10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 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 November 01, 2016, there were 26,914,516 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

 

PART I – FINANCIAL INFORMATION

  

ITEM 1.

 

FINANCIAL STATEMENTS (Unaudited):

  
 

Consolidated Statements of Financial Position as of September 30, 2016 and December 31, 2015

     3   
 

Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015

     4   
 

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

     5   
 

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

     5   
 

Consolidated Statements of Cash Flows for the nine months ended September 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

     51   

ITEM 4.

 

CONTROLS AND PROCEDURES

     51   
 

PART II – OTHER INFORMATION

  

ITEM 1.

 

LEGAL PROCEEDINGS

     52   

ITEM 1A.

 

RISK FACTORS

     52   

ITEM 2.

 

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

     54   

ITEM 3.

 

DEFAULTS UPON SENIOR SECURITIES

     54   

ITEM 4.

 

MINE SAFETY DISCLOSURES

     54   

ITEM 5.

 

OTHER INFORMATION

     54   

ITEM 6.

 

EXHIBIT INDEX

     55   

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited and in thousands, except share data)

 

                                 
     September 30,
2016
    December 31,
2015
 

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair value $7,805,540 and $7,755,553)

   $ 7,363,132      $ 7,609,420   

Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $5,601,668 and $5,427,831)

     5,925,900        5,483,916   

Equity securities, at fair value
(Cost $787,119 and $810,826)

     1,546,801        1,514,979   

Mortgage loans on real estate, net of allowance

     4,113,637        3,483,280   

Policy loans

     384,257        407,491   

Investment real estate, net of accumulated depreciation of $226,849 and $212,139

     592,815        581,255   

Short-term investments

     405,463        460,612   

Other invested assets

     217,781        173,042   
  

 

 

   

 

 

 

Total investments

     20,549,786        19,713,995   
  

 

 

   

 

 

 

Cash and cash equivalents

     107,000        190,237   

Investments in unconsolidated affiliates

     465,233        379,348   

Accrued investment income

     180,343        177,474   

Reinsurance recoverables

     422,984        413,881   

Prepaid reinsurance premiums

     69,024        77,907   

Premiums due and other receivables

     308,771        285,446   

Deferred policy acquisition costs

     1,280,951        1,324,669   

Property and equipment, net

     117,638        120,680   

Current tax receivable

     51,974        4,091   

Other assets

     129,416        140,788   

Separate account assets

     913,667        918,446   
  

 

 

   

 

 

 

Total assets

   $ 24,596,787      $ 23,746,962   
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,895,172      $ 2,853,962   

Annuity

     1,265,903        1,113,057   

Accident and health

     61,179        65,034   

Policyholders’ account balances

     11,112,998        10,829,173   

Policy and contract claims

     1,323,311        1,280,011   

Unearned premium reserve

     849,116        812,977   

Other policyholder funds

     316,577        305,836   

Liability for retirement benefits

     196,275        207,635   

Notes payable

     146,068        128,436   

Deferred tax liabilities, net

     348,354        219,295   

Other liabilities

     486,768        550,629   

Separate account liabilities

     913,667        918,446   
  

 

 

   

 

 

 

Total liabilities

     19,915,388        19,284,491   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY

    

Common stock, $1.00 par value, - Authorized 50,000,000, Issued 30,832,449 and 30,832,449 Outstanding 26,914,516 and 26,894,456 shares

     30,832        30,832   

Additional paid-in capital

     16,194        13,689   

Accumulated other comprehensive income

     514,399        352,620   

Retained earnings

     4,212,749        4,157,184   

Treasury stock, at cost

     (101,777     (102,043
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,672,397        4,452,282   

Noncontrolling interest

     9,002        10,189   
  

 

 

   

 

 

 

Total stockholders’ equity

     4,681,399        4,462,471   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 24,596,787      $ 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 September 30,     Nine months ended September 30,  
     2016     2015     2016     2015  

PREMIUMS AND OTHER REVENUE

        

Premiums

        

Life

   $ 83,521      $ 78,397      $ 235,691      $ 225,550   

Annuity

     61,279        43,514        217,517        110,045   

Accident and health

     43,879        45,638        131,020        148,610   

Property and casualty

     318,658        291,486        926,807        849,876   

Other policy revenues

     64,210        60,271        194,046        175,392   

Net investment income

     227,784        184,482        634,548        597,357   

Net realized investment gains

     22,181        7,528        38,209        63,598   

Other-than-temporary impairments

     (5,914     (19,407     (12,941     (22,904

Other income

     7,544        7,950        23,663        26,408   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     823,142        699,859        2,388,560        2,173,932   
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

        

Policyholder benefits

        

Life

     103,873        94,087        296,398        273,275   

Annuity

     75,132        54,720        250,034        145,237   

Claims incurred

        

Accident and health

     39,375        46,236        101,994        110,289   

Property and casualty

     233,474        179,699        676,392        583,871   

Interest credited to policyholders’ account balances

     87,973        57,509        250,401        202,477   

Commissions for acquiring and servicing policies

     122,382        111,618        350,211        308,290   

Other operating expenses

     118,755        121,498        378,328        368,159   

Change in deferred policy acquisition costs

     (5,544     (12,168     (26,708     (5,092
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     775,420        653,199        2,277,050        1,986,506   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     47,722        46,660        111,510        187,426   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

        

Current

     (8,259     30,037        (5,370     76,546   

Deferred

     30,849        (11,903     33,780        2,488   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision for federal income taxes

