10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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.    x  Yes    ¨  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    x  Yes    ¨  No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act:

 

Large accelerated filer   x    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 August 01, 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 June 30, 2016 and December 31, 2015

     3   
 

Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2015

     4   
 

Consolidated Statements of Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015

     5   
 

Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June 30, 2016 and 2015

     5   
 

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

     50   

ITEM 4.

 

CONTROLS AND PROCEDURES

     50   
 

PART II – OTHER INFORMATION

     51   

ITEM 1.

 

LEGAL PROCEEDINGS

     51   

ITEM 1A.

 

RISK FACTORS

     51   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     51   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     51   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     51   

ITEM 5.

 

OTHER INFORMATION

     51   

ITEM 6.

 

EXHIBIT INDEX

     52   

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited and in thousands, except share data)

 

     June 30, 2016     December 31, 2015  

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair value $7,895,093 and $7,755,553)

   $ 7,456,908      $ 7,609,420   

Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $5,582,349 and $5,427,831)

     5,894,667        5,483,916   

Equity securities, at fair value
(Cost $806,541 and $810,826)

     1,531,926        1,514,979   

Mortgage loans on real estate, net of allowance

     3,996,073        3,483,280   

Policy loans

     388,763        407,491   

Investment real estate, net of accumulated depreciation of $221,543 and $212,139

     589,497        581,255   

Short-term investments

     252,431        460,612   

Other invested assets

     178,659        173,042   
  

 

 

   

 

 

 

Total investments

     20,288,924        19,713,995   
  

 

 

   

 

 

 

Cash and cash equivalents

     133,889        190,237   

Investments in unconsolidated affiliates

     456,437        379,348   

Accrued investment income

     177,215        177,474   

Reinsurance recoverables

     364,096        413,881   

Prepaid reinsurance premiums

     62,001        77,907   

Premiums due and other receivables

     321,638        285,446   

Deferred policy acquisition costs

     1,281,087        1,324,669   

Property and equipment, net

     120,426        120,680   

Current tax receivable

     41,413        4,091   

Other assets

     139,150        140,788   

Separate account assets

     900,972        918,446   
  

 

 

   

 

 

 

Total assets

   $ 24,287,248      $ 23,746,962   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,878,392      $ 2,853,962   

Annuity

     1,222,077        1,113,057   

Accident and health

     62,249        65,034   

Policyholders’ account balances

     11,038,145        10,829,173   

Policy and contract claims

     1,257,379        1,280,011   

Unearned premium reserve

     832,703        812,977   

Other policyholder funds

     326,196        305,836   

Liability for retirement benefits

     199,127        207,635   

Notes payable

     140,239        128,436   

Deferred tax liabilities, net

     299,355        219,295   

Other liabilities

     513,019        550,629   

Separate account liabilities

     900,972        918,446   
  

 

 

   

 

 

 

Total liabilities

     19,669,853        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

     15,950        13,689   

Accumulated other comprehensive income

     488,082        352,620   

Retained earnings

     4,175,524        4,157,184   

Treasury stock, at cost

     (101,781     (102,043
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,608,607        4,452,282   

Noncontrolling interest

     8,788        10,189   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,617,395        4,462,471   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 24,287,248      $ 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 June 30,     Six months ended June 30,  
     2016     2015     2016     2015  

PREMIUMS AND OTHER REVENUE

        

Premiums

        

Life

   $ 77,053      $ 75,071      $ 152,170      $ 147,153   

Annuity

     86,030        25,088        156,238        66,531   

Accident and health

     44,828        51,135        87,141        102,972   

Property and casualty

     304,788        281,909        608,149        558,390   

Other policy revenues

     65,489        57,597        129,836        115,121   

Net investment income

     210,710        203,662        406,764        412,875   

Net realized investment gains

     6,966        16,768        16,028        56,070   

Other-than-temporary impairments

     (3,551     (3,472     (7,027     (3,497

Other income

     8,135        9,748        16,119        18,458   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     800,448        717,506        1,565,418        1,474,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

        

Policyholder benefits

        

Life

     91,754        91,184        192,525        179,188   

Annuity

     93,655        36,150        174,902        90,517   

Claims incurred

        

Accident and health

     30,327        32,256        62,619        64,053   

Property and casualty

     230,960        211,920        442,918        404,172   

Interest credited to policyholders’ account balances

     85,901        69,215        162,428        144,968   

Commissions for acquiring and servicing policies

     114,945        103,557        227,829        196,672   

Other operating expenses

     129,197        123,203        259,573        246,661   

Change in deferred policy acquisition costs

     (16,571     614        (21,164     7,076   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     760,168        668,099        1,501,630        1,333,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     40,280        49,407        63,788        140,766   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision for federal income taxes

        

Current

     7,603        11,117        2,889        46,509   

Deferred

     2,287        4,093        2,931        14,391   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision for federal income taxes

     9,890        15,210        5,820        60,900   

Equity in earnings of unconsolidated affiliates

     1,798        462        2,735        57,046   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     32,188        34,659        60,703        136,912   

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

     (437     (394     (1,238     (1,123
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American National

   $ 32,625      $ 35,053      $ 61,941      $ 138,035   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

        

Earnings per share

        

Basic

   $ 1.21      $ 1.30      $ 2.30      $ 5.14   

Diluted

     1.21        1.30        2.30        5.12   

Cash dividends to common stockholders

     0.82        0.77        1.62        1.54   

Weighted average common shares outstanding

     26,908,077        26,877,833        26,908,748        26,847,936   

Weighted average common shares outstanding and dilutive potential common shares

     26,970,597        26,952,107        26,965,702        26,941,477   

See accompanying notes to the consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended June 30,     Six months ended June 30,  
     2016     2015     2016     2015  

