.5

Energy and utilities

     10.4        10.3   

Finance

     19.2        20.0   

Healthcare

     13.5        14.6   

Industrials

     8.5        8.2   

Information technology

     18.1        17.8   

Other

     8.8        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:

 

     March 31, 2016     December 31, 2015  

East North Central

     18.7     18.8

East South Central

     4.9        4.8   

Mountain

     11.7        11.6   

Pacific

     13.4        10.7   

South Atlantic

     17.2        18.8   

West South Central

     28.7        29.0   

Other

     5.4        6.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

For the quarter ended March 31, 2016, American National foreclosed on no loans. As of March 31, 2016 one loan was in the process of foreclosure with a recorded investment of $2,450,000. For the year ended December 31, 2015, American National foreclosed on three loans with a recorded investment totaling $24,333,000, and one was in the process of foreclosure with a recorded investment of $2,450,000. American National sold no loans for the three months ended March 31, 2016 and one loan with a recorded investment of $2,702,000 resulting in a realized loss of $1,602,000 for the year ended December 31, 2015.

 

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  

March 31, 2016

                   

Industrial

   $ —         $ —         $ —         $ —         $ 778,077       $ 778,077        21.0   

Office

     6,406         —           2,450         8,856         1,259,282         1,268,138        34.2   

Retail

     —           —           —           —           583,408         583,408        15.7   

Other

     —           —           —           —           1,074,991         1,074,991        29.1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 6,406       $ —         $ 2,450       $ 8,856       $ 3,695,758       $ 3,704,614        100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (11,403  
                 

 

 

   

Total, net of allowance

                  $ 3,693,211     
                 

 

 

   

December 31, 2015

                   

Industrial

   $ —         $ —         $ —         $ —         $ 704,426       $ 704,426        20.1   

Office

     —           5,883         2,450         8,333         1,252,484         1,260,817        36.1   

Retail

     19,088         —           —           19,088         583,810         602,898        17.2   

Other

     —           —           —           —           928,034         928,034        26.6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 19,088       $ 5,883       $ 2,450       $ 27,421       $ 3,468,754       $ 3,496,175        100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (12,895  
                 

 

 

   

Total, net of allowance

                  $ 3,483,280     
                 

 

 

   

Total mortgage loans are net of unamortized discounts of $399,000 and $452,000 and unamortized origination fees of $23,113,000 and $22,637,000 at March 31, 2016 and December 31, 2015, 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):

 

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

Beginning balance 2016

   $ 10,716       $ 2,179   

Change in allowance

     194         (1,686
  

 

 

    

 

 

 

Ending balance 2016

   $ 10,910       $ 493   
  

 

 

    

 

 

 

At March 31, 2016 and December 31, 2015, the recorded investment for loans collectively evaluated for impairment was $3,675,801,000 and $3,442,211,000, respectively. The recorded investment for loans individually evaluated for impairment was $28,813,000 and $53,964,000, respectively.

 

13


Table of Contents

Note 5 – Mortgage Loans – (Continued)

 

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

 

     Three months ended March 31,  
     2016      2015  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  
       Investment          Recognized          Investment          Recognized    

With an allowance

           

Office

   $ —         $ —         $ 9,979       $ 209   

Industrial

     —           —           1,100         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 11,079       $ 246   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance

           

Office

   $ 28,952       $ 457       $ 20,996       $ 341   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,952       $ 457       $ 20,996       $ 341   
  

 

 

    

 

 

    

 

 

    

 

 

 
     March 31, 2016      December 31, 2015  
            Unpaid             Unpaid  
     Recorded      Principal      Recorded      Principal  
     Investment      Balance      Investment      Balance  

With an allowance

           

Office

   $ —         $ —         $ 16,168       $ 17,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 16,168       $ 17,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance

           

Office

   $ 28,813       $ 28,813       $ 29,091       $ 29,091   

Retail

     —           —           8,705         8,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,813       $ 28,813       $ 37,796       $ 37,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

There were no mortgage loans placed into troubled debt restructuring during the three months ended March 31, 2016 and 2015, respectively.

 

14


Table of Contents

Note 6 – Investment Real Estate

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

 

         March 31, 2016         December 31, 2015  

Industrial

     9.7     10.9

Office

     38.0        38.1   

Retail

     37.7        37.0   

Other

     14.6        14.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     March 31, 2016     December 31, 2015  

East North Central

     7.3     11.4

East South Central

     3.6        3.6   

Mountain

     12.4        12.6   

Pacific

     5.7        5.6   

South Atlantic

     14.1        10.1   

West South Central

     51.0        50.7   

Other

     5.9        6.0   
  

 

 

   

 

 

 

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 2016 or 2015.

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

 

         March 31, 2016          December 31, 2015  

Investment real estate

   $ 173,244       $ 174,264   

Short-term investments

     1         1   

Cash and cash equivalents

     3,842         3,855   

Accrued investment income

     —           557   

Other receivables

     6,812         8,101   

Other assets

     10,093         8,210   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 193,992       $ 194,988   
  

 

 

    

 

 

 

Notes payable

   $ 135,975       $ 128,436   

Other liabilities

     16,425         19,436   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 152,400       $ 147,872   
  

 

 

    

 

 

 

 

15


Table of Contents

Note 6 – Investment Real Estate – (Continued)

 

The notes payable in the consolidated statements of financial position pertain to the borrowings of the consolidated VIEs. The liability of American National 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 $36,924,000 and $34,699,000 at March 31, 2016 and December 31, 2015, respectively. The total long-term portion of notes payable, $98,293,000, consists of four notes with the following interest rates: 4.0%, one note with adjusted LIBOR plus LIBOR margin, one note at LIBOR, and one note at the lessor of the Prime Rate or the highest rate permitted by law. Of the long-term notes payable, two notes will mature in 2018 and two notes will mature beyond 5 years. The current portion of notes payable, $37,682,000, maturing in 2016 and 2017, consists of two notes with the following interest: prime plus 0.5%, and a loan with adjusted LIBOR plus LIBOR margin.