     22,590        18,134        28,410        79,034   

Equity in earnings of unconsolidated affiliates

     36,530        16,339        39,265        73,385   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     61,662        44,865        122,365        181,777   

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

     2,373        2,852        1,135        1,729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American National

   $ 59,289      $ 42,013      $ 121,230      $ 180,048   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

        

Earnings per share

        

Basic

   $ 2.20      $ 1.56      $ 4.51      $ 6.70   

Diluted

     2.20        1.56        4.50        6.68   

Cash dividends to common stockholders

     0.82        0.80        2.44        2.34   

Weighted average common shares outstanding

     26,908,032        26,899,683        26,908,619        26,865,359   

Weighted average common shares outstanding and dilutive potential common shares

     26,967,331        26,963,635        26,966,387        26,945,386   

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 September 30,     Nine months ended September 30,  
     2016     2015     2016     2015  

Net income

   $ 61,662      $ 44,865      $ 122,365      $ 181,777   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

        

Change in net unrealized gains (losses) on securities

     25,290        (70,900     156,066        (117,203

Foreign currency transaction and translation adjustments

     (1,101     (1,437     (671     (2,087

Defined benefit pension plan adjustment

     2,128        1,517        6,384        4,549   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     26,317        (70,820     161,779        (114,741
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss)

     87,979        (25,955     284,144        67,036   

Less: Comprehensive income attributable to noncontrolling interest

     2,373        2,852        1,135        1,729   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss) attributable to American National

   $ 85,606      $ (28,807   $ 283,009      $ 65,307   
  

 

 

   

 

 

   

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited and in thousands)

 

                                 
     Nine months ended September 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

     1,825        3,032   

Income tax effect from restricted stock arrangement

     49        —     

Amortization of restricted stock

     631        935   
  

 

 

   

 

 

 

Balance at end of the period

     16,194        13,215   
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance as of January 1,

     352,620        490,782   

Other comprehensive income (loss)

     161,779        (114,741
  

 

 

   

 

 

 

Balance at end of the period

     514,399        376,041   
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     4,157,184        3,998,642   

Net income attributable to American National

     121,230        180,048   

Cash dividends to common stockholders

     (65,665     (62,933
  

 

 

   

 

 

 

Balance at end of the period

     4,212,749        4,115,757   
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (102,043     (101,941

Reissuance (purchase) of treasury shares

     266        (141
  

 

 

   

 

 

 

Balance at end of the period

     (101,777     (102,082
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     10,189        12,384   

Contributions

     1        32   

Distributions

     (2,323     (2,874

Net gain attributable to noncontrolling interest

     1,135        1,729   
  

 

 

   

 

 

 

Balance at end of the period

     9,002        11,271   
  

 

 

   

 

 

 

Total Stockholders’ Equity

   $ 4,681,399      $ 4,445,034   
  

 

 

   

 

 

 

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)

 

                                 
     Nine months ended September 30,  
     2016     2015  

OPERATING ACTIVITIES

    

Net income

   $ 122,365      $ 181,777   

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

    

Net realized investment gains

     (38,209     (63,598

Other-than-temporary impairments

     12,941        22,904   

Amortization of premiums, discounts and loan origination fees

     (1,301     2,043   

Net capitalized interest on policy loans and mortgage loans

     (23,344     (23,300

Depreciation

     36,811        32,665   

Interest credited to policyholders’ account balances

     250,401        202,477   

Charges to policyholders’ account balances

     (194,046     (175,392

Deferred federal income tax expense

     33,780        2,488   

Equity in earnings of unconsolidated affiliates

     (39,265     (73,385

Distributions from equity method investments

     827        549   

Changes in

    

Policyholder liabilities

     266,909        155,778   

Deferred policy acquisition costs

     (26,708     (5,092

Reinsurance recoverables

     (9,103     17,741   

Premiums due and other receivables

     (23,532     (21,814

Prepaid reinsurance premiums

     8,883        (14,962

Accrued investment income

     (2,869     3,763   

Current tax receivable/payable

     (47,883     16,277   

Liability for retirement benefits

     (11,360     (9,164

Other, net

     14,463        7,361   
  

 

 

   

 

 

 

Net cash provided by operating activities

     329,760        259,116   
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     362,950        906,026   

Available-for-sale securities

     394,436        380,287   

Investment real estate

     12,879        14,247   

Mortgage loans

     396,783        632,309   

Policy loans

     46,194        42,309   

Other invested assets

     22,918        25,070   

Disposals of property and equipment

     8,677        1,397   

Distributions from unconsolidated affiliates

     40,464        122,162   

Payment for the purchase/origination of

    

Held-to-maturity securities

     (112,679     (360,768

Available-for-sale securities

     (575,299     (883,242

Investment real estate

     (38,611     (58,536

Mortgage loans

     (1,010,671     (718,410

Policy loans

     (18,693     (18,747

Other invested assets

     (51,516     (31,078

Additions to property and equipment

     (24,337     (28,931

Contributions to unconsolidated affiliates

     (107,998     (90,222

Change in short-term investments

     55,149        (63,495

Other, net

     9,242        17,021   
  

 

 

   

 

 

 

Net cash used in investing activities

     (590,112     (112,601
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     1,197,460        941,340   

Policyholders’ account withdrawals

     (969,989     (1,080,029

Change in notes payable

     17,631        17,967   

Dividends to stockholders

     (65,665     (62,933

Payments to noncontrolling interest

     (2,322     (2,842
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     177,115        (186,497
  

 

 

   

 

 

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

     (83,237     (39,982

Beginning of the period

     190,237        209,455   
  

 

 

   

 

 

 

End of the period

   $ 107,000      $ 169,473   
  

 

 

   

 

 

 

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.