Net income

   $ 32,188      $ 34,659      $ 60,703      $ 136,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Change in net unrealized gains (losses) on securities

     78,803        (54,139     130,776        (46,303

Foreign currency transaction and translation adjustments

     442        1,188        430        (650

Defined benefit pension plan adjustment

     2,377        1,589        4,256        3,032   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     81,622        (51,362     135,462        (43,921
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     113,810        (16,703     196,165        92,991   

Less: Comprehensive loss attributable to noncontrolling interest

     (437     (394     (1,238     (1,123
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to American National

   $ 114,247      $ (16,309   $ 197,403      $ 94,114   
  

 

 

   

 

 

   

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited and in thousands)

 

     Six months ended June 30,  
     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

     1,795        2,997   

Income tax effect from restricted stock arrangement

     47        —     

Amortization of restricted stock

     419        653   
  

 

 

   

 

 

 

Balance at end of the period

     15,950        12,898   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance as of January 1,

     352,620        490,782   

Other comprehensive income (loss)

     135,462        (43,921
  

 

 

   

 

 

 

Balance at end of the period

     488,082        446,861   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     4,157,184        3,998,642   

Net income attributable to American National

     61,941        138,035   

Cash dividends to common stockholders

     (43,601     (41,371
  

 

 

   

 

 

 

Balance at end of the period

     4,175,524        4,095,306   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (102,043     (101,941

Reissuance of treasury shares

     262        136   
  

 

 

   

 

 

 

Balance at end of the period

     (101,781     (101,805
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     10,189        12,384   

Contributions

     —          27   

Distributions

     (163     (154

Net loss attributable to noncontrolling interest

     (1,238     (1,123
  

 

 

   

 

 

 

Balance at end of the period

     8,788        11,134   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 4,617,395      $ 4,495,226   
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Six months ended June 30,  
     2016     2015  

OPERATING ACTIVITIES

    

Net income

   $ 60,703      $ 136,912   

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

    

Net realized investment gains

     (16,028     (56,070

Other-than-temporary impairments

     7,027        3,497   

Amortization of premiums, discounts and loan origination fees

     1,725        1,098   

Net capitalized interest on policy loans and mortgage loans

     (14,046     (15,668

Depreciation

     24,845        18,669   

Interest credited to policyholders’ account balances

     162,428        144,968   

Charges to policyholders’ account balances

     (129,836     (115,121

Deferred federal income tax expense

     2,931        14,391   

Equity in earnings of unconsolidated affiliates

     (2,735     (57,046

Distributions from equity method investments

     572        359   

Changes in

    

Policyholder liabilities

     136,237        107,256   

Deferred policy acquisition costs

     (21,164     7,076   

Reinsurance recoverables

     49,785        19,140   

Premiums due and other receivables

     (36,399     (35,837

Prepaid reinsurance premiums

     15,906        (10,860

Accrued investment income

     259        9,648   

Current tax receivable/payable

     (37,322     15,461   

Liability for retirement benefits

     (8,507     (5,325

Other, net

     34,787        (42,197
  

 

 

   

 

 

 

Net cash provided by operating activities

     231,168        140,351   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     236,480        619,477   

Available-for-sale securities

     267,510        303,836   

Investment real estate

     6,701        13,413   

Mortgage loans

     204,886        399,600   

Policy loans

     27,919        28,702   

Other invested assets

     8,143        12,332   

Disposals of property and equipment

     8,604        817   

Distributions from unconsolidated affiliates

     9,862        79,514   

Payment for the purchase/origination of

    

Held-to-maturity securities

     (89,169     (205,446

Available-for-sale securities

     (443,085     (600,818

Investment real estate

     (26,578     (25,985

Mortgage loans

     (713,247     (358,011

Policy loans

     (12,130     (11,859

Other invested assets

     (12,471     (25,386

Additions to property and equipment

     (20,629     (17,614

Contributions to unconsolidated affiliates

     (97,079     (55,550

Change in short-term investments

     208,181        758   

Other, net

     4,168        13,879   
  

 

 

   

 

 

 

Net cash provided by (used in) investing activities

     (431,934     171,659   
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     860,140        461,687   

Policyholders’ account withdrawals

     (683,760     (796,960

Change in notes payable

     11,802        14,287   

Dividends to stockholders

     (43,601     (41,371

Payments to noncontrolling interest

     (163     (127
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     144,418        (362,484
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (56,348     (50,474

Beginning of the period

     190,237        209,455   
  

 

 

   

 

 

 

End of the period

   $ 133,889      $ 158,981   
  

 

 

   

 

 

 

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 results of operations or financial position.

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 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 annual periods and interim periods within those annual 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 results of operations or financial position.

 

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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 periods beginning after December 15, 2015, and for interim periods beginning after December 15, 2016. The guidance affects disclosures only and will not impact the Company’s results of operations or financial position.

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 annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of the adoption to the Company’s results of operations and financial position.

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 and interim periods within those annual periods beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption, which is not expected to be material to the Company’s results of operations or financial position.

In June 2016, the FASB issued guidance that will significantly change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace the current “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do under the current other-than-temporary impairment model. The amended guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption to the Company’s results of operations and financial position.

