10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2018

or

 

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

Commission File No. 001- 34280

 

 

 

LOGO

American National Insurance Company

(Exact name of registrant as specified in its charter)

 

 

 

Texas   74-0484030

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification No.)

One Moody Plaza

Galveston, Texas 77550-7999

(Address of principal executive offices) (Zip Code)

(409) 763-4661

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☑  Yes    ☐  No

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

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

 

Large accelerated filer     Smaller reporting company  
Non-accelerated filer     Accelerated filer  
Emerging growth company      

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

As of May 01, 2018, there were 26,885,449 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION   

ITEM 1.

  FINANCIAL STATEMENTS (Unaudited):   
  Consolidated Statements of Financial Position as of March 31, 2018 and December 31, 2017      3  
  Consolidated Statements of Operations for the three months ended March 31, 2018 and 2017      4  
  Consolidated Statements of Comprehensive Income (Loss) for the three months ended March 31, 2018 and 2017      5  
  Consolidated Statements of Changes in Equity for the three months ended March 31, 2018 and 2017      5  
  Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017      6  
  Notes to the Unaudited Consolidated Financial Statements      7  

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      36  

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      54  

ITEM 4.

 

CONTROLS AND PROCEDURES

     55  
 

PART II – OTHER INFORMATION

  

ITEM 1.

  LEGAL PROCEEDINGS      55  

ITEM 1A.

  RISK FACTORS      55  

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      55  

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      55  

ITEM 4.

  MINE SAFETY DISCLOSURES      55  

ITEM 5.

  OTHER INFORMATION      55  

ITEM 6.

  EXHIBIT INDEX      56  

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited and in thousands, except share data)

 

     March 31,
2018
    December 31,
2017
 

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost (Fair value $7,963,724 and $7,774,353)

   $ 7,915,973     $ 7,552,959  

Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $6,100,771 and $5,957,901)

     6,145,010       6,145,308  

Equity securities, at fair value (Cost $776,740 and $757,583)

     1,770,753       1,784,226  

Mortgage loans on real estate, net of allowance

     4,920,041       4,749,999  

Policy loans

     374,930       377,103  

Investment real estate, net of accumulated depreciation of $264,345 and $260,904

     536,699       532,346  

Short-term investments

     284,456       658,765  

Other invested assets

     82,722       80,165  
  

 

 

   

 

 

 

Total investments

     22,030,584       21,880,871  
  

 

 

   

 

 

 

Cash and cash equivalents

     329,036       375,837  

Investments in unconsolidated affiliates

     493,191       484,207  

Accrued investment income

     193,776       187,670  

Reinsurance recoverables

     412,805       418,589  

Prepaid reinsurance premiums

     61,993       63,625  

Premiums due and other receivables

     329,592       314,345  

Deferred policy acquisition costs

     1,410,864       1,373,844  

Property and equipment, net of accumulated depreciation of $223,034 and $217,076

     114,062       115,818  

Current tax receivable

     6,949       44,170  

Other assets

     141,420       158,024  

Separate account assets

     939,605       969,764  
  

 

 

   

 

 

 

Total assets

   $ 26,463,877     $ 26,386,764  
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 3,002,178     $ 2,997,353  

Annuity

     1,435,323       1,400,150  

Accident and health

     55,940       57,104  

Policyholders’ account balances

     12,238,653       12,060,045  

Policy and contract claims

     1,375,793       1,390,561  

Unearned premium reserve

     898,117       875,294  

Other policyholder funds

     325,348       334,501  

Liability for retirement benefits

     111,028       114,538  

Notes payable

     137,389       137,458  

Deferred tax liabilities, net

     294,071       316,370  

Other liabilities

     428,922       477,855  

Separate account liabilities

     939,605       969,764  
  

 

 

   

 

 

 

Total liabilities

     21,242,367       21,130,993  
  

 

 

   

 

 

 

EQUITY

    

American National stockholders’ equity:

    

Common stock, $1.00 par value,—Authorized 50,000,000,

    

Issued 30,832,449 and 30,832,449

    