 

8


Table of Contents

Note 4 – Investment in Securities

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

 

                                                                   
     September 30, 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

   $ 315,764       $ 25,965       $ (10    $ 341,719   

Foreign governments

     4,069         871         —           4,940   

Corporate debt securities

     6,795,678         432,891         (35,449      7,193,120   

Residential mortgage-backed securities

     243,551         18,593         (633      261,511   

Collateralized debt securities

     1,292         81         —           1,373   

Other debt securities

     2,778         99         —           2,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,363,132         478,500         (36,092      7,805,540   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,152         788         (2      24,938   

U.S. states and political subdivisions

     952,945         59,121         (102      1,011,964   

Foreign governments

     5,000         1,885         —           6,885   

Corporate debt securities

     4,594,735         276,261         (17,055      4,853,941   

Residential mortgage-backed securities

     19,218         2,470         (138      21,550   

Collateralized debt securities

     5,618         1,007         (3      6,622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,601,668         341,532         (17,300      5,925,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     767,488         765,187         (12,322      1,520,353   

Preferred stock

     19,631         6,817         —           26,448   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     787,119         772,004         (12,322      1,546,801   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total investments in securities

   $ 13,751,919       $ 1,592,036       $ (65,714    $ 15,278,241   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

                                                                   
     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):

 

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

Due in one year or less

   $ 410,950       $ 420,567       $ 210,126       $ 213,646   

Due after one year through five years

     3,347,145         3,592,814         1,355,035         1,456,040   

Due after five years through ten years

     3,411,875         3,587,225         3,410,678         3,597,976   

Due after ten years

     187,311         199,909         620,829         653,269   

Without single maturity date

     5,851         5,025         5,000         4,969   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,363,132       $ 7,805,540       $ 5,601,668       $ 5,925,900   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

                                                                   
     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Proceeds from sales of available-for-sale securities

   $ 36,950       $ 8,876       $ 79,681       $ 48,352   

Gross realized gains

     12,990         3,982         21,574         17,991   

Gross realized losses

     (244      —           (582      (65

Gains and losses are determined using specific identification of the securities sold. During the nine months ended September 30, 2016 there were no bonds transferred from held-to-maturity to available-for-sale. During the nine months ended September 30, 2015 there were bonds with a carrying value of $171,000 transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ credit worthiness became evident. An unrealized loss of $53,000 was recorded in 2015, following the transfer at fair value.

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

 

                                 
     Nine months ended September 30,  
     2016      2015  

Bonds available-for-sale

   $ 268,148       $ (81,173

Equity securities

     55,529         (135,991
  

 

 

    

 

 

 

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

     323,677         (217,164

Adjustments for

     

Deferred policy acquisition costs

     (70,426      30,491   

Participating policyholders’ interest

     (13,472      7,222   

Deferred federal income tax benefit (expense)

     (83,713      62,248   
  

 

 

    

 

 

 

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

   $ 156,066       $ (117,203
  

 

 

    

 

 

 

 

10


Table of Contents

Note 4 – Investment in Securities – (Continued)

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

 

                                                                                                     
     September 30, 2016  
     Less than 12 months      12 Months or more      Total  
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

              

U.S. states and political subdivisions

   $ (10   $ 1,209       $ —        $ —         $ (10   $ 1,209   

Corporate debt securities

     (2,315     135,170         (33,134     268,473         (35,449     403,643   

Residential mortgage-backed securities

     (32     3,247         (601     11,026         (633     14,273   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (2,357     139,626         (33,735     279,499         (36,092     419,125   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (2     4,087         —          —           (2     4,087   

U.S. states and political subdivisions

     (101     18,061         (1     122         (102     18,183   

Corporate debt securities

     (3,630     218,012         (13,425     179,475         (17,055     397,487   

Residential mortgage-backed securities

     —          —           (138     4,240         (138     4,240   

Collateralized debt securities

     —          —           (3     167         (3     167   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (3,733     240,160         (13,567     184,004         (17,300     424,164   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (12,322     84,585         —          —           (12,322     84,585   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (12,322     84,585         —          —           (12,322     84,585   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (18,412   $ 464,371       $ (47,302   $ 463,503       $ (65,714   $ 927,874   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

                                                                                                     
     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 September 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:

 

                                 
     September 30, 2016     December 31, 2015  

AAA

     5.3     5.4

AA

     10.9        12.0   

A

     35.3        36.5   

BBB

     44.6        43.3   

BB and below

     3.9        2.8   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Equity securities by market sector distribution are shown below:

 

                                 
     September 30, 2016     December 31, 2015  

Consumer goods

     20.6     20.5

Energy and utilities

     11.1        10.3   

Finance

     20.1        20.0   

Healthcare

     13.5        14.6   

Industrials

     8.5        8.2   

Information technology

     17.9        17.8   

Other

     8.3        8.6   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Note 5 – Mortgage Loans

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

 

                                 
     September 30, 2016     December 31, 2015  

East North Central

     17.0     18.8

East South Central

     3.7        4.8   

Mountain

     11.0        11.6   

Pacific

     16.9        10.7   

South Atlantic

     16.7        18.8   

West South Central

     29.6        29.0   

Other

     5.1        6.3   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

For the nine months ended September 30, 2016, American National did not foreclose on any loans, and one loan was in the process of foreclosure with a recorded investment of $1,940,000. 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 nine months ended September 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  

September 30, 2016

                   