 

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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):

 

     June 30, 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

   $ 317,279       $ 28,749       $ —         $ 346,028   

Foreign governments

     4,079         940         —           5,019   

Corporate debt securities

     6,876,230         442,296         (54,519      7,264,007   

Residential mortgage-backed securities

     254,784         21,183         (671      275,296   

Collateralized debt securities

     1,295         99         —           1,394   

Other debt securities

     3,241         108         —           3,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,456,908         493,375         (55,190      7,895,093   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,190         865         —           25,055   

U.S. states and political subdivisions

     965,790         70,179         (84      1,035,885   

Foreign governments

     5,000         2,000         —           7,000   

Corporate debt securities

     4,560,458         265,534         (29,518      4,796,474   

Residential mortgage-backed securities

     21,216         2,512         (161      23,567   

Collateralized debt securities

     5,695         995         (4      6,686   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,582,349         342,085         (29,767      5,894,667   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     785,554         735,384         (19,780      1,501,158   

Preferred stock

     20,987         9,782         (1      30,768   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     806,541         745,166         (19,781      1,531,926   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

   $ 13,845,798       $ 1,580,626       $ (104,738    $ 15,321,686   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     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):

 

     June 30, 2016  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 310,167       $ 317,325       $ 222,447       $ 226,023   

Due after one year through five years

     3,323,763         3,576,841         1,338,240         1,438,204   

Due after five years through ten years

     3,605,305         3,770,060         3,401,117         3,565,931   

Due after ten years

     211,822         225,854         615,545         659,653   

Without single maturity date

     5,851         5,013         5,000         4,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,456,908       $ 7,895,093       $ 5,582,349       $ 5,894,667   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Proceeds from sales of available-for-sale securities

   $ 27,026       $ 23,894       $ 42,731       $ 39,476   

Gross realized gains

     3,517         7,226         8,584         14,009   

Gross realized losses

     (214      (65      (338      (65

Gains and losses are determined using specific identification of the securities sold. During the six months ended June 30, 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):

 

     Six months ended June 30,  
     2016      2015  

Bonds available-for-sale

   $ 256,233       $ (69,817

Equity securities

     21,232         (21,325
  

 

 

    

 

 

 

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

     277,465         (91,142

Adjustments for

     

Deferred policy acquisition costs

     (64,746      17,680   

Participating policyholders’ interest

     (11,882      2,722   

Deferred federal income tax benefit (expense)

     (70,061      24,437   
  

 

 

    

 

 

 

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

   $ 130,776       $ (46,303
  

 

 

    

 

 

 

 

10


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     June 30, 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

              

Corporate debt securities

   $ (26,871   $ 310,356       $ (27,648   $ 287,195       $ (54,519   $ 597,551   

Residential mortgage-backed securities

     (36     6,095         (635     12,876         (671     18,971   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (26,907     316,451         (28,283     300,071         (55,190     616,522   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     —          3,384         —          —           —          3,384   

U.S. states and political subdivisions

     (82     2,933         (2     121         (84     3,054   

Corporate debt securities

     (8,788     194,814         (20,730     285,180         (29,518     479,994   

Residential mortgage-backed securities

     (8     1,237         (153     4,499         (161     5,736   

Collateralized debt securities

     —          51         (4     191         (4     242   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (8,878     202,419         (20,889     289,991         (29,767     492,410   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (19,780     106,757         —          —           (19,780     106,757   

Preferred stock

     —          —           (1     —           (1     —     
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (19,780     106,757         (1     —           (19,781     106,757   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (55,565   $ 625,627       $ (49,173   $ 590,062       $ (104,738   $ 1,215,689   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     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 June 30, 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:

 

     June 30, 2016     December 31, 2015  

AAA

     5.4     5.4

AA

     11.6        12.0   

A

     35.5        36.5   

BBB

     44.2        43.3   

BB and below

     3.3        2.8   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

     June 30, 2016     December 31, 2015  

Consumer goods

     21.4     20.5

Energy and utilities

     11.0        10.3   

Finance

     19.6        20.0   

Healthcare

     13.7        14.6   

Industrials

     8.5        8.2   

Information technology

     17.1        17.8   

Other

     8.7        8.6   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Note 5 – Mortgage Loans

Generally, commercial mortgage loans are secured by first liens on income-producing real estate. American National attempts to maintain a diversified portfolio by considering the location of the underlying collateral. The distribution based on carrying amount of mortgage loans by location are as follows:

 

     June 30, 2016     December 31, 2015  

East North Central

     17.8     18.8

East South Central

     4.6        4.8   

Mountain

     11.1        11.6   

Pacific

     15.7        10.7   

South Atlantic

     17.1        18.8   

West South Central

     28.1        29.0   

Other

     5.6        6.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

For the six months ended June 30, 2016, American National foreclosed on no loans, and 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 loan was in the process of foreclosure with a recorded investment of $2,450,000. American National sold no loans for the six months ended June 30, 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  

June 30, 2016

                   

Industrial

   $ —         $ —         $ —         $ —         $ 833,188       $ 833,188        20.8   

Office

     —           —           2,450         2,450         1,301,245         1,303,695        32.5   

Retail

     —           —           —           —           700,259         700,259        17.5   

Other

     —           —           —           —           1,170,766         1,170,766        29.2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ —         $ —         $ 2,450       $ 2,450       $ 4,005,458       $ 4,007,908        100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (11,835  
                 

 

 

   

Total, net of allowance

                  $ 3,996,073     
                 

 

 

   

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 $344,000 and $452,000 and unamortized origination fees of $26,141,000 and $22,637,000 at June 30, 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):

 