Outstanding 26,938,341 and 26,931,884 shares

     30,832       30,832  

Additional paid-in capital

     20,069       19,193  

Accumulated other comprehensive income (loss)

     (86,070     642,216  

Retained earnings

     5,350,129       4,656,134  

Treasury stock, at cost

     (101,546     (101,616
  

 

 

   

 

 

 

Total American National stockholders’ equity

     5,213,414       5,246,759  

Noncontrolling interest

     8,096       9,012  
  

 

 

   

 

 

 

Total equity

     5,221,510       5,255,771  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 26,463,877     $ 26,386,764  
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

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

 

     Three months ended March 31,  
     2018     2017  

PREMIUMS AND OTHER REVENUE

    

Premiums

    

Life

   $ 81,376     $ 77,474  

Annuity

     70,616       29,809  

Accident and health

     41,015       37,039  

Property and casualty

     351,973       327,450  

Other policy revenues

     71,339       63,452  

Net investment income

     176,039       228,503  

Net realized investment gains

     2,099       14,008  

Other-than-temporary impairments

     (1,595     (6,783

Other income

     10,513       8,845  
  

 

 

   

 

 

 

Total premiums and other revenues

     803,375       779,797  
  

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

    

Policyholder benefits

    

Life

     98,546       101,166  

Annuity

     84,746       43,989  

Claims incurred

    

Accident and health

     28,140       24,380  

Property and casualty

     242,490       227,530  

Interest credited to policyholders’ account balances

     70,545       96,008  

Commissions for acquiring and servicing policies

     144,696       125,492  

Other operating expenses

     130,394       126,061  

Change in deferred policy acquisition costs

     (16,966     (9,487
  

 

 

   

 

 

 

Total benefits, losses and expenses

     782,591       735,139  
  

 

 

   

 

 

 

Income before federal income tax and other items

     20,784       44,658  
  

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

    

Current

     (2,105     (1,204

Deferred

     3,294       14,939  
  

 

 

   

 

 

 

Total provision for federal income taxes

     1,189       13,735  
  

 

 

   

 

 

 

Income after federal income tax

     19,595       30,923  
  

 

 

   

 

 

 

Equity in earnings (losses) of unconsolidated affiliates

     (545     9,500  

Other components of net periodic pension costs, net of tax

     (792     (1,232
  

 

 

   

 

 

 

Net income

     18,258       39,191  

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

     (519     (649
  

 

 

   

 

 

 

Net income attributable to American National

   $ 18,777     $ 39,840  
  

 

 

   

 

 

 

Amounts available to American National common stockholders

    

Earnings per share

    

Basic

   $ 0.70     $ 1.48  

Diluted

     0.70       1.48  

Cash dividends to common stockholders

     0.82       0.82  

Weighted average common shares outstanding

     26,889,151       26,899,648  

Weighted average common shares outstanding and dilutive potential common shares

     26,964,355       26,972,128  

See accompanying notes to the unaudited consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2018     2017  

Net income

   $ 18,258     $ 39,191  
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    

Change in net unrealized gains (losses) on securities

     (91,333     55,912  

Foreign currency transaction and translation adjustments

     (366     112  

Defined benefit pension plan adjustment

     789       1,534  
  

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (90,910     57,558  
  

 

 

   

 

 

 

Total comprehensive income (loss)

     (72,652     96,749  

Less: Comprehensive loss attributable to noncontrolling interest

     (519     (649
  

 

 

   

 

 

 

Total comprehensive income (loss) attributable to American National

   $ (72,133   $ 97,398  
  

 

 

   

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2018     2017  

Common Stock

    

Balance at beginning and end of the period

   $ 30,832     $ 30,832  
  

 

 

   

 

 

 

Additional Paid-In Capital

    

Balance as of January 1,

     19,193       16,406  

Reissuance of treasury shares

     675       1,379  

Amortization of restricted stock

     201       207  
  

 

 

   

 

 

 

Balance at end of the period

     20,069       17,992  
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income (Loss)

    

Balance as of January 1,

     642,216       455,899  

Cumulative effect of accounting change

     (637,376     —    

Other comprehensive income (loss)