Industrial

   $ —         $ —         $ —         $ —         $ 767,922       $ 767,922        18.6   

Office

     —           —           1,940         1,940         1,421,769         1,423,709        34.5   

Retail

     —           —           —           —           723,982         723,982        17.5   

Other

     —           —           —           —           1,210,742         1,210,742        29.4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ —         $ —         $ 1,940       $ 1,940       $ 4,124,415       $ 4,126,355        100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (12,718  
                 

 

 

   

Total, net of allowance

                  $ 4,113,637     
                 

 

 

   

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 $289,000 and $452,000 and unamortized origination fees of $30,008,000 and $22,637,000 at September 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):

 

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

Beginning balance 2016

   $ 10,716       $ 2,179   

Change in allowance

     1,000         (1,177
  

 

 

    

 

 

 

Ending balance 2016

   $ 11,716       $ 1,002   
  

 

 

    

 

 

 

At September 30, 2016 and December 31, 2015, the recorded investment for loans collectively evaluated for impairment was $4,087,732,000 and $3,442,211,000, respectively. The recorded investment for loans individually evaluated for impairment was $38,623,000 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):

 

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

Three months ended

           

With an allowance

           

Office

   $ 2,195       $ 40       $ 18,014       $ 555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,195       $ 40       $ 18,014       $ 555   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance

           

Office

   $ 26,442       $ 422       $ 26,639       $ 422   

Retail

     10,161         135         8,812         134   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,603       $ 557       $ 35,451       $ 556   
  

 

 

    

 

 

    

 

 

    

 

 

 

Nine months ended

           

With an allowance

           

Office

   $ 2,195       $ 119       $ 18,116       $ 1,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 2,195       $ 119       $ 18,116       $ 1,016   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance

           

Office

   $ 26,590       $ 1,253       $ 26,326       $ 1,262   

Retail

     10,173         411         8,895         410   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,763       $ 1,664       $ 35,221       $ 1,672   
  

 

 

    

 

 

    

 

 

    

 

 

 
     September 30, 2016      December 31, 2015  
            Unpaid             Unpaid  
     Recorded      Principal      Recorded      Principal  
     Investment      Balance      Investment      Balance  

With an allowance

           

Office

   $ 1,940       $ 2,450       $ 16,168       $ 17,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,940       $ 2,450       $ 16,168       $ 17,855   
  

 

 

    

 

 

    

 

 

    

 

 

 

Without an allowance

           

Office

   $ 26,539       $ 26,539       $ 29,091       $ 29,091   

Retail

     10,144         10,144         8,705         8,705   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 36,683       $ 36,683       $ 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):

 

                                                                                                     
     Nine months ended September 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

     —         $ —         $ —           2       $ 12,211       $ 12,211   

Retail

     2         10,189         10,189         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     2       $ 10,189       $ 10,189         2       $ 12,211       $ 12,211   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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:

 

                                 
     September 30, 2016     December 31, 2015  

Industrial

     9.3     10.9

Office

     38.3        38.1   

Retail

     37.0        37.0   

Other

     15.4        14.0   
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     September 30, 2016     December 31, 2015  

East North Central

     7.2     11.4

East South Central

     3.4        3.6   

Mountain

     12.1        12.6   

Pacific

     5.7        5.6   

South Atlantic

     12.9        10.1   

West South Central

     52.5        50.7   

Other

     6.2        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):

 

                                 
     September 30, 2016      December 31, 2015  

Investment real estate

   $ 187,631       $ 174,264   

Short-term investments

     1         1   

Cash and cash equivalents

     5,339         3,855   

Accrued investment income

     —           557   

Other receivables

     5,888         8,101   

Other assets

     7,902         8,210   
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 206,761       $ 194,988   
  

 

 

    

 

 

 

Notes payable

   $ 146,068       $ 128,436   

Other liabilities

     11,012         19,436   
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 157,080       $ 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 $36,177,000 and $34,699,000 at September 30, 2016 and December 31, 2015, respectively. The long-term portion of notes payable, $136,693,000, consists of five notes with the following interest rates: 4.0%, one note with adjusted LIBOR plus LIBOR margin, one note at LIBOR, one note at LIBOR plus 2.5%, 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, one note will mature in 2021, and two notes will mature beyond five years. A sixth note with a balance of $9,375,000 matured and was paid off in October, 2016.

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):

 

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

Investment in unconsolidated affiliates

   $ 305,100       $ 305,100       $ 236,816       $ 236,816   

Mortgage loans

     525,403         525,403         212,228         212,228   

Accrued investment income

     1,971         1,971         661         661   

As of September 30, 2016, one real estate investment with a carrying value of $2,825,000 was 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

  September 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

    433      $ 1,335,100      $ 145,450        419      $ 1,200,600      $ 123,007   

Equity-indexed embedded derivative

 

Policyholders’ account balances

    56,789        1,223,700        298,499        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 September 30,     Nine months ended September 30,  
      2016     2015     2016     2015  

Equity-indexed options

  

Net investment income

   $ 15,040      $ (33,682   $ 17,190      $ (34,646

Equity-indexed embedded derivative

  

Interest credited to policyholders’ account balances

     (15,054     16,780        (21,227     19,997   

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

Net investment income is shown below (in thousands):

 

                                                                   
     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Bonds

   $ 137,322       $ 138,707       $ 416,301       $ 421,543   

Equity securities

     9,094         9,353         28,421         27,869   

Mortgage loans

     61,277         50,681         158,593         149,682   

Real estate

     2,395         13,555         950         11,949   

Options

     15,040         (33,682      17,190         (34,646

Other invested assets

     2,656         5,868         13,093         20,960   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 227,784       $ 184,482       $ 634,548       $ 597,357   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