For other VIEs in which American National is a partner, it is not the primary beneficiary and these entities are 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):

 

     March 31, 2016      December 31, 2015  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 240,681       $ 240,681       $ 236,816       $ 236,816   

Mortgage loans

     317,530         317,530         212,228         212,228   

Accrued investment income

     1,172         1,172         661         661   

As of March 31, 2016, no real estate investments were classified as held for sale.

Note 7 – Derivative Instruments

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

 

Derivatives Not Designated

as Hedging Instruments

  

Location in the Consolidated

Statements of Financial Position

   March 31, 2016      December 31, 2015  
      Number of
Instruments
     Notional
Amounts
     Estimated
Fair Value
     Number of
Instruments
     Notional
Amounts
     Estimated
Fair Value
 

Equity-indexed options

   Other invested assets      422       $ 1,242,000       $ 123,761         419       $ 1,200,600       $ 123,007   

Equity-indexed embedded derivative

   Policyholders’ account balances      54,091         1,122,600         258,267         51,815         1,067,600         242,412   

 

Derivatives Not Designated

as Hedging Instruments

  

Location in the Consolidated

Statements of Operations

   Gains (Losses) Recognized in Income on Derivatives  
      Three months ended March 31,  
      2016     2015  
Equity-indexed options    Net investment income    $ (3,639   $ 1,131   
Equity-indexed embedded derivative    Interest credited to policyholders’ account balances      2,552        (1,196

 

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Table of Contents

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

Net investment income is shown below (in thousands):

 

     Three months ended March 31,  
     2016      2015  

Bonds

   $ 140,193       $ 143,741   

Equity securities

     9,279         8,467   

Mortgage loans

     48,002         49,499   

Real estate

     (1,874      (1,753

Options

     (3,639      1,131   

Other invested assets

     4,093         8,128   
  

 

 

    

 

 

 

Total

   $ 196,054       $ 209,213   
  

 

 

    

 

 

 

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

 

     Three months ended March 31,  
     2016      2015  

Bonds

   $ 2,739       $ 1,298   

Equity securities

     4,865         28,627   

Mortgage loans

     1,492         (524

Real estate

     —           9,911   

Other invested assets

     (34      (10
  

 

 

    

 

 

 

Total

   $ 9,062       $ 39,302   
  

 

 

    

 

 

 

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

 

     Three months ended March 31,  
     2016          2015      

Equity securities

     (3,476      (25
  

 

 

    

 

 

 

Total

   $ (3,476    $ (25
  

 

 

    

 

 

 

 

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Table of Contents

Note 9 – Fair Value of Financial Instruments

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

 

     March 31, 2016      December 31, 2015  
     Carrying             Carrying         
     Amount      Fair Value      Amount      Fair Value  

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

   $ 7,567,273       $ 7,863,320       $ 7,609,420       $ 7,755,553   

Fixed maturity securities, bonds available-for-sale

     5,776,762         5,776,762         5,483,916         5,483,916   

Equity securities

     1,510,495         1,510,495         1,514,979         1,514,979   

Equity-indexed options

     123,761         123,761         123,007         123,007   

Mortgage loans on real estate, net of allowance

     3,693,211         3,772,509         3,483,280         3,621,978   

Policy loans

     405,604         405,604         407,491         407,491   

Short-term investments

     312,306         312,306         460,612         460,612   

Separate account assets

     899,750         899,750         918,446         918,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,289,162       $ 20,664,507       $ 20,001,151       $ 20,285,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,825,987       $ 8,825,987       $ 8,787,376       $ 8,787,376   

Embedded derivative liability for equity-indexed contracts

     258,267         258,267         242,412         242,412   

Notes payable

     135,975         135,975         128,436         128,436   

Separate account liabilities

     899,750         899,750         918,446         918,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,119,979       $ 10,119,979       $ 10,076,670       $ 10,076,670   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

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

 

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Table of Contents

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

 

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

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

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

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

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

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

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

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

 

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Table of Contents

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

 

The significant unobservable input used to calculate the fair value of the embedded derivatives is equity option implied volatility. An increase in implied volatility will result in an increase in the value of the equity-indexed embedded derivatives, all other things being equal. At March 31, 2016 and December 31, 2015, the one year implied volatility used to estimate embedded derivative value was 16.4% and 17.5%, 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.

 

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Table of Contents

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

 

Quantitative Disclosures

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

 

     Fair Value Measurement as of March 31, 2016  
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 348,923       $ —         $ 348,923       $ —     

Foreign governments

     5,039         —           5,039         —     

Corporate debt securities

     7,206,221         —           7,125,502         80,719   

Residential mortgage-backed securities

     286,201         —           285,274         927   

Collateralized debt securities

     1,389         —           —           1,389   

Other debt securities

     15,547         —           12,222         3,325   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,863,320         —           7,776,960         86,360   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     25,027         —           25,027         —     

U.S. states and political subdivisions

     999,857         —           997,377         2,480   

Foreign governments

     6,918         —           6,918         —     

Corporate debt securities

     4,711,268         —           4,696,574         14,694   

Residential mortgage-backed securities

     25,624         —           23,138         2,486   

Collateralized debt securities

     8,068         —           6,039         2,029   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,776,762         —           5,755,073         21,689   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,481,451         1,481,451         —           —     

Preferred stock

     29,044         29,044         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,510,495         1,510,495         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     123,761         —           —           123,761   

Mortgage loans on real estate

     3,772,509         —           3,772,509         —     

Policy loans

     405,604         —           —           405,604   

Short-term investments

     312,306         —           312,306         —     

Separate account assets

     899,750         —           899,750         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,664,507       $ 1,510,495       $ 18,516,598       $ 637,414   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,825,987       $ —         $ —         $ 8,825,987   