     (90,910     57,558  
  

 

 

   

 

 

 

Balance at end of the period

     (86,070     513,457  
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     4,656,134       4,250,818  

Cumulative effect of accounting changes

     697,307       —    

Net income attributable to American National

     18,777       39,840  

Cash dividends to common stockholders

     (22,089     (22,080
  

 

 

   

 

 

 

Balance at end of the period

     5,350,129       4,268,578  
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (101,616     (101,777

Reissuance of treasury shares

     70       182  
  

 

 

   

 

 

 

Balance at end of the period

     (101,546     (101,595
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     9,012       9,317  

Contributions

     —         224  

Distributions

     (397     (246

Net loss attributable to noncontrolling interest

     (519     (649
  

 

 

   

 

 

 

Balance at end of the period

     8,096       8,646  
  

 

 

   

 

 

 

Total Equity

   $ 5,221,510     $ 4,737,910  
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2018     2017  

OPERATING ACTIVITIES

    

Net income

   $ 18,258     $ 39,191  

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

    

Net realized investment gains

     (2,099     (14,008

Other-than-temporary impairments

     1,595       6,783  

Accretion of premiums, discounts and loan origination fees

     (2,325     (2,661

Net capitalized interest on policy loans and mortgage loans

     (10,808     (8,368

Depreciation

     12,992       14,981  

Interest credited to policyholders’ account balances

     70,545       96,008  

Charges to policyholders’ account balances

     (71,339     (63,452

Deferred federal income tax expense

     3,294       14,939  

Equity in (earnings) losses of unconsolidated affiliates

     545       (9,500

Distributions from equity method investments

     245       410  

Changes in

    

Policyholder liabilities

     44,688       39,136  

Deferred policy acquisition costs

     (16,966     (9,487

Reinsurance recoverables

     5,784       29,163  

Premiums due and other receivables

     (15,247     (16,257

Prepaid reinsurance premiums

     1,632       239  

Accrued investment income

     (6,106     18  

Current tax receivable/payable

     37,221       (3,260

Liability for retirement benefits

     (2,511     (3,366

Fair value of option securities

     14,166       (23,034

Fair value of equity securities

     32,630       —    

Other, net

     3,882       22,604  
  

 

 

   

 

 

 

Net cash provided by operating activities

     120,076       110,079  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     152,587       203,445  

Available-for-sale securities

     136,481       118,007  

Investment real estate

     4,264       3,911  

Mortgage loans

     89,936       104,007  

Policy loans

     16,893       12,885  

Other invested assets

     20,527       14,404  

Disposals of property and equipment

     —         1,408  

Distributions from unconsolidated affiliates

     6,461       2,639  

Payment for the purchase/origination of

    

Held-to-maturity securities

     (529,876     (28,356

Available-for-sale securities

     (258,285     (138,132

Investment real estate

     (16,052     (7,829

Mortgage loans

     (247,555     (212,561

Policy loans

     (5,976     (6,201

Other invested assets

     (20,128     (7,577

Additions to property and equipment

     (4,232     (10,588

Contributions to unconsolidated affiliates

     (20,926     (14,748

Change in short-term investments

     374,309       (219,723

Change in collateral held for derivatives

     (17,093     14,062  

Other, net

     (5,058     15,649  
  

 

 

   

 

 

 

Net cash used in investing activities

     (323,723     (155,298
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     461,788       393,369  

Policyholders’ account withdrawals

     (282,386     (322,746

Change in notes payable

     (70     3,593  

Dividends to stockholders

     (22,089     (22,080

Payments to noncontrolling interest

     (397     (22
  

 

 

   

 

 

 

Net cash provided by financing activities

     156,846       52,114  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     (46,801     6,895  

Beginning of the period

     375,837       289,338  
  

 

 

   

 

 

 

End of the period

   $ 329,036     $ 296,233  
  

 

 

   

 

 

 

See accompanying notes to the unaudited consolidated financial statements.

 

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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 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, 2017. 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.