                                                                   
     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Bonds

   $ 8,412       $ (34    $ 13,005       $ 10,063   

Equity securities

     17,599         7,669         28,529         44,579   

Mortgage loans

     (883      639         176         (94

Real estate

     (2,928      (739      (2,655      9,094   

Other invested assets

     (19      (7      (846      (44
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,181       $ 7,528       $ 38,209       $ 63,598   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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 September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Bonds

   $ (94    $ (286    $ (94    $ (286

Equity securities

     (5,820      (19,121      (12,847      (22,618
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (5,914    $ (19,407    $ (12,941    $ (22,904
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 9 – Fair Value of Financial Instruments

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

 

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

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 7,363,132       $ 7,805,540       $ 7,609,420       $ 7,755,553   

Fixed maturity securities, bonds available-for-sale

     5,925,900         5,925,900         5,483,916         5,483,916   

Equity securities

     1,546,801         1,546,801         1,514,979         1,514,979   

Equity-indexed options

     145,450         145,450         123,007         123,007   

Mortgage loans on real estate, net of allowance

     4,113,637         4,279,760         3,483,280         3,621,978   

Policy loans

     384,257         384,257         407,491         407,491   

Short-term investments

     405,463         405,463         460,612         460,612   

Separate account assets

     913,667         913,667         918,446         918,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,798,307       $ 21,406,838       $ 20,001,151       $ 20,285,982   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,830,282       $ 8,830,282       $ 8,787,376       $ 8,787,376   

Embedded derivative liability for equity-indexed contracts

     298,499         298,499         242,412         242,412   

Notes payable

     146,068         146,068         128,436         128,436   

Separate account liabilities

     913,667         913,667         918,446         918,446   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,188,516       $ 10,188,516       $ 10,076,670       $ 10,076,670   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

 

18


Table of Contents

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

 

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.

 

19


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 September 30, 2016 and December 31, 2015, the one year implied volatility used to estimate embedded derivative value was 16.0% 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 September 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

   $ 341,719       $ —         $ 341,719       $ —     

Foreign governments

     4,940         —           4,940         —     

Corporate debt securities

     7,193,120         —           7,143,851         49,269   

Residential mortgage-backed securities

     261,511         —           260,592         919   

Collateralized debt securities

     1,373         —           —           1,373   

Other debt securities

     2,877         —           —           2,877   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,805,540         —           7,751,102         54,438   
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     24,938         —           24,938         —     

U.S. states and political subdivisions

     1,011,964         —           1,009,489         2,475   

Foreign governments

     6,885         —           6,885         —     

Corporate debt securities

     4,853,941         —           4,839,805         14,136   

Residential mortgage-backed securities

     21,550         —           19,004         2,546   

Collateralized debt securities

     6,622         —           4,491         2,131   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,925,900         —           5,904,612         21,288   
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,520,353         1,520,353         —           —     

Preferred stock

     26,448         26,448         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,546,801         1,546,801         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     145,450         —           —           145,450   

Mortgage loans on real estate

     4,279,760         —           4,279,760         —     

Policy loans

     384,257         —           —           384,257   

Short-term investments

     405,463         —           405,463         —     

Separate account assets

     913,667         —           913,667         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 21,406,838       $ 1,546,801       $ 19,254,604       $ 605,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,830,282       $ —         $ —         $ 8,830,282   

Embedded derivative liability for equity-indexed contracts

     298,499         —           —           298,499   

Notes payable

     146,068         —           —           146,068   

Separate account liabilities

     913,667         —           913,667         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,188,516       $ —         $ 913,667       $ 9,274,849   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

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

 

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

Beginning balance, 2016

  $ 21,666      $ 134,575      $ 278,570      $ 20,130      $ 123,007      $ 242,412   

Total realized and unrealized investment gains included in other comprehensive income

    128        —          —          639        —          —     

Net fair value change included in realized losses

    (2     —          —          (1     —          —     

Net gain for derivatives included in net investment income

    —          14,716        —          —          16,866        —     

Net change included in interest credited

    —          —          15,054        —          —          21,227   

Purchases, sales and settlements or maturities

           

Purchases

    —          7,786        —          —          20,257        —     

Sales

    —          —          —          —          —          —     

Settlements or maturities

    —          (11,627     —          (389     (14,680     —     

Premiums less benefits

    —          —          4,875        —          —          34,860   

Gross transfers into Level 3

    —          —          —          1,413        —          —     

Gross transfers out of Level 3

    (504     —          —          (504     —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance September 30, 2016

  $ 21,288      $ 145,450      $ 298,499      $ 21,288      $ 145,450      $ 298,499   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2015

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

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

    150        —          —          (18     —          —     

Net fair value change included in realized gains (losses)

    —          —          —          —          —          —     

Net loss for derivatives

        —              —     

included in net investment income

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

Net change included in interest credited

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

Purchases, sales and settlements or maturities

           

Purchases

    120        5,725        —          —          15,313        —     

Sales

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

Settlements or maturities

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

Premiums less benefits

    —          —          15,255        —          —          19,112   

Gross transfers into Level 3

    —          —          —          3,398        —          —     

Gross transfers out of Level 3

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance September 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $34,146,000 relating to assets still held at September 30, 2016 and unrealized losses of $51,875,000 at September 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. The 2016 and 2015 transfers out of Level 3 were securities being priced by the third-party service at the end of the period, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2.