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

Beginning balance 2016

   $ 10,716       $ 2,179   

Change in allowance

     626         (1,686
  

 

 

    

 

 

 

Ending balance 2016

   $ 11,342       $ 493   
  

 

 

    

 

 

 

At June 30, 2016 and December 31, 2015, the recorded investment for loans collectively evaluated for impairment was $3,975,191,000 and $3,442,211,000, respectively. The recorded investment for loans individually evaluated for impairment was $32,717,000 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):

 

     June 30, 2016      June 30, 2015  
     Average      Interest      Average      Interest  
     Recorded      Income      Recorded      Income  
     Investment      Recognized      Investment      Recognized  

Three months ended

           

Without an allowance

           

Office

   $ 28,804       $ 454       $ 20,996       $ 340   

Retail

     3,939         54         2,503         88   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,743       $ 508       $ 23,499       $ 428   
  

 

 

    

 

 

    

 

 

    

 

 

 

Six months ended

           

Without an allowance

           

Office

   $ 28,943       $ 911       $ 20,996       $ 681   

Retail

     3,954         119         5,032         177   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,897       $ 1,030       $ 26,028       $ 858   
  

 

 

    

 

 

    

 

 

    

 

 

 
     June 30, 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

   $ 28,794       $ 28,794       $ 29,091       $ 29,091   

Retail

     3,923         3,923         8,705         8,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 32,717       $ 32,717       $ 37,796       $ 37,796   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

Note 5 – Mortgage Loans – (Continued)

 

Troubled Debt Restructurings

American National has granted concessions which are classified as troubled debt restructurings to certain 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.

Troubled debt restructuring mortgage loan information is as follows (in thousands, except number of contracts):

 

     Six months ended June 30,  
     2016      2015  
     Number of
contracts
     Recorded
investment pre-
modification
     Recorded
investment post
modification
     Number of
contracts
     Recorded
investment pre-
modification
     Recorded
investment post
modification
 

Office

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

Retail

     1         3,934         3,934         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     1       $ 3,934       $ 3,934         1       $ 6,432       $ 6,432   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

Note 6 – Investment Real Estate

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

 

     June 30, 2016     December 31, 2015  

Industrial

     9.6     10.9

Office

     37.8        38.1   

Retail

     37.4        37.0   

Other

     15.2        14.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     June 30, 2016     December 31, 2015  

East North Central

     7.2     11.4

East South Central

     3.5        3.6   

Mountain

     12.3        12.6   

Pacific

     5.7        5.6   

South Atlantic

     13.3        10.1   

West South Central

     52.3        50.7   

Other

     5.7        6.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

15


Table of Contents

Note 6 – Investment Real Estate – (Continued)

 

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):

 

     June 30, 2016      December 31, 2015  

Investment real estate

   $ 172,589       $ 174,264   

Short-term investments

     1         1   

Cash and cash equivalents

     4,367         3,855   

Accrued investment income

     —           557   

Other receivables

     4,077         8,101   

Other assets

     10,426         8,210   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 191,460       $ 194,988   
  

 

 

    

 

 

 

Notes payable

   $ 140,239       $ 128,436   

Other liabilities

     12,544         19,436   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 152,783       $ 147,872   
  

 

 

    

 

 

 

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 $36,317,000 and $34,699,000 at June 30, 2016 and December 31, 2015, respectively. The total long-term portion of notes payable, $100,537,000, 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 lesser 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, $39,702,000, 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):

 

     June 30, 2016      December 31, 2015  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 297,240       $ 297,240       $ 236,816       $ 236,816   

Mortgage loans

     413,709         413,709         212,228         212,228   

Accrued investment income

     1,427         1,427         661         661   

As of June 30, 2016, no real estate investments were classified as held for sale.

 

16


Table of Contents

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. These options are not designated as hedging instruments for accounting purposes under U.S. GAAP. Equity-indexed contracts include a fixed host universal-life insurance or annuity contract and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands, except number of instruments):

 

Derivatives Not Designated
as Hedging Instruments

 

Location in the Consolidated
Statements of Financial Position

  June 30, 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

    428      $ 1,301,500      $ 134,575        419      $ 1,200,600      $ 123,007   

Equity-indexed embedded derivative

 

Policyholders’ account balances

    56,789        1,175,400        278,570        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 June 30,     Six months ended June 30,  
    2016     2015     2016     2015  

Equity-indexed options

 

Net investment income

  $ 5,789      $ (2,095   $ 2,150      $ (964

Equity-indexed embedded derivative

 

Interest credited to policyholders’ account balances

    (8,725     4,413        (6,173     3,217   

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

Net investment income is shown below (in thousands):

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Bonds

   $ 138,786       $ 139,095       $ 278,979       $ 282,836   

Equity securities

     10,048         10,049         19,327         18,516   

Mortgage loans

     49,314         49,502         97,316         99,001   

Real estate

     429         147         (1,445      (1,606

Options

     5,789         (2,095      2,150         (964

Other invested assets

     6,344         6,964         10,437         15,092   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 210,710       $ 203,662       $ 406,764       $ 412,875   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Bonds

   $ 1,854       $ 8,799       $ 4,593       $ 10,097   

Equity securities

     6,065         8,283         10,930         36,910   

Mortgage loans

     (433      (209      1,059         (733

Real estate

     273         (78      273         9,833   

Other invested assets

     (793      (27      (827      (37
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,966       $ 16,768       $ 16,028       $ 56,070   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

17


Table of Contents

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

 

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

 

     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Equity securities

     (3,551      (3,472      (7,027      (3,497
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (3,551    $ (3,472    $ (7,027    $ (3,497
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 9 – Fair Value of Financial Instruments