 

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Note 3 – Recently Issued Accounting Pronouncements

Future Adoption of New Accounting Standards— The FASB issued the following accounting guidance relevant to American National:

In February 2016, the FASB issued guidance that will require significant changes to the statement of financial position of lessees. With certain limited exceptions, lessees will need to recognize virtually all of their leases on the statement of financial position, by recording a right-of-use asset and a lease liability. Lessor accounting is less affected by the standard, but has been updated to align with certain changes in the lessee model and the new revenue recognition standard. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. We are currently quantifying the expected gross up of our balance sheet for a right of use asset and a lease liability as required. Since the majority of our lease activity is as a lessor, we do not expect the adoption of the standard 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 measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The guidance 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 standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company must develop appropriate models to measure expected credit losses to begin determining the impact of adopting the standard on our results of operations or financial position.

In February 2018, the FASB issued guidance that allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company plans to adopt the standard effective January 1, 2019. The guidance changes equity presentation only and will not have an impact on the Company’s consolidated financial position, results of operations, equity or cash flows.

Adoption of New Accounting Standards

In May 2014, the FASB issued guidance that superseded 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 Company’s revenues include premium, other policy revenue, net investment income, realized investment gains, and other income. Other income includes fee income which is recognized when obligations under the terms specified within a contract with a customer are either (1) satisfied at a point in time or (2) the progress of completion is measured over a period of time as the obligation is performed using the input method. The Company adopted the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The majority of our revenue sources are insurance related and not in the scope of the guidance. The adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the three months ended March 31, 2018.

 

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Note 3 – Recently Issued Accounting Pronouncements – (Continued)

Adoption of New Accounting Standards – (Continued)

In January 2016, the FASB issued guidance that changed certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance requires that equity investments, other than those accounted for under the equity method or those that result in consolidation of the investee, be measured at fair value and the changes in fair value are recognized through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance 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 statement of financial position. The Company adopted the standard on its required effective date of January 1, 2018 using a modified retrospective approach. Upon adoption, cumulative unrealized gains and losses on equity securities of $667.7 million, partially offset by participating policyholders’ interest related to unrealized gains and losses on equity securities of $30.4 million, net of tax were reclassified from accumulated other comprehensive income to retained earnings. Net investment income decreased $32.6 million from the change in unrealized gains and losses on equity securities for the three months ended March 31, 2018.

In October of 2016, the FASB issued guidance requiring an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Whereas, prior guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset was sold to an outside party. The Company adopted the standard on its required effective date of January 1, 2018 using a modified retrospective approach. Upon adoption, an other liability was released and retained earnings increased by $59.9 million. The adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows for the three months ended March 31, 2018.

In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit costs. The guidance requires the service cost component to be reported in the same line item as other compensation costs. All other components of net periodic pension cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. The Company adopted the standard on its required effective date of January 1, 2018 using a retrospective approach. Upon adoption, other components of net periodic pension costs of $1,232 net of tax for the three months ended March 31, 2017, were reclassified from other operating expenses. The guidance changed presentation only and did not have an impact on the Company’s consolidated financial position, results of operations, equity or cash flows. Since the Company’s defined benefit plans have been frozen, the components of net periodic benefit cost have not materially changed from year-end 2017.

 

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Note 4 – Investment in Securities

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

 

     March 31, 2018  
     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

   $ 269,946      $ 8,924      $ (204   $ 278,666  

Foreign governments

     3,999        523        —         4,522  

Corporate debt securities

     7,372,239        112,160        (78,867     7,405,532  

Residential mortgage-backed securities

     267,929        7,679        (2,517     273,091  

Collateralized debt securities

     597        22        —         619  

Other debt securities

     1,263        31        —         1,294  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     7,915,973        129,339        (81,588     7,963,724  
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     28,483        403        (274     28,612  

U.S. states and political subdivisions

     859,090        16,478        (3,856     871,712  

Foreign governments

     5,000        1,287        —         6,287  

Corporate debt securities

     5,173,405        83,455        (53,795     5,203,065  

Residential mortgage-backed securities

     31,708        390        (546     31,552  

Collateralized debt securities

     3,085        702        (5     3,782  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     6,100,771        102,715        (58,476     6,145,010  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     758,422        1,002,501        (11,545     1,749,378  