Embedded derivative liability for equity-indexed contracts

     258,267         —           —           258,267   

Notes payable

     135,975         —           —           135,975   

Separate account liabilities

     899,750         —           899,750         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,119,979       $ —         $ 899,750       $ 9,220,229   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

21


Table of Contents

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

 

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

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 346,517       $ —         $ 346,517       $ —     

Foreign governments

     4,968         —           4,968         —     

Corporate debt securities

     7,091,670         —           7,010,165         81,505   

Residential mortgage-backed securities

     294,200         —           293,267         933   

Collateralized debt securities

     2,024         —           2,024         —     

Other debt securities

     16,174         —           12,355         3,819   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,755,553         —           7,669,296         86,257   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,692         —           24,692         —     

U.S. states and political subdivisions

     972,491         —           969,996         2,495   

Foreign governments

     6,733         —           6,733         —     

Corporate debt securities

     4,444,622         —           4,431,263         13,359   

Residential mortgage-backed securities

     27,364         —           24,958         2,406   

Collateralized debt securities

     8,014         —           6,144         1,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,483,916         —           5,463,786         20,130   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,491,029         1,491,029         —           —     

Preferred stock

     23,950         23,950         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,514,979         1,514,979         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     123,007         —           —           123,007   

Mortgage loans on real estate

     3,621,978         —           3,621,978         —     

Policy loans

     407,491         —           —           407,491   

Short-term investments

     460,612         —           460,612         —     

Separate account assets

     918,446         —           918,446         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,285,982       $ 1,514,979       $ 18,134,118       $ 636,885   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,787,376       $ —         $ —         $ 8,787,376   

Embedded derivative liability for equity-indexed contracts

     242,412         —           —           242,412   

Notes payable

     128,436         —           —           128,436   

Separate account liabilities

     918,446         —           918,446         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,076,670       $ —         $ 918,446       $ 9,158,224   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

22


Table of Contents

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

 

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

 

     Level 3  
     Three months ended March 31,  
     Assets     Liability  
     Investment     Equity-Indexed     Embedded  
         Securities         Options         Derivative      

Beginning balance, 2016

   $ 20,130      $ 123,007      $ 242,412   

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

     159        —          —     

Net fair value change included in realized gains (losses)

     —          —          —     

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

     —          (3,639     —     

Net change included in interest credited

     —          —          (2,552

Purchases, sales and settlements or maturities

      

Purchases

     —          5,293        —     

Sales

     —          —          —     

Settlements or maturities

     (13     (900     —     

Premiums less benefits

     —          —          18,407   

Gross transfers into Level 3

     1,413        —          —     

Gross transfers out of Level 3

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2016

   $ 21,689      $ 123,761      $ 258,267   
  

 

 

   

 

 

   

 

 

 

Beginning balance, 2015

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

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

     937        —          —     

Net fair value change included in realized gains (losses)

     —          —          —     

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

     —          (743     —     

Net change included in interest credited

     —          —          1,196   

Purchases, sales and settlements or maturities

      

Purchases

     —          3,763        —     

Sales

     (61     —          —     

Settlements or maturities

     (10     (4,463     —     

Premiums less benefits

     —          —          (971

Gross transfers into Level 3

     —          —          —     

Gross transfers out of Level 3

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Ending balance March 31, 2015

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

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $5,401,000 relating to assets still held at March 31, 2016 and losses of $3,309,000 at March 31, 2015.

There were no transfers between Level 1 and Level 2 fair value hierarchies. The transfers into Level 3 during the three months ended March 31, 2016 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.

 

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Table of Contents

Note 10 – Deferred Policy Acquisition Costs

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

 

                 Accident     Property        
     Life     Annuity     & Health     & Casualty     Total  

Beginning balance, 2016

   $   756,023      $   411,206      $   44,390      $   113,050      $ 1,324,669   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     25,217        20,946        3,980        64,214        114,357   

Amortization

     (22,171     (17,023     (5,553     (65,017     (109,764

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

     (6,294     (25,169     —          —          (31,463
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     (3,248     (21,246     (1,573     (803     (26,870
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2016

   $ 752,775      $ 389,960      $ 42,817      $ 112,247      $ 1,297,799   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Note 11 – Liability for Unpaid Claims and Claim Adjustment Expenses

The liability for unpaid claims and claim adjustment expenses (“claims”) for accident and health, and property and casualty insurance is included in “Policy and contract claims” in the consolidated statements of financial position and is the amount estimated for claims that have been reported but not settled and IBNR claims. Liability for unpaid claims are estimated based upon American National’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs and reduced for anticipated salvage and subrogation. The effects of the changes are included in the consolidated results of operations in the period in which the changes occur.

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

 

     Three months ended March 31,  
     2016      2015  

Unpaid claims balance, beginning

   $ 1,104,302       $ 1,132,394   

Less reinsurance recoverables

     217,337         245,906   
  

 

 

    

 

 

 

Net beginning balance

     886,965         886,488   
  

 

 

    

 

 

 

Incurred related to

     

Current

     252,781         239,128   

Prior years

     (7,806      (12,100
  

 

 

    

 

 

 

Total incurred claims

     244,975         227,028   
  

 

 

    

 

 

 

Paid claims related to

     

Current

     101,995         98,382   

Prior years

     129,200         124,534   
  

 

 

    

 

 

 

Total paid claims

     231,195         222,916   
  

 

 

    

 

 

 

Net balance

     900,745         890,600   

Plus reinsurance recoverables

     202,386         236,370   
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,103,131       $ 1,126,970   
  

 

 

    

 

 

 

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 $7,806,000 during the first three months of 2016 and decreased by approximately $12,100,000 during the first three months of 2015, reflecting lower-than-anticipated losses in the commercial auto, other liability and multi-peril lines of business.