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

 

     June 30, 2016      December 31, 2015  
     Carrying      Fair Value      Carrying         
     Amount         Amount      Fair Value  

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

   $ 7,456,908       $ 7,895,093       $ 7,609,420       $ 7,755,553   

Fixed maturity securities, bonds available-for-sale

     5,894,667         5,894,667         5,483,916         5,483,916   

Equity securities

     1,531,926         1,531,926         1,514,979         1,514,979   

Equity-indexed options

     134,575         134,575         123,007         123,007   

Mortgage loans on real estate, net of allowance

     3,996,073         4,208,615         3,483,280         3,621,978   

Policy loans

     388,763         388,763         407,491         407,491   

Short-term investments

     252,431         252,431         460,612         460,612   

Separate account assets

     900,972         900,972         918,446         918,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,556,315       $ 21,207,042       $ 20,001,151       $ 20,285,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,826,473       $ 8,826,473       $ 8,787,376       $ 8,787,376   

Embedded derivative liability for equity-indexed contracts

     278,570         278,570         242,412         242,412   

Notes payable

     140,239         140,239         128,436         128,436   

Separate account liabilities

     900,972         900,972         918,446         918,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,146,254       $ 10,146,254       $ 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.

 

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Table of Contents

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

 

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.

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.

 

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Table of Contents

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

 

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.

The significant unobservable input used to calculate the fair value of the embedded derivatives is equity option implied volatility. An increase in implied volatility will result in an increase in the value of the equity-indexed embedded derivatives, all other things being equal. At June 30, 2016 and December 31, 2015, the one year implied volatility used to estimate embedded derivative value was 17.1% 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.

 

20


Table of Contents

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

 

Quantitative Disclosures

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

 

     Fair Value Measurement as of June 30, 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

   $ 346,028       $ —         $ 346,028       $ —     

Foreign governments

     5,019         —           5,019         —     

Corporate debt securities

     7,264,007         —           7,213,891         50,116   

Residential mortgage-backed securities

     275,296         —           274,373         923   

Collateralized debt securities

     1,394         —           —           1,394   

Other debt securities

     3,349         —           —           3,349   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,895,093         —           7,839,311         55,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     25,055         —           25,055         —     

U.S. states and political subdivisions

     1,035,885         —           1,033,405         2,480   

Foreign governments

     7,000         —           7,000         —     

Corporate debt securities

     4,796,474         —           4,781,895         14,579   

Residential mortgage-backed securities

     23,567         —           21,083         2,484   

Collateralized debt securities

     6,686         —           4,563         2,123   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,894,667         —           5,873,001         21,666   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,501,158         1,501,158         —           —     

Preferred stock

     30,768         30,768         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,531,926         1,531,926         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     134,575         —           —           134,575   

Mortgage loans on real estate

     4,208,615         —           4,208,615         —     

Policy loans

     388,763         —           —           388,763   

Short-term investments

     252,431         —           252,431         —     

Separate account assets

     900,972         —           900,972         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 21,207,042       $ 1,531,926       $ 19,074,330       $ 600,786   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,826,473       $ —         $ —         $ 8,826,473   

Embedded derivative liability for equity-indexed contracts

     278,570         —           —           278,570   

Notes payable

     140,239         —           —           140,239   

Separate account liabilities

     900,972         —           900,972         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,146,254       $ —         $ 900,972       $ 9,245,282   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

Beginning balance, 2016

   $ 21,689      $ 123,761      $ 258,267      $ 20,130      $ 123,007      $ 242,412   

Total realized and unrealized investment gains included in other comprehensive income

     352        —          —          511        —          —     

Net fair value change included in realized gains

     1        —          —          1        —          —     

Net gain for derivatives included in net investment income

     —          5,789        —          —          2,150        —     

Net change included in interest credited

     —          —          8,725        —          —          6,173   

Purchases, sales and settlements or maturities

            

Purchases

     —          7,178        —          —          12,471        —     

Sales

     —          —          —          —          —          —     

Settlements or maturities

     (376     (2,153     —          (389     (3,053     —     

Premiums less benefits

     —          —          11,578        —          —          29,985   

Gross transfers into Level 3

     —          —          —          1,413        —          —     

Gross transfers out of Level 3

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance June 30, 2016

   $ 21,666      $ 134,575      $ 278,570      $ 21,666      $ 134,575      $ 278,570   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2015

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

Total realized and unrealized investment losses included in other comprehensive income

     (1,105     —          —          (168     —          —     

Net fair value change included in realized gains (losses)

     —          —          —          —          —          —     

Net loss for derivatives included in net investment income

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

Net change included in interest credited

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

Purchases, sales and settlements or maturities

            

Purchases

     —          5,825        —          —          9,588        —     

Sales

     (60     —          —          (121     —          —     

Settlements or maturities

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

Premiums less benefits

     —          —          4,828        —          —          3,857   

Gross transfers into Level 3

     3,398        —          —          3,398        —          —     

Gross transfers out of Level 3

     —          —          —          —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance June 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $19,745,000 relating to assets still held at June 30, 2016 and losses of $10,602,000 at June 30, 2015.

There were no transfers between Level 1 and Level 2 fair value hierarchies. The transfers into Level 3 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers.