Preferred stock

     18,318        3,657        (600     21,375  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     776,740        1,006,158        (12,145     1,770,753  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 14,793,484      $ 1,238,212      $ (152,209   $ 15,879,487  
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2017  
     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

   $ 266,966      $ 12,466      $ (37   $ 279,395  

Foreign governments

     4,011        582        —         4,593  

Corporate debt securities

     7,032,464        217,883        (18,020     7,232,327  

Residential mortgage-backed securities

     246,803        9,702        (1,262     255,243  

Collateralized debt securities

     923        31        —         954  

Other debt securities

     1,792        49        —         1,841  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     7,552,959        240,713        (19,319     7,774,353  
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     27,569        475        (146     27,898  

U.S. states and political subdivisions

     866,250        31,621        (824     897,047  

Foreign governments

     5,000        1,460        —         6,460  

Corporate debt securities

     5,038,908        170,112        (16,093     5,192,927  

Residential mortgage-backed securities

     15,009        37        (329     14,717  

Collateralized debt securities

     3,171        651        (4     3,818  

Other debt securities

     1,994        447        —         2,441  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     5,957,901        204,803        (17,396     6,145,308  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     738,453        1,029,340        (7,166     1,760,627  

Preferred stock

     19,130        4,469        —         23,599  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     757,583        1,033,809        (7,166     1,784,226  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 14,268,443      $ 1,479,325      $ (43,881   $ 15,703,887  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

10


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2018  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 226,948      $ 229,707      $ 137,593      $ 139,037  

Due after one year through five years

     4,349,837        4,415,709        2,228,746        2,265,488  

Due after five years through ten years

     2,758,080        2,740,046        3,172,783        3,178,309  

Due after ten years

     581,108        578,262        561,649        562,176  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,915,973      $ 7,963,724      $ 6,100,771      $ 6,145,010  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three months ended March 31,  
     2018      2017  

Proceeds from sales of available-for-sale securities

   $ 47,181      $ 27,723  

Gross realized gains

     1,424        10,826  

Gross realized losses

     (555      (6

Gains and losses are determined using specific identification of the securities sold. During the three months ended March 31, 2018 and 2017, bonds with a carrying value of $34,850,000 and $15,000,000, respectively, were transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ credit worthiness became evident. A realized loss of $6,000,000 was recorded in 2017 on a bond that was transferred due to an other-than-temporary impairment.

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

 

     Three months ended March 31,  
     2018      2017  

Bonds available-for-sale

   $ (143,168    $ 36,075  

Adjustments for

     

Deferred policy acquisition costs

     20,054        (5,444

Participating policyholders’ interest

     6,953        (4,971

Deferred federal income tax benefit (expense)

     24,828        (8,290
  

 

 

    

 

 

 

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

   $ (91,333    $ 17,370  
  

 

 

    

 

 

 

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

 

     Three months ended March 31,  
     2018      2017  

Net gains (losses) on equity securities

   $ (31,575    $ 70,656  

Less: Net gains on equity securities sold

     (1,055      (11,360
  

 

 

    

 

 

 

Unrealized gains (losses) on equity securities

   $ (32,630    $ 59,296  
  

 

 

    

 

 

 

 

11


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2018  
     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

   $ (204   $ 40,410      $ —       $ —        $ (204   $ 40,410  

Corporate debt securities

     (68,999     2,869,097        (9,868     156,182        (78,867     3,025,279  

Residential mortgage-backed securities

     (1,430     104,506        (1,087     17,564        (2,517     122,070  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (70,633     3,014,013        (10,955     173,746        (81,588     3,187,759  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (271     15,456        (3     4,221        (274     19,677  

U.S. states and political subdivisions

     (2,455     183,318        (1,401     27,197        (3,856     210,515  

Corporate debt securities

     (41,341     1,895,863        (12,454     146,268        (53,795     2,042,131  

Residential mortgage-backed securities

     (405     27,023        (141     1,359        (546     28,382  

Collateralized debt securities

     (1     159        (4     123        (5     282  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (44,473     2,121,819        (14,003     179,168        (58,476     2,300,987  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (11,545     76,088        —         —          (11,545     76,088  