 

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Table of Contents

Note 10 – Deferred Policy Acquisition Costs

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

 

                                                                                    
                 Accident     Property        
     Life     Annuity     & Health     & Casualty     Total  

Beginning balance, 2016

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     80,025        59,750        8,149        198,004        345,928   

Amortization

     (61,273     (52,096     (11,042     (194,809     (319,220

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

     (16,976     (53,450     —          —          (70,426
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     1,776        (45,796     (2,893     3,195        (43,718
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2016

   $ 757,799      $ 365,410      $ 41,497      $ 116,245      $ 1,280,951   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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 incurred but not reported (“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, offset by anticipated salvage and subrogation. The effects of the changes are included in the consolidated results of operations in the period in which the changes occur.

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

 

                                 
     Nine months ended September 30,  
     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

     804,177         705,988   

Prior years

     (26,632      (7,835
  

 

 

    

 

 

 

Total incurred claims

     777,545         698,153   
  

 

 

    

 

 

 

Paid claims related to

     

Current

     472,413         414,287   

Prior years

     271,701         284,732   
  

 

 

    

 

 

 

Total paid claims

     744,114         699,019   
  

 

 

    

 

 

 

Net balance

     920,396         885,622   

Plus reinsurance recoverables

     247,998         215,464   
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,168,394       $ 1,101,086   
  

 

 

    

 

 

 

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. During the first nine months of 2016, estimates for ultimate incurred claims attributable to insured events of prior years decreased by approximately $26,632,000 and $7,835,000 during the same period in 2015. This was a reflection of lower-than-anticipated losses in the multi-peril line of business in 2016 and lower-than-anticipated losses in the workers compensation, commercial auto and personal auto liability lines of business in 2015.

 

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Note 12 – Federal Income Taxes

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

 

                                                                                                                                       
     Three months ended September 30,     Nine months ended September 30,  
     2016     2015     2016     2015  
     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  

Income tax on pre-tax income

   $ 29,488        35.0   $ 22,050        35.0   $ 52,771        35.0   $ 91,284        35.0

Tax-exempt investment income

     (1,980     (2.4     (1,863     (3.0     (5,926     (3.9     (5,688     (2.2

Deferred tax adjustment

     —          —          —          —          (10,508     (7.0     —          —     

Dividend exclusion

     (1,917     (2.3     (1,841     (2.9     (6,143     (4.1     (5,788     (2.2

Miscellaneous tax credits, net

     (2,430     (2.9     (2,256     (3.6     (7,546     (5.0     (6,728     (2.6

Low income housing tax credit expense

     1,294        1.5        1,307        2.1        3,883        2.6        3,792        1.5   

Other items, net

     (1,907     (2.3     737        1.2        (765     (0.5     2,162        0.8   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for federal income tax before interest expense

     22,548        26.6        18,134        28.8        25,766        17.1        79,034        30.3   

Interest expense

     42        —          —          —          2,644        1.8        —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 22,590        26.6   $ 18,134        28.8   $ 28,410        18.9   $ 79,034        30.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

American National made income tax payments of $35,458,000 and $52,106,000 during the nine months ended September 30, 2016 and 2015, respectively. During 2016, the Company recognized a $10,508,000 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 September 30, 2016 and 2015. There are no ordinary loss tax carryforwards that will expire by December 31, 2016.

American National’s federal income tax returns for years 2013 to 2015 and years 2006 to 2009 are subject to examination by the Internal Revenue Service. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld. No provision for penalties was established; however, management has accrued interest in the amount of $2.6 million, net of tax, in the first quarter of 2016 relating to a dispute with the Internal Revenue Service. Management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

 

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Note 13 – Accumulated Other Comprehensive Income

The components of and changes in the accumulated other comprehensive income (“AOCI”), and the related tax effects, are shown below (in thousands):

 

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

Beginning balance, 2016

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

Amounts reclassified from AOCI (net of tax benefit $7,078 and expense $3,438)

    (13,145     6,384        —          (6,761

Unrealized holding gains arising during the period (net of tax expense $120,365)

    223,535        —          —          223,535   

Unrealized adjustment to DAC (net of tax benefit $24,859)

    (45,567     —          —          (45,567

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $4,715)

    (8,757     —          —          (8,757

Foreign currency adjustment (net of tax benefit $361)

    —          —          (671     (671
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2016

  $ 609,500      $ (91,505   $ (3,596   $ 514,399   
 

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2015

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

Amounts reclassified from AOCI (net of tax benefit $8,221 and expense $2,449)

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

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

    (125,888     —          —          (125,888

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

    19,259        —          —          19,259   

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

    4,694        —          —          4,694   

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

    —          —          (2,087     (2,087
 

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at September 30, 2015

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

 

 

   

 

 

   

 

 

   

 

 

 

Note 14 – Stockholders’ Equity and Noncontrolling Interests

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

 

                                 
     September 30, 2016      December 31, 2015  

Common stock

     

Shares issued

     30,832,449         30,832,449   

Treasury shares

     (3,917,933      (3,937,993
  

 

 

    

 

 

 

Outstanding shares

     26,914,516         26,894,456   

Restricted shares

     (76,000      (76,000
  

 

 

    

 

 

 

Unrestricted outstanding shares

     26,838,516         26,818,456   
  

 

 

    

 

 

 

Stock-based compensation

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

 

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

 

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

 