 

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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

     54,464        43,295        4,915        129,507        232,181   

Amortization

     (39,958     (36,034     (7,265     (127,760     (211,017

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

     (14,808     (49,938     —          —          (64,746
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     (302     (42,677     (2,350     1,747        (43,582
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2016

   $ 755,721      $ 368,529      $ 42,040      $ 114,797      $ 1,281,087   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Note 11 – Liability for Unpaid Claims and Claim Adjustment Expenses

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

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

 

     Six months ended June 30,  
     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

     523,388         485,872   

Prior years

     (16,628      (14,189
  

 

 

    

 

 

 

Total incurred claims

     506,760         471,683   
  

 

 

    

 

 

 

Paid claims related to

     

Current

     266,566         246,056   

Prior years

     209,805         208,300   
  

 

 

    

 

 

 

Total paid claims

     476,371         454,356   
  

 

 

    

 

 

 

Net balance

     917,354         903,815   

Plus reinsurance recoverables

     206,962         222,376   
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,124,316       $ 1,126,191   
  

 

 

    

 

 

 

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 $16,628,000 during the first six months of 2016 and decreased by approximately $14,189,000 during the first six months of 2015, reflecting lower-than-anticipated losses in the multi-peril line of business.

 

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Note 12 – Federal Income Taxes

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

 

     Three months ended June 30,     Six months ended June 30,  
     2016     2015     2016     2015  
     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  

Income tax on pre-tax income

   $ 14,727        35.0   $ 17,454        35.0   $ 23,283        35.0   $ 69,234        35.0

Tax-exempt investment income

     (1,974     (4.7     (1,946     (3.9     (3,946     (5.9     (3,825     (1.9

Deferred tax adjustment

     (341     (0.8     —          —          (10,508     (15.8     —          —     

Dividend exclusion

     (1,879     (4.5     (1,864     (3.7     (4,226     (6.4     (3,947     (2.0

Miscellaneous tax credits, net

     (2,865     (6.8     (2,541     (5.1     (5,116     (7.7     (4,472     (2.3

Low income housing tax credit expense

     1,295        3.1        1,221        2.4        2,589        3.9        2,485        1.3   

Other items, net

     885        2.1        2,886        5.8        1,142        1.7        1,425        0.7   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for federal income tax before interest expense

     9,848        23.4        15,210        30.5        3,218        4.8        60,900        30.8   

Interest expense

     42        0.1        —          —          2,602        3.9        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 9,890        23.5   $ 15,210        30.5   $ 5,820        8.7   $ 60,900        30.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

American National made income tax payments of $35,458,000 and $25,080,000 during the six months ended June 30, 2016 and 2015, respectively. 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 June 30, 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):

 

            Defined                
     Net Unrealized      Benefit      Foreign         
     Gains (Losses)      Pension Plan      Currency         
     on Securities      Adjustments      Adjustments      AOCI  

Beginning balance, 2016

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

 

 

    

 

 

    

 

 

    

 

 

 

Amounts reclassified from AOCI (net of tax benefit $2,105 and expense $2,292)

     (3,910      4,256         —           32,031   

Unrealized holding gains arising during the period (net of tax expense $99,218)

     184,262         —           —           152,577   

Unrealized adjustment to DAC (net of tax benefit $22,893)

     (41,853      —           —           (41,853

Unrealized losses on investments attributable to participating policyholders’ interest (net of tax benefit $4,159)

     (7,723      —           —           (7,723

Foreign currency adjustment (net of tax expense $232)

     —           —           430         430   
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2016

   $ 584,210       $ (93,633    $ (2,495    $ 488,082   
  

 

 

    

 

 

    

 

 

    

 

 

 

Beginning balance, 2015

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

Amounts reclassified from AOCI (net of tax benefit $12,334 and expense $1,633)

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

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

     (36,337      —           —           (36,337

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

     11,170         —           —           11,170   

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

     1,769         —           —           1,769   

Foreign currency adjustment (net of tax benefit $350)

     —           —           (650      (650
  

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2015

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

 

 

    

 

 

    

 

 

    

 

 

 

Note 14 – Stockholders’ Equity and Noncontrolling Interests

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

 

     June 30, 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  
           Weighted-Average             Weighted-Average            Weighted-Average  
           Grant Date             Grant Date            Grant Date  
     Shares     Fair Value      Shares      Fair Value      Units     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

     (4,934     110.99         —           —           (66,234     100.02   

Forfeited

     —          —           —           —           (182     105.75   

Expired

     (16,364     116.89         —           —           —          —     
  

 

 

      

 

 

       

 

 

   

Outstanding at June 30, 2016

     16,794      $ 114.74         76,000       $ 110.73         106,158      $ 105.98   
  

 

 

      

 

 

       

 

 

   

 

     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     1.42         3.18         1.93   

Exercisable shares

     16,794         N/A         N/A   

Weighted-average exercise price

   $ 114.74       $ 110.73       $ 105.98   

Weighted-average exercise price exercisable shares

     114.74         N/A         N/A   

Compensation expense (credit)

        

Three months ended June 30, 2016

   $ 4,000       $ 209,000       $ 345,000   

Three months ended June 30, 2015

     10,000         276,000         1,127,000   

Six months ended June 30, 2016

     37,000         419,000         4,447,000   

Six months ended June 30, 2015

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

Fair value of liability award

        

June 30, 2016

   $ 71,000         N/A       $ 21,168,000   

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 June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Weighted average shares outstanding

     26,908,077         26,877,833         26,908,748         26,847,936   

Incremental shares from RS awards and RSUs

     62,520         74,274         56,954         93,541   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shares for diluted calculations

     26,970,597         26,952,107         26,965,702         26,941,477   
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to American National (in thousands)