Preferred stock

     (600     5,000        —         —          (600     5,000  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (12,145     81,088        —         —          (12,145     81,088  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (127,251   $ 5,216,920      $ (24,958   $ 352,914      $ (152,209   $ 5,569,834  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 
     December 31, 2017  
     Less than 12 months      12 Months or more      Total  
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

              

U.S. states and political subdivisions

   $ (37   $ 1,937      $ —       $ —        $ (37   $ 1,937  

Corporate debt securities

     (8,444     951,425        (9,576     192,737        (18,020     1,144,162  

Residential mortgage-backed securities

     (325     49,283        (937     18,888        (1,262     68,171  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (8,806     1,002,645        (10,513     211,625        (19,319     1,214,270  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (141     20,352        (5     3,875        (146     24,227  

U.S. states and political subdivisions

     (160     27,669        (664     28,010        (824     55,679  

Corporate debt securities

     (6,657     559,710        (9,436     159,532        (16,093     719,242  

Residential mortgage-backed securities

     (193     12,419        (136     1,428        (329     13,847  

Collateralized debt securities

     —         —          (4     123        (4     123  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (7,151     620,150        (10,245     192,968        (17,396     813,118  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (7,166     60,391        —         —          (7,166     60,391  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (7,166     60,391        —         —          (7,166     60,391  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (23,123   $  1,683,186      $ (20,758   $  404,593      $ (43,881   $ 2,087,779  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

As of March 31, 2018, 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 more-likely-than-not that American National will not 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.

 

12


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

The following table identifies the total bonds distributed by credit quality rating (in thousands, except percentages):

 

     March 31, 2018     December 31, 2017  
     Amortized      Estimated      % of Fair     Amortized      Estimated      % of Fair  
     Cost      Fair Value      Value     Cost      Fair Value      Value  

AAA

   $ 631,251      $ 646,046        4.6   $ 638,039      $ 664,396        4.8

AA

     1,239,163        1,256,909        8.9       1,220,544        1,264,282        9.0  

A

     5,041,380        5,061,204        35.9       4,856,802        4,997,574        35.9  

BBB

     6,575,551        6,631,221        47.0       6,273,220        6,480,719        46.6  

BB and below

     529,399        513,354        3.6       522,255        512,690        3.7  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 14,016,744      $ 14,108,734        100.0   $ 13,510,860      $ 13,919,661        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Equity securities by market sector distribution are shown below:

 

     March 31, 2018     December 31, 2017  

Consumer goods

     20.1     20.2

Energy and utilities

     8.1       8.6  

Finance

     21.3       21.9  

Healthcare

     11.5       11.8  

Industrials

     9.6       9.5  

Information technology

     20.8       20.0  

Other

     8.6       8.0  
  

 

 

   

 

 

 

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 is as follows:

 

     March 31, 2018     December 31, 2017  

East North Central

     15.2     15.4

East South Central

     3.0       3.1  

Mountain

     15.2       14.0  

Pacific

     16.7       16.5  

South Atlantic

     13.5       14.1  

West South Central

     29.0       29.8  

Other

     7.4       7.1  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

For the three months ended March 31, 2018, American National foreclosed on two loans with recorded investments of $1,940,000 and $8,376,000. Three loans with a total recorded investment of $12,635,000 were in the process of foreclosure. For the year ended December 31, 2017, American National foreclosed on one loan with a recorded investment of $2,285,000, and four loans with a total recorded investment of $17,263,000 were in the process of foreclosure. American National did not sell any loans during the three months ended March 31, 2018 or during the year ended December 31, 2017.