                                                                                                     
     SAR      RS Shares      RS Units  
     Shares     Weighted-Average
Grant Date

Fair Value
     Shares      Weighted-Average
Grant Date

Fair Value
     Units     Weighted-Average
Grant Date

Fair Value
 

Outstanding at December 31, 2015

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

Granted

     —          —           —           —           36,849        103.58   

Exercised

     (7,071     111.24         —           —           (66,581     100.06   

Forfeited

     —          —           —           —           (182     105.75   

Expired

     (16,564     116.88         —           —           —          —     
  

 

 

      

 

 

       

 

 

   

Outstanding at September 30, 2016

     14,457      $ 115.15         76,000       $ 110.73         105,811      $ 105.98   
  

 

 

      

 

 

       

 

 

   

 

                                                  
     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     1.20         3.04         1.76   

Exercisable shares

     14,457         N/A         N/A   

Weighted-average exercise price

   $ 115.15       $ 110.73       $ 105.98   

Weighted-average exercise price exercisable shares

     115.15         N/A         N/A   

Compensation expense (credit)

        

Three months ended September 30, 2016

   $ 98,000       $ 212,000       $ 1,297,000   

Three months ended September 30, 2015

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

Nine months ended September 30, 2016

     135,000         631,000         5,744,000   

Nine months ended September 30, 2015

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

Fair value of liability award

        

September 30, 2016

   $ 170,000         N/A       $ 22,465,000   

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, death or disability 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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Table of Contents

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 September 30,     Nine months ended September 30,  
    2016     2015     2016     2015  

Weighted average shares outstanding

    26,908,032        26,899,683        26,908,619        26,865,359   

Incremental shares from RS awards and RSUs

    59,299        63,952        57,768        80,027   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total shares for diluted calculations

    26,967,331        26,963,635        26,966,387        26,945,386   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American National (in thousands)

  $ 59,289      $ 42,013      $ 121,230      $ 180,048   

Basic earnings per share

  $ 2.20      $ 1.56      $ 4.51      $ 6.70   

Diluted earnings per share

    2.20        1.56        4.50        6.68   

Statutory Capital and Surplus

Risk Based Capital (“RBC”) is a measure insurance regulators use to evaluate the capital adequacy of American National Insurance Company and its insurance subsidiaries. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level at least 200% of the authorized control level RBC are required to take certain actions. At September 30, 2016 and December 31, 2015, American National Insurance Company’s statutory capital and surplus was $2,905,490,000 and $2,925,935,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at September 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 $66,683,000 and $66,042,000 at September 30, 2016 and September 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):

 

                                 
     September 30, 2016      December 31, 2015  

Statutory capital and surplus

     

Life insurance entities

   $ 1,867,243       $ 1,900,939   

Property and casualty insurance entities

     1,047,488         1,033,942   

 

                                                                   
     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Statutory net income (loss)

           

Life insurance entities

   $ 22,226       $ 21,990       $ 45,335       $ 101,232   

Property and casualty insurance entities

     11,417         29,253         14,674         43,190   

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 September 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 $2,252,000 and $3,439,000 at September 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.

 

    Corporate and Other—consists of net investment income from investments not allocated to the insurance segments and revenues from non-insurance operations.

 

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Table of Contents

Note 15 – Segment Information – (Continued)

 

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 September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Life

   $ 9,547       $ 10,193       $ 22,832       $ 25,523   

Annuity

     13,567         4,433         49,001         38,668   

Health

     (6,487      (11,178      (2,702      1,725   

Property and Casualty

     663         33,980         2,878         42,758   

Corporate and Other

     30,432         9,232         39,501         78,752   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,722       $ 46,660       $ 111,510       $ 187,426   
  

 

 

    

 

 

    

 

 

    

 

 

 

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at September 30, 2016, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $977,825,000 of which $393,534,000 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 September 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, 2017.

 

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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 September 30, 2016, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $208,565,000.

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  
          Nine months ended September 30,      September 30,     December 31,  

Related Party

  

Financial Statement Line Impacted

   2016      2015      2016     2015  

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 1,060       $ 986       $ 4,122      $ 5,182   

Gal-Tex Hotel Corporation

   Net investment income      256         330         25        31   

Greer, Herz & Adams, LLP

   Other operating expenses      7,610         6,011         (435     (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 nine months ended September 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 September 30,           Nine months ended September 30,        
    2016     2015     Change     2016     2015     Change  

Premiums and other revenues

           

Premiums

  $ 507,337      $ 459,035      $ 48,302      $ 1,511,035      $ 1,334,081      $ 176,954   

Other policy revenues

    64,210        60,271        3,939        194,046        175,392        18,654   

Net investment income

    227,784        184,482        43,302        634,548        597,357        37,191   

Realized investments gains (losses), net

    16,267        (11,879     28,146        25,268        40,694        (15,426

Other income

    7,544        7,950        (406     23,663        26,408        (2,745
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

    823,142        699,859        123,283        2,388,560        2,173,932        214,628   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

           

Policyholder benefits

    179,005        148,807        30,198        546,432        418,512        127,920   

Claims incurred

    272,849        225,935        46,914        778,386        694,160        84,226   

Interest credited to policyholders’ account balances

    87,973        57,509        30,464        250,401        202,477        47,924   

Commissions for acquiring and servicing policies

    122,382        111,618        10,764        350,211        308,290        41,921   

Other operating expenses

    118,755        121,498        (2,743     378,328        368,159        10,169   

Change in deferred policy acquisition costs (1)

    (5,544     (12,168     6,624        (26,708     (5,092     (21,616
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    775,420        653,199        122,221        2,277,050        1,986,506        290,544   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

  $ 47,722      $ 46,660      $ 1,062      $ 111,510      $ 187,426      $ (75,916
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 amortizedand represents an increase to expenses in the period indicated.