 

24


Table of Contents

Note 12 – Federal Income Taxes

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

 

     Three months ended March 31,  
     2016     2015  
     Amount          Rate         Amount          Rate      

Income tax on pre-tax income

   $ 8,556         35.0   $ 51,780         35.0

Tax-exempt investment income

     (1,972      (8.1     (1,879      (1.3

Tax-exempt restructuring

     (10,167      (41.6     —           —     

Dividend exclusion

     (2,347      (9.6     (2,083      (1.4

Miscellaneous tax credits, net

     (2,251      (9.2     (1,931      (1.3

Low income housing tax credit expense

     1,294         5.3        1,264         0.9   

Interest expense

     2,560         10.5        —           —     

Other items, net

     257         1.0        (1,461      (1.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ (4,070      (16.7 )%    $ 45,690         30.9
  

 

 

    

 

 

   

 

 

    

 

 

 

American National made income tax payments of $5,952,000 and $370,000 during the three months ended March 31, 2016 and 2015, respectfully. In the first quarter of 2016, the Company recognized a $10,167,000 tax benefit associated with the reduction of a deferred tax liability, when a determination was made that no tax would be due on the restructuring of a subsidiary ownership interest.

Management believes that a sufficient level of taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of March 31, 2016 and 2015. There are no ordinary loss tax carryforwards that will expire by December 31, 2016.

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, however, management has accrued interest in the amount of $2.6 million, net of tax, in the first quarter of 2016 relating to a dispute with the Internal Revenue Service. Management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

 

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Note 13 – Accumulated Other Comprehensive Income

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, 2016

   $ 453,434      $ (97,889   $ (2,925   $   352,620   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts reclassified from AOCI (net of tax expense $5,496 and expense $1,012)

     10,208        1,879        —          12,087   

Unrealized holding gains arising during the period (net of tax expense $35,626)

     66,164        —          —          66,164   

Unrealized adjustment to DAC (net of tax benefit $10,972)

     (20,491     —          —          (20,491

Unrealized losses on investments attributable to participating policyholders’ interest (net of tax benefit $2,104)

     (3,908     —          —          (3,908

Foreign currency adjustment (net of tax benefit $6)

     —          —          (12     (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2016

   $ 505,407      $ (96,010   $ (2,937   $ 406,460   
  

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2015

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

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

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

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

     40,024        —          —          40,024   

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

     (9,131     —          —          (9,131

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

     (1,873     —          —          (1,873

Foreign currency adjustment (net of tax benefit $990)

     —          —          (1,838     (1,838
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2015

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

 

 

   

 

 

   

 

 

   

 

 

 

Note 14 – Stockholders’ Equity and Noncontrolling Interests

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

 

     March 31, 2016      December 31, 2015  

Common stock

     

Shares issued

     30,832,449         30,832,449   

Treasury shares

     (3,918,231      (3,937,993
  

 

 

    

 

 

 

Outstanding shares

     26,914,218         26,894,456   

Restricted shares

     (76,000      (76,000
  

 

 

    

 

 

 

Unrestricted outstanding shares

     26,838,218         26,818,456   
  

 

 

    

 

 

 

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.

 

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

 

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, 2015

     38,092      $ 115.18         76,000       $ 110.73         135,725      $ 103.73   

Granted

     —          —           —           —           36,849        103.58   

Exercised

     (1,267     96.31         —           —           (65,734     99.99   

Forfeited

     —          —           —           —           (182     105.75   

Expired

     (4,200     116.48         —           —           —          —     
  

 

 

      

 

 

       

 

 

   

Outstanding at March 31, 2016

     32,625      $ 115.74         76,000       $ 110.73         106,658      $ 105.98   
  

 

 

      

 

 

       

 

 

   

 

             SAR                  RS Shares          RS Units  

Weighted-average contractual remaining life (in years)

     1.06         3.34         2.13   

Exercisable shares

     32,625         N/A         N/A   

Weighted-average exercise price

   $ 115.74       $ 110.73       $ 105.98   

Weighted-average exercise price exercisable shares

     115.74         N/A         N/A   

Compensation expense (credit)

        

Three months ended March 31, 2016

   $ 33,000       $ 210,000       $ 4,102,000   

Three months ended March 31, 2015

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

Fair value of liability award

        

March 31, 2016

   $ 67,000         N/A       $ 20,823,000   

December 31, 2015

     37,000         N/A         19,415,000   

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 most of 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.

 

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

 

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 March 31,  
     2016      2015  

Weighted average shares outstanding

     26,909,511         26,818,215   

Incremental shares from RS awards and RSUs

     56,456         146,135   
  

 

 

    

 

 

 

Total shares for diluted calculations

     26,965,967         26,964,350   
  

 

 

    

 

 

 

Net income attributable to American National (in thousands)

   $ 29,316       $ 102,982   

Basic earnings per share

   $ 1.09       $ 3.84   

Diluted earnings per share

     1.09         3.82   

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 March 31, 2016 and December 31, 2015, American National Insurance Company’s statutory capital and surplus was $2,921,096,000 and $2,925,935,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2016 and December 31, 2015, substantially above 200% of the authorized control level.

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 $67,115,000 and $64,991,000 at March 31, 2016 and March 31, 2015, 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.

 

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

 

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):

 

     March 31, 2016      December 31, 2015  

Statutory capital and surplus

     

Life insurance entities

   $ 1,893,485       $ 1,900,939   

Property and casualty insurance entities

     1,036,577         1,033,942   
     Three months ended March 31,  
     2016      2015  

Statutory net income

     

Life insurance entities

   $ 3,927       $ 46,094   

Property and casualty insurance entities

     4,548         15,048   

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 $292,593,000 during 2016, without prior approval of the Texas Department of Insurance. Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to American National Insurance Company apply to its insurance subsidiaries.

Noncontrolling interests

American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company that is owned by its policyholders. American National has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at March 31, 2016 and December 31, 2015.

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 $2,638,000 and $3,439,000 at March 31, 2016 and December 31, 2015, 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.

 

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Note 15 – Segment Information – (Continued)

 

    Property and Casualty—writes personal, agricultural and targeted 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.