   $ 32,625       $ 35,053       $ 61,941       $ 138,035   

Basic earnings per share

   $ 1.21       $ 1.30       $ 2.30       $ 5.14   

Diluted earnings per share

     1.21         1.30         2.30         5.12   

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 June 30, 2016 and December 31, 2015, American National Insurance Company’s statutory capital and surplus was $2,920,318,000 and $2,925,935,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at June 30, 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 $64,555,000 and $64,225,000 at June 30, 2016 and June 30, 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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Table of Contents

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):

 

                   June 30, 2016      December 31, 2015  

Statutory capital and surplus

           

Life insurance entities

         $ 1,888,976       $ 1,900,939   

Property and casualty insurance entities

           1,040,461         1,033,942   
     Three months ended June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Statutory net income (loss)

           

Life insurance entities

   $ 19,182       $ 33,147       $ 23,109       $ 79,241   

Property and casualty insurance entities

     (1,291      (1,111      3,257         13,937   

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 June 30, 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 $2,038,000 and $3,439,000 at June 30, 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.

 

    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.

 

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Note 15 – Segment Information – (Continued)

 

    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 June 30,      Six months ended June 30,  
     2016      2015      2016      2015  

Life

   $ 16,766       $ 7,131       $ 13,285       $ 15,330   

Annuity

     17,463         17,122         35,434         34,235   

Health

     4,419         5,360         3,785         12,903   

Property and Casualty

     (4,775      (1,444      2,215         8,778   

Corporate and Other

     6,407         21,238         9,069         69,520   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 40,280       $ 49,407       $ 63,788       $ 140,766   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at June 30, 2016, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $869,114,000 of which $479,418,000 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 June 30, 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.

 

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Note 16 – Commitments and Contingencies – (Continued)

 

Guarantees

American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on the bank loan, American National would be obligated to pay off the loans. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of June 30, 2016, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $210,638,000.

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  
        Six months ended June 30,     June 30,     December 31,  

Related Party

 

Financial Statement Line Impacted

  2016     2015     2016     2015  

Gal-Tex Hotel Corporation

  Mortgage loan on real estate   $ 700      $ 651      $ 4,482      $ 5,182   

Gal-Tex Hotel Corporation

  Net investment income     177        226        27        31   

Greer, Herz & Adams, LLP

  Other operating expenses     4,627        4,012        (336     (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 and six months ended June 30, 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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    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
June 30,
           Six months ended June 30,         
     2016     2015      Change     2016     2015      Change  

Premiums and other revenues

              

Premiums

   $ 512,699      $ 433,203       $ 79,496      $ 1,003,698      $ 875,046       $ 128,652   

Other policy revenues

     65,489        57,597         7,892        129,836        115,121         14,715   

Net investment income

     210,710        203,662         7,048        406,764        412,875         (6,111

Realized investments gains (losses), net

     3,415        13,296         (5,161     9,001        52,573         (36,454

Other income

     8,135        9,748         (6,333     16,119        18,458         (9,457
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total premiums and other revenues

     800,448        717,506         82,942        1,565,418        1,474,073         91,345   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Benefits, losses and expenses

              

Policyholder benefits

     185,409        127,334         58,075        367,427        269,705         97,722   

Claims incurred

     261,287        244,176         17,111        505,537        468,225         37,312   

Interest credited to policyholders’ account balances

     85,901        69,215         16,686        162,428        144,968         17,460   

Commissions for acquiring and servicing policies

     114,945        103,557         11,388        227,829        196,672         31,157   

Other operating expenses

     129,197        123,203         5,994        259,573        246,661         12,912   

Change in deferred policy acquisition costs (1)

     (16,571     614         (17,185     (21,164     7,076         (28,240
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total benefits and expenses

     760,168        668,099         92,069        1,501,630        1,333,307         168,323   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 40,280      $ 49,407       $ (9,127   $ 63,788      $ 140,766       $ (76,978
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 June 30, 2016 compared to 2015 primarily due to a decrease in property and casualty earnings impacted by higher personal auto claim frequency and severity, a decline in health premiums, and a decrease in realized investment gains. Consolidated earnings decreased during the six months ended June 30, 2016 compared to 2015 primarily due to a decrease in realized investment gains.

Life

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

 

     Three months ended June 30,           Six months ended June 30,        
     2016     2015     Change     2016     2015     Change  

Premiums and other revenues

            

Premiums

   $ 77,053      $ 75,071      $ 1,982      $ 152,170      $ 147,153      $ 5,017   

Other policy revenues

     62,579        54,174        8,405        124,187        108,600        15,587   

Net investment income

     56,060        56,372        (312     110,244        113,986        (3,742

Other income

     477        607        (130     1,070        1,030        40   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     196,169        186,224        9,945        387,671        370,769        16,902   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

            

Policyholder benefits

     91,754        91,184        570        192,525        179,188        13,337   

Interest credited to policyholders’ account balances

     17,470        14,112        3,358        33,555        29,900        3,655   

Commissions for acquiring and servicing policies

     31,189        32,532        (1,343     60,983        59,848        1,135   

Other operating expenses

     50,450        48,916        1,534        101,829        101,568        261   

Change in deferred policy acquisition costs (1)

     (11,460     (7,651     (3,809     (14,506     (15,065     559   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     179,403        179,093        310        374,386        355,439        18,947   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 16,766      $ 7,131      $ 9,635      $ 13,285      $ 15,330      $ (2,045
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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Earnings increased during the three months ended June 30, 2016 compared to 2015 primarily due to an increase in other policy revenues. Earnings decreased during the six months ended June 30, 2016 compared to 2015 primarily due an increase in policyholder benefits.