Consolidated earnings remained relatively constant during the three months ended September 30, 2016 compared to 2015. Consolidated earnings decreased during the nine months ended September 30, 2016 compared to 2015 primarily due to a decrease in property and casualty earnings impacted by an increase in catastrophe losses, and lower realized capital gains attributable to a decrease in sales of equity securities.

 

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Life

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

 

                                                                                                     
    Three months ended September 30,           Nine months ended September 30,        
    2016     2015     Change     2016     2015     Change  

Premiums and other revenues

           

Premiums

  $ 83,521      $ 78,397      $ 5,124      $ 235,691      $ 225,550      $ 10,141   

Other policy revenues

    61,445        57,127        4,318        185,632        165,727        19,905   

Net investment income

    59,055        54,904        4,151        169,299        168,890        409   

Other income

    491        189        302        1,561        1,219        342   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

    204,512        190,617        13,895        592,183        561,386        30,797   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

           

Policyholder benefits

    103,873        94,087        9,786        296,398        273,275        23,123   

Interest credited to policyholders’ account balances

    13,822        12,851        971        47,377        42,751        4,626   

Commissions for acquiring and servicing policies

    36,154        30,297        5,857        97,137        90,145        6,992   

Other operating expenses

    45,362        48,694        (3,332     147,191        150,262        (3,071

Change in deferred policy acquisition costs (1)

    (4,246     (5,505     1,259        (18,752     (20,570     1,818   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    194,965        180,424        14,541        569,351        535,863        33,488   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

  $ 9,547      $ 10,193      $ (646   $ 22,832      $ 25,523      $ (2,691
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 remained relatively constant during the three months ended September 30, 2016 compared to 2015. Earnings decreased during the nine months ended September 30, 2016 compared to 2015 primarily due to lower returns on invested assets coupled with the increase in interest credited to policyholders due to in-force policies with guaranteed crediting rates.

Premiums and other revenues

Premiums, as shown in the table on the previous page, increased during the three and nine months ended September 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 nine months ended September 30, 2016 compared to 2015 is attributable to an increase in universal life policies in-force.

Life insurance sales

The following table presents life insurance sales as measured by annualized premium, a non-GAAP measure used by the insurance industry, which allows a comparison of new policies sold by an insurance company during the period (in thousands):

 

                                                                                                     
     Three months ended September 30,            Nine months ended September 30,         
     2016      2015      Change     2016      2015      Change  

Traditional Life

   $ 12,551       $ 13,410       $ (859   $ 39,864       $ 41,818       $ (1,954

Universal Life

     5,380         3,506         1,874        14,345         10,439         3,906   

Indexed UL

     5,721         5,191         530        17,310         16,352         958   

Variable UL

     —           6         (6     24         15         9   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Recurring

   $ 23,652       $ 22,113       $ 1,539      $ 71,543       $ 68,624       $ 2,919   
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Single and excess

   $ 515       $ 633       $ (118   $ 1,470       $ 1,546       $ (76

Credit life

     1,179         1,064         115        3,224         3,106         118   

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 nine months ended September 30, 2016 compared to 2015. Universal life sales were the main driver of the increase.

Benefits, losses and expenses

Policyholder benefits increased during the three and nine months ended September 30, 2016 compared to 2015 primarily due to universal life claims with higher face amounts on a closed block of older aged policyholders.

Commissions increased during the three and nine months ended September 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 September 30,           Nine months ended September 30,        
     2016     2015     Change     2016     2015     Change  

Acquisition cost capitalized

   $ 25,561      $ 27,936      $ (2,375   $ 80,025      $ 81,568      $ (1,543

Amortization of DAC

     (21,315     (22,431     1,116        (61,273     (60,998     (275
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 4,246      $ 5,505      $ (1,259   $ 18,752      $ 20,570      $ (1,818
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Policy in-force information

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

 

                                                  
     September 30,      December 31,         
     2016      2015      Change  

Life insurance in-force

        

Traditional life

   $ 66,531,651       $ 63,336,601       $ 3,195,050   

Interest-sensitive life

     27,566,967         26,858,051         708,916   
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 94,098,618       $ 90,194,652       $ 3,903,966   
  

 

 

    

 

 

    

 

 

 

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

 

                                                  
     September 30,
2016
     December 31,
2015
     Change  

Number of policies in-force

        

Traditional life

     1,843,204         1,890,600         (47,396

Interest-sensitive life

     219,757         212,851         6,906   
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,062,961         2,103,451         (40,490 ) 
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the nine months ended September 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 September 30,           Nine months ended September 30,        
    2016     2015     Change     2016     2015     Change  

Premiums and other revenues

           

Premiums

  $ 61,279      $ 43,514      $ 17,765      $ 217,517      $ 110,045      $ 107,472   

Other policy revenues

    2,765        3,144        (379     8,414        9,665        (1,251

Net investment income

    128,764        84,036        44,728        369,300        316,903        52,397   

Other income

    647        1,036        (389     2,409        2,918        (509
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

    193,455        131,730        61,725        597,640        439,531        158,109   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

           

Policyholder benefits

    75,132        54,720        20,412        250,034        145,237        104,797   

Interest credited to policyholders’ account balances

    74,151        44,658        29,493        203,024        159,726        43,298   

Commissions for acquiring and servicing policies

    19,807        20,918        (1,111     63,078        41,372        21,706   

Other operating expenses