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

 

     Three months ended March 31,  
     2016      2015  

Life

   $ (3,481    $ 8,199   

Annuity

     17,971         17,113   

Health

     (634      7,543   

Property and Casualty

     6,990         10,222   

Corporate and Other

     2,662         48,282   
  

 

 

    

 

 

 

Total

   $ 23,508       $ 91,359   
  

 

 

    

 

 

 

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at March 31, 2016, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $727,320,000 of which $578,084,000 is expected to be funded in 2016 with the remainder funded in 2017 and beyond.

American National has a $100,000,000 short-term variable rate borrowing facility containing a $55,000,000 sub-feature for the issuance of letters of credit. Borrowings under the facility are at the discretion of the lender and would be used only for funding working capital requirements. The combination of borrowings and outstanding letters of credit cannot exceed $100,000,000 at any time. As of March 31, 2016 and December 31, 2015, the outstanding letters of credit were $9,501,000, 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,

 

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Note 16 – Commitments and Contingencies – (Continued)

 

American National would be obligated to pay off the loans. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of March 31, 2016, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $211,503,000.

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.

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):

 

          Dollar Amount of Transactions      Amount due to (from) American National  
          Three months ended March 31,      March 31,     December 31,  

Related Party

  

Financial Statement Line Impacted

   2016      2015      2016     2015  

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 347       $ 323       $ 4,835      $ 5,182   

Gal-Tex Hotel Corporation

   Net investment income      92         116         29        31   

Greer, Herz & Adams, LLP

   Other operating expenses      2,550         1,964         (418     (274

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National holds a first mortgage loan originated in 1999, with an interest rate of 7.25% and final maturity date of April 1, 2019 issued to Gal-Tex, which is collateralized by a hotel property in San Antonio, Texas. This loan is current as to principal and interest payments.

Transactions with Greer, Herz & Adams, LLP: Irwin M. Herz, Jr. is an American National advisory director and a Partner with Greer, Herz & Adams, LLP, which serves as American National’s General Counsel.

 

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

Set forth on the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three months ended March 31, 2016 and 2015 of American National Insurance Company and its subsidiaries (referred to in this document as “we”, “our”, “us”, or the “Company”). This information should be read in conjunction with our consolidated financial statements included in Item 1, Financial Statements (unaudited), of this Form 10-Q.

Forward-Looking Statements

This document contains forward-looking statements that reflect our estimates and assumptions related to business, economic, competitive and legislative developments. Forward-looking statements generally are indicated by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning and include, without limitation, statements regarding the outlook of our business and expected financial performance. Forward-looking statements are not guarantees of future performance and involve various risks and uncertainties. Moreover, forward-looking statements speak only as of the date made, and we undertake no obligation to update them. Certain important factors could cause our actual results to differ, possibly materially, from our expectations or estimates. These factors are described in greater detail in Item IA, Risk Factors, in our 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016, 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 product pricing, 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, adequacy and collectability 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 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016.

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 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016. There have been no material changes in accounting policies since December 31, 2015.

Recently Issued Accounting Pronouncements

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

 

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Consolidated Results of Operations

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

 

     Three months ended March 31,         
     2016      2015      Change  

Premiums and other revenues

        

Premiums

   $ 490,999       $ 441,843       $ 49,156   

Other policy revenues

     64,347         57,524         6,823   

Net investment income

     196,054         209,213         (13,159

Realized investments gains (losses), net

     5,586         39,277         (33,691

Other income

     7,984         8,710         (726
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     764,970         756,567         8,403   
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     182,018         142,371         39,647   

Claims incurred

     244,250         224,049         20,201   

Interest credited to policyholders’ account balances

     76,527         75,753         774   

Commissions for acquiring and servicing policies

     112,884         93,115         19,769   

Other operating expenses

     130,376         123,458         6,918   

Change in deferred policy acquisition costs (1)

     (4,593      6,462         (11,055
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     741,462         665,208         76,254   
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 23,508       $ 91,359       $ (67,851
  

 

 

    

 

 

    

 

 

 

 

(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 amortized and represents an increase to expenses in the period indicated.

Consolidated earnings decreased during the three months ended March 31, 2016 compared to 2015 primarily due to decreases in realized investment gains and net investment income, as well as increases in policyholder benefits and claims incurred.

Life

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

 

     Three months ended March 31,         
     2016      2015      Change  

Premiums and other revenues

        

Premiums

   $ 75,117       $ 72,082       $ 3,035   

Other policy revenues

     61,608         54,426         7,182   

Net investment income

     54,184         57,614         (3,430

Other income

     593         423         170   
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     191,502         184,545         6,957   
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     100,771         88,004         12,767   

Interest credited to policyholders’ account balances

     16,085         15,788         297   

Commissions for acquiring and servicing policies

     29,794         27,316         2,478   

Other operating expenses

     51,379         52,652         (1,273

Change in deferred policy acquisition costs (1)

     (3,046      (7,414      4,368   
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     194,983         176,346         18,637   
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ (3,481    $ 8,199       $ (11,680
  

 

 

    

 

 

    

 

 

 

 

(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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Premiums and other revenues

Premiums increased during the three months ended March 31, 2016 compared to 2015 primarily due to continued renewal growth in our term products.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies. The increase in other policy revenues during the three months ended March 31, 2016 compared to 2015 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 March 31,         
     2016      2015      Change  

Traditional Life

   $ 13,539       $ 14,198       $ (659

Universal Life

     4,158         3,331         827   

Indexed UL

     5,078         5,058         20   

Variable UL

     —           4         (4
  

 

 

    

 

 

    

 

 

 

Total Recurring

   $ 22,775       $ 22,591       $ 184   
  

 

 

    

 

 

    

 

 

 

Single and excess

   $ 423       $ 351       $ 72   

Credit life

     880         959         (79

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 slightly during the three months ended March 31, 2016 compared to 2015. Universal life sales were the main driver of the increase but were partially offset by lower sales of traditional life products.