Premiums and other revenues

Premiums increased during the three and six months ended June 30, 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 and six months ended June 30, 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 June 30,            Six months ended June 30,         
     2016      2015      Change     2016      2015      Change  

Traditional Life

   $ 13,774       $ 14,210       $ (436   $ 27,313       $ 28,408       $ (1,095

Universal Life

     4,807         3,602         1,205        8,965         6,933         2,032   

Indexed UL

     6,511         6,103         408        11,589         11,161         428   

Variable UL

     24         5         19        24         9         15   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Recurring

   $ 25,116       $ 23,920       $ 1,196      $ 47,891       $ 46,511       $ 1,380   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Single and excess

   $ 532       $ 562       $ (30   $ 955       $ 913       $ 42   

Credit life

     1,165         1,082         83        2,045         2,042         3   

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 and six months ended June 30, 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 six months ended June 30, 2016 compared to 2015 primarily due to an increase in claims with higher face amounts on a block of older aged policyholders.

Commissions decreased slightly during the three months ended June 30, 2016 compared to 2015. Commissions increased slightly during the six months ended June 30, 2016 compared to 2015 primarily due to increased sales of universal life products.

 

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

 

     Three months ended June 30,            Six months ended June 30,        
     2016     2015     Change      2016     2015     Change  

Acquisition cost capitalized

   $ 29,247      $ 28,594      $ 653       $ 54,464      $ 53,632      $ 832   

Amortization of DAC

     (17,787     (20,943     3,156         (39,958     (38,567     (1,391
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 11,460      $ 7,651      $ 3,809       $ 14,506      $ 15,065      $ (559
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Policy in-force information

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

 

     June 30,      December 31,         
     2016      2015      Change  

Life insurance in-force

        

Traditional life

   $ 65,545,085       $ 63,336,601       $ 2,208,484   

Interest-sensitive life

     27,291,615         26,858,051         433,564   
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 92,836,700       $ 90,194,652       $ 2,642,048   
  

 

 

    

 

 

    

 

 

 

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

 

     June 30,      December 31,         
     2016      2015      Change  

Number of policies in-force

        

Traditional life

     1,856,601         1,890,600         (33,999

Interest-sensitive life

     217,704         212,851         4,853   
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,074,305         2,103,451         (29,146
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the six months ended June 30, 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.

 

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Annuity

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

 

     Three months ended June 30,            Six months ended June 30,         
     2016     2015      Change     2016     2015      Change  

Premiums and other revenues

              

Premiums

   $ 86,030      $ 25,088       $ 60,942      $ 156,238      $ 66,531       $ 89,707   

Other policy revenues

     2,910        3,423         (513     5,649        6,521         (872

Net investment income

     123,640        113,205         10,435        240,536        232,867         7,669   

Other income

     802        1,012         (210     1,762        1,882         (120
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total premiums and other revenues

     213,382        142,728         70,654        404,185        307,801         96,384   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Benefits, losses and expenses

              

Policyholder benefits

     93,655        36,150         57,505        174,902        90,517         84,385   

Interest credited to policyholders’ account balances

     68,431        55,103         13,328        128,873        115,068         13,805   

Commissions for acquiring and servicing policies

     21,363        11,349         10,014        43,271        20,454         22,817   

Other operating expenses

     15,808        12,948         2,860        28,966        25,997         2,969   

Change in deferred policy acquisition costs (1)

     (3,338     10,056         (13,394     (7,261     21,530         (28,791
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total benefits and expenses

     195,919        125,606         70,313        368,751        273,566         95,185   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 17,463      $ 17,122       $ 341      $ 35,434      $ 34,235       $ 1,199   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

(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 remained relatively constant during the three and six months ended June 30, 2016 compared to 2015.

Premiums and other revenues

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

 

     Three months ended June 30,            Six months ended June 30,         
     2016      2015      Change     2016      2015      Change  

Fixed deferred annuity

   $ 145,792       $ 58,151       $ 87,641      $ 329,948       $ 105,710       $ 224,238   

Single premium immediate annuity

     98,552         30,243         68,309        177,164         79,853         97,311   

Equity-indexed deferred annuity

     159,292         82,645         76,647        301,271         134,792         166,479   

Variable deferred annuity

     20,685         22,364         (1,679     40,574         48,827         (8,253
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premium and deposits

     424,321         193,403         230,918        848,957         369,182         479,775   

Less: Policy deposits

     338,291         168,315         169,976        692,719         302,651         390,068   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 86,030       $ 25,088       $ 60,942      $ 156,238       $ 66,531       $ 89,707   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Fixed deferred, single premium immediate, and equity-indexed annuity sales increased significantly during the six months ended June 30, 2016 compared to 2015. During the third quarter of 2015, the Company started marketing enhanced annuity crediting rates for certain annuity products which have been well received by the market and have continued to increase sales in 2016.

 

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

 

     Six months ended June 30,  
     2016      2015  

Fixed deferred and equity-indexed annuity

     

Account value, beginning of period

   $ 8,880,448       $ 8,873,397   

Net inflows

     492,357         114,330   

Surrenders

     (439,972      (557,427

Fees

     (3,060      (3,378

Interest credited

     125,050         111,408   
  

 

 

    

 

 

 

Account value, end of period

   $ 9,054,823       $ 8,538,330   
  

 

 

    

 

 

 

Single premium immediate annuity

     

Reserve, beginning of period

   $ 1,398,481       $ 1,274,664