Benefits, losses and expenses

Policyholder benefits increased during the three months ended March 31, 2016 compared to 2015 primarily due to an increase in claims.

Commissions increased slightly during the three months ended March 31, 2016 compared to 2015 primarily due to increased sales of universal life products.

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

 

     Three months ended March 31,         
     2016      2015      Change  

Acquisition cost capitalized

   $ 25,217       $ 25,038       $ 179   

Amortization of DAC

     (22,171      (17,624      (4,547
  

 

 

    

 

 

    

 

 

 

Change in DAC

   $ 3,046       $ 7,414       $ (4,368
  

 

 

    

 

 

    

 

 

 

 

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Policy in-force information

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

 

     March 31,
2016
     December 31,
2015
     Change  

Life insurance in-force

        

Traditional life

   $ 64,291,076       $ 63,336,601       $ 954,475   

Interest-sensitive life

     27,060,675         26,858,051         202,624   
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 91,351,751       $ 90,194,652       $ 1,157,099   
  

 

 

    

 

 

    

 

 

 

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

 

     March 31,
2016
     December 31,
2015
     Change  

Number of policies in-force

        

Traditional life

     1,874,556         1,890,600         (16,044

Interest-sensitive life

     215,125         212,851         2,274   
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,089,681         2,103,451         (13,770
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the three months ended March 31, 2016 compared to December 31, 2015, while the total number of policies decreased for the same periods, reflecting the transition to fewer but higher face amount policies.

Annuity

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

 

     Three months ended March 31,         
     2016      2015      Change  

Premiums and other revenues

        

Premiums

   $ 70,208       $ 41,443       $ 28,765   

Other policy revenues

     2,739         3,098         (359

Net investment income

     116,896         119,662         (2,766

Other income

     960         870         90   
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     190,803         165,073         25,730   
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     81,247         54,367         26,880   

Interest credited to policyholders’ account balances

     60,442         59,965         477   

Commissions for acquiring and servicing policies

     21,908         9,105         12,803   

Other operating expenses

     13,158         13,049         109   

Change in deferred policy acquisition costs (1)

     (3,923      11,474         (15,397
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     172,832         147,960         24,872   
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 17,971       $ 17,113       $ 858   
  

 

 

    

 

 

    

 

 

 

 

(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 were relatively flat during the three months ended March 31, 2016 compared to 2015.

 

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Premiums and other revenues

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

 

     Three months ended March 31,         
     2016      2015      Change  

Fixed deferred annuity

   $ 184,156       $ 47,559       $ 136,597   

Single premium immediate annuity

     78,612         49,610         29,002   

Equity-indexed deferred annuity

     141,979         52,147         89,832   

Variable deferred annuity

     19,889         26,463         (6,574
  

 

 

    

 

 

    

 

 

 

Total premium and deposits

     424,636         175,779         248,857   

Less: Policy deposits

     354,428         134,336         220,092   
  

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 70,208       $ 41,443       $ 28,765   
  

 

 

    

 

 

    

 

 

 

Fixed deferred and equity-indexed annuity sales increased significantly during the three months ended March 31, 2016 compared to 2015. During the third quarter of 2015, the Company marketed enhanced annuity crediting rates for certain products, which were well received by the market and increased sales.

Single premium immediate annuity (SPIA) sales, which tend to vary with market conditions, increased during the three months ended March 31, 2016 compared to 2015.

We monitor account values and changes in those values as a key indicator of performance in our Annuity segment. Shown below are the changes in account values (in thousands):

 

     Three months ended March 31,  
     2016      2015  

Fixed deferred and equity-indexed annuity

     

Account value, beginning of period

   $ 8,880,448       $ 8,873,397   

Net inflows

     253,769         84,013   

Surrenders

     (202,981      (333,931

Fees

     (1,506      (1,573

Interest credited

     57,558         58,328   
  

 

 

    

 

 

 

Account value, end of period

   $ 8,987,288       $ 8,680,234   
  

 

 

    

 

 

 

Single premium immediate annuity

     

Reserve, beginning of period

   $ 1,398,481       $ 1,274,664   

Net inflows

     38,768         12,880   

Interest and mortality

     14,031         14,377   
  

 

 

    

 

 

 

Reserve, end of period

   $ 1,451,280       $ 1,301,921   
  

 

 

    

 

 

 

Variable deferred annuity

     

Account value, beginning of period

   $ 417,821       $ 494,516   

Net inflows

     19,070         25,551   

Surrenders

     (24,499      (52,014

Fees

     (1,167      (1,429

Change in market value and other

     (3,468      30,663   
  

 

 

    

 

 

 

Account value, end of period

   $ 407,757       $ 497,287   
  

 

 

    

 

 

 

Variable annuity premiums have shown a declining trend in recent years. These net inflows 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 $1.0 million and $0.9 million as of March 31, 2016 and 2015, respectively.

 

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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 SPIA contracts. The level of benefits for the three months ended March 31, 2016 and 2015, was commensurate with increases in SPIA premium during these periods.

Commissions increased during the three months ended March 31, 2016 compared to 2015 driven by the increase in fixed deferred and equity-indexed annuity sales.

Other operating expenses were relatively flat during the three months ended March 31, 2016 compared to 2015.

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

 

     Three months ended March 31,         
     2016      2015      Change  

Acquisition cost capitalized

   $ 20,946       $ 8,955       $ 11,991   

Amortization of DAC

     (17,023      (20,429      3,406   
  

 

 

    

 

 

    

 

 

 

Change in DAC

   $ 3,923       $ (11,474    $ 15,397   
  

 

 

    

 

 

    

 

 

 

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. The ratios for the three months ended March 31, 2016 and 2015 were 34.7%, and 39.7%, respectively. The decrease in the 2016 ratio was directly related to lower surrenders.

Options and Derivatives

The S&P 500 Index return increased by approximately 0.8% and 0.4% in the three months ended March 31, 2016 and 2015, respectively. This change led to a decrease in the option return of $3.9 million during the three months ended March 31, 2016 compared to 2015, partially offset by a $3.3 million decrease in the related equity-indexed embedded derivative, for a net decrease in earnings of $0.6 million.

Net investment income without option return increased during the three months ended March 31, 2016 compared to 2015, primarily due to higher aggregate account values.

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 March 31,         
     2016      2015      Change  

Net investment income

        

Without option return

   $ 119,953       $ 118,837       $ 1,116   

Option return

     (3,057      825         (3,882

Interest credited to policy account balances

        

Without embedded derivatives

     62,751         58,958         3,793   

Equity-indexed annuity embedded derivatives

     (2,309      1,007         (3,316

 

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Health

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

 

     Three months ended March 31,         
     2016      2015      Change  

Premiums and other revenues

        

Premiums

   $ 42,313       $ 51,837       $ (9,524

Net investment income

     2,449         2,653         (204

Other income

     4,179         4,569         (390
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     48,941         59,059         (10,118
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Claims incurred

     32,292         31,797         495   

Commissions for acquiring and servicing policies

     4,878         7,191         (2,313

Other operating expenses

     10,832         11,403         (571

Change in deferred policy acquisition costs (1)

     1,573         1,125         448   
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     49,575         51,516         (1,941
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ (634    $ 7,543       $ (8,177
  

 

 

    

 

 

    

 

 

 

 

(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 significantly during the three months ended March 31, 2016 compared to 2015, primarily due to decreasing policies in-force, compounded by claims activity that remained relatively flat in comparison to a large decrease in premiums.

Premiums and other revenues

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

 

     Three months ended March 31,  
     2016     2015  

Medicare Supplement

   $ 17,640         41.7    $ 19,863         38.3 

Medical expense

     3,700         8.7        4,572         8.8   

Group health

     8,231         19.5        9,370         18.1   

Credit accident and health

     2,791         6.6        3,270         6.3   

MGU

     3,419         8.1        5,301         10.2   

Supplemental Insurance

     5,257         12.4        7,880         15.2   

All other

     1,275         3.0        1,581         3.1   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 42,313         100.0    $ 51,837         100.0 
  

 

 

    

 

 

   

 

 

    

 

 

 

Earned premiums decreased during the three months ended March 31, 2016 compared to 2015, primarily due to risk management initiatives related to the MGU business that significantly decreased sales. Supplemental insurance sales began to see an increase when compared to the previous calendar quarter, as the supplemental product portfolio became more widely approved and distributed; however, the increase was not able to offset the continued shrinkage of in-force policies.

 

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Our in-force certificates or policies as of the dates indicated are as follows:

 

     Three months ended March 31,  
     2016     2015  

Medicare Supplement

     34,365         6.5     36,878         6.1

Medical expense

     2,477         0.5        3,027         0.5   

Group

     16,756         3.2        16,856         2.8   

Credit accident and health

     196,104         37.2        216,684         35.7   

MGU

     179,406         34.1        226,361         37.3   

Supplemental Insurance

     61,097         11.6        67,124         11.1   

All other

     36,408         6.9        40,346         6.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     526,613         100.0     607,276         100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total in-force policies decreased during the three months ended March 31, 2016 compared to 2015, primarily due to levels of lapsation that were greater than new sales, and the continued shrinkage of the closed Medical Expense and All Other blocks.

Benefits, losses and expenses

Claims incurred remained at similar levels when comparing the first quarter of 2016 to the same period in 2015, but with the decrease in premium, the percentage of benefits to premiums rose. The decrease in commissions is a result of the lower sales.

Change in Deferred Policy Acquisition Costs

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

 

     Three months ended March 31,         
     2016      2015      Change  

Acquisition cost capitalized

   $ 3,980       $ 3,954       $ 26   

Amortization of DAC

     (5,553      (5,079      (474
  

 

 

    

 

 

    

 

 

 

Change in DAC

   $ (1,573    $ (1,125    $ (448
  

 

 

    

 

 

    

 

 

 

The change in DAC had a larger impact on expenses during the period due to declining commission expense deferral.

 

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Table of Contents

Property and Casualty

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

 

     Three months ended March 31,        
     2016     2015     Change  

Premiums and other revenues

      

Net premiums written

   $ 313,345      $ 286,944      $ 26,401   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 303,361      $ 276,481      $ 26,880   

Net investment income

     14,912        14,406        506   

Other income

     990        1,140        (150
  

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     319,263        292,027        27,236   
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

      

Claims incurred

     211,958        192,252        19,706   

Commissions for acquiring and servicing policies

     56,306        49,503        6,803   

Other operating expenses

     43,206        38,773        4,433   

Change in deferred policy acquisition costs (1)

     803        1,277        (474
  

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     312,273        281,805        30,468   
  

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 6,990      $ 10,222      $ (3,232
  

 

 

   

 

 

   

 

 

 

Loss ratio

     69.9     69.5     0.4   

Underwriting expense ratio

     33.1        32.4        0.7   
  

 

 

   

 

 

   

 

 

 

Combined ratio

     103.0     101.9     1.1   
  

 

 

   

 

 

   

 

 

 

Impact of catastrophe events on combined ratio

     7.4        4.5        2.9   
  

 

 

   

 

 

   

 

 

 

Combined ratio without impact of catastrophe events

     95.6     97.4     (1.8
  

 

 

   

 

 

   

 

 

 

Gross catastrophe losses

   $ 22,327      $ 12,630      $ 9,697   

Net catastrophe losses

     22,143        12,485        9,658   

 

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

A positive net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.

Property and Casualty results decreased during the three months ended March 31, 2016 compared to 2015 primarily due to a return to more typical first quarter wind and hail losses in 2016 from a low amount in the first quarter of 2015 and larger claims related to the automobile lines of business during the first quarter of 2016.

Premiums and other revenues

Net premiums written and earned increased during the three months ended March 31, 2016 compared to 2015 for all major lines of business. The largest increases were in the collateral protection and personal automobile lines of business.

Benefits, losses and expenses

Commissions for acquiring and servicing policies increased during the three months ended March 31, 2016 compared to 2015, primarily as a result of the growth of the collateral protection and mortgage security insurance lines of business.

Operating expenses increased during the three months ended March 31, 2016 compared to 2015 as a result of costs related to growth initiatives.

 

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Table of Contents

Products

Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 54.5% of net premiums written; (ii) Commercial products, which focus primarily on agricultural and other markets, representing 34.0% of net premiums written; and (iii) Credit-related property insurance products, which are marketed to and through financial institutions and retailers, representing 11.5% of net premiums written.

Personal Products

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

 

     Three months ended March 31,        
     2016     2015     Change  

Net premiums written

      

Automobile

   $ 110,043      $ 103,675      $ 6,368   

Homeowner

     49,879        47,722        2,157   

Other Personal

     10,944        10,525        419   
  

 

 

   

 

 

   

 

 

 

Total net premiums written

   $ 170,866      $ 161,922      $ 8,944   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

      

Automobile

   $ 103,869      $ 98,993      $ 4,876   

Homeowner

     55,959        54,692        1,267   

Other Personal

     10,366        9,886        480   
  

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 170,194      $ 163,571      $ 6,623   
  

 

 

   

 

 

   

 

 

 

Loss ratio

      

Automobile

     81.8     76.6     5.2   

Homeowner

     65.3        62.2        3.1   

Other Personal

     34.2        75.0        (40.8

Personal line loss ratio

     73.5     71.7     1.8   

Combined Ratio

      

Automobile

     109.0     101.9     7.1   

Homeowner

     95.2        89.7        5.5   

Other Personal

     62.1        101.7        (39.6

Personal line combined ratio

     101.6     97.8     3.8   

Automobile: Net premiums written and earned increased in our personal automobile line during the three months ended March 31, 2016 compared to 2015, due to an increase of policies in force and improved rate adequacy. The loss and combined ratio increased during the three months ended March 31, 2016 compared to 2015, primarily due to an increase in larger claims compared to the prior year.

Homeowner: Net premiums written and earned increased during the three months ended March 31, 2016 compared to 2015, primarily due to increases in sales of homeowner products to renters. The combined ratio increased during the three months ended March 31, 2016 compared to 2015, due to increases in wind and hail claims compared to the prior year.

Other Personal: These products include watercraft, rental-owner and umbrella coverages for individuals seeking to protect their personal property and liability not covered within their home and auto policies. The loss ratio decreased during the three months ended March 31, 2016 compared to 2015 due to unusually low claim activity in 2016.

 

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Table of Contents

Commercial Products

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

 

     Three months ended March 31,        
     2016     2015     Change  

Net premiums written

      

Other Commercial

   $ 45,612      $ 44,013      $ 1,599   

Agricultural Business

     32,908        30,280        2,628   

Automobile

     27,964        26,535        1,429   
  

 

 

   

 

 

   

 

 

 

Total net premiums written

   $  106,484      $ 100,828      $ 5,656   
  

 

 

   

 

 

   

 

 

 

Net premiums earned

      

Other Commercial

   $ 38,709      $ 36,378      $ 2,331   

Agricultural Business

     31,888        29,240        2,648   

Automobile

     22,696        21,235        1,461   
  

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 93,293      $ 86,853      $ 6,440   
  

 

 

   

 

 

   

 

 

 

Loss ratio

      

Other Commercial

     69.5     67.2     2.3   

Agricultural Business

     79.6        87.5        (7.9

Automobile

     74.1        73.3        0.8   

Commercial line loss ratio

     74.1     75.5     (1.4

Combined ratio

      

Other Commercial

     101.8     96.2     5.6   

Agricultural Business

     118.0        126.3        (8.3

Automobile

     99.0        99.1        (0.1

Commercial line combined ratio

     106.6     107.0     (0.4

Other Commercial: Net premiums written and earned increased during the three months ended March 31, 2016 compared to 2015 primarily due to increased sales of mortgage security insurance. Increases in the loss and combined ratios for the three months ended March 31, 2016 compared to 2015 are primarily due to increased claim activity on the business owners’ policy line of business.

Agricultural Business: Our agricultural business product allows policyholders to customize and cover their agriculture exposure using a package policy which includes coverage for residences and household contents, farm buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased during the three months ended March 31, 2016 compared to 2015, primarily as a result of improved rate adequacy. The loss and combined ratio decreased during the three months ended March 31, 2016 compared to 2015 primarily due to a decrease in catastrophe losses.

Automobile: Net premiums written and earned increased during the three months ended March 31, 2016 compared to 2015, primarily due to improved rate adequacy. The loss ratio increased during the three months ended March 31, 2016 compared to 2015, primarily due to an increase in average severity of losses.

 

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Table of Contents

Credit Products

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

 

     Three months ended March 31,        
     2016     2015     Change  

Net premiums written

   $ 35,995      $ 24,194      $ 11,801   

Net premiums earned

     39,874        26,057        13,817   

Loss ratio

     44.7     36.0     8.7

Combined ratio

     102.5     107.5     (5.0 )% 

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

Net written and earned premiums increased during the three months ended March 31, 2016 compared to 2015, primarily due to increases in our collateral protection business. The loss ratio increased during the three months ended March 31, 2016 compared to 2015, primarily due to an increase in claims in our collateral protection and guaranteed auto protection business lines.

Corporate and Other

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

 

     Three months ended March 31,         
     2016      2015      Change  

Other revenues

        

Net investment income

   $ 7,613       $ 14,878       $ (7,265

Realized investment gains, net

     5,586         39,277         (33,691

Other Income

     1,262         1,708         (446
  

 

 

    

 

 

    

 

 

 

Total other revenues

     14,461         55,863     &nbs