 

13


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  
March 31, 2018    Past Due      Past Due      90 Days      Total      Current      Amount     Percent  

Industrial

   $ 28,822      $ —        $ —        $ 28,822      $ 778,680      $ 807,502       16.4  

Office

     7,509        5,708        6,432        19,649        1,806,365        1,826,014       37.0  

Retail

     —          —          —          —          759,257        759,257       15.4  

Other

     —          15,102        —          15,102        1,530,221        1,545,323       31.2  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 36,331      $ 20,810      $ 6,432      $ 63,573      $ 4,874,523      $ 4,938,096       100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (18,055  
                 

 

 

   

Total, net of allowance

                  $ 4,920,041    
                 

 

 

   

December 31, 2017

                   

Industrial

   $ 4,985      $ —        $ —        $ 4,985      $ 781,385      $ 786,370       16.5  

Office

     —          10,713        8,881        19,594        1,764,151        1,783,745       37.4  

Retail

     —          —          —          —          750,979        750,979       15.7  

Other

     —          —          —          —          1,447,771        1,447,771       30.4  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 4,985      $  10,713      $  8,881      $  24,579      $ 4,744,286      $ 4,768,865       100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (18,866  
                 

 

 

   

Total, net of allowance

                  $ 4,749,999    
                 

 

 

   

Total mortgage loans are calculated net of unamortized purchase discounts. There were no unamortized purchase discounts for the three months ended March 31, 2018 or during the year ended December 31, 2017. Total mortgage loans were also net of unamortized origination fees of $31,923,000 and $32,766,000 at March 31, 2018 and December 31, 2017, respectively. No unearned income is included in these amounts.

Allowance for Credit Losses

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Mortgage loans with temporary difficulties are not considered impaired when the borrower has the financial capacity to fund revenue shortfalls from the properties for the foreseeable future. Individual valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral. Loans not evaluated individually for collectability are segregated by property-type and location, and allowance factors are applied. These factors are developed 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, except number of loans):

 

     Collectively Evaluated for Impairment     Individually Impaired     Total  
     Number of
Loans
     Recorded
Investment
     Valuation
Allowance
    Number of
Loans
    Recorded
Investment
    Valuation
Allowance
    Number of
Loans
     Recorded
Investment
     Valuation
Allowance
 

Beginning balance, 2018

     451      $ 4,762,315        16,041       3     $ 6,550       2,825       454      $ 4,768,865      $ 18,866  

Change in allowance

     —          —          (302     —         —         —         —          —          (302

Net change in recorded investment

     6        171,171        —         (1     (1,940     (509     5        169,231        (509
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Ending balance at March 31, 2018

     457      $ 4,933,486      $ 15,739       2     $ 4,610     $ 2,316       459      $ 4,938,096      $ 18,055  
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

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 loans):

 

     Three months ended March 31,  
     2018      2017  
     Number of
loans
     Recorded
investment pre-

modification
     Recorded
investment post
modification
     Number of
loans
     Recorded
investment pre-

modification
     Recorded
investment post
modification
 

Other (hotel/motel)

     —        $ —        $ —          5      $ 24,801      $ 24,801  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     —        $ —        $ —          5      $ 24,801      $ 24,801  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There are no loans determined to be troubled debt restructurings for the three months from year end to March 31, 2018.

Note 6 – Real Estate and Other Investments

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

 

     March 31, 2018     December 31, 2017  

Industrial

     5.6     6.0

Office

     40.2       39.0  

Retail

     39.2       39.3  

Other

     15.0       15.7  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     March 31, 2018     December 31, 2017  

East North Central

     6.0     6.1

East South Central

     4.0       3.6  

Mountain

     13.0       13.2  

Pacific

     8.3       8.5  

South Atlantic

     15.3       14.0  

West South Central

     51.0       52.4  

Other

     2.4       2.2  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

15


Table of Contents

Note 6 – Real Estate and Other Investments – (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 2018 or 2017.

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

 

     March 31, 2018      December 31, 2017  

Investment real estate

   $ 146,533      $ 148,456  

Short-term investments

     500        501  

Cash and cash equivalents

     9,722        6,320  

Other receivables

     5,071        4,461  

Other assets

     13,628        15,920  
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 175,454      $ 175,658  
  

 

 

    

 

 

 

Notes payable

   $ 137,389      $ 137,458  

Other liabilities

     8,887        5,616  
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 146,276      $ 143,074  
  

 

 

    

 

 

 

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 $27,952,000 and $28,377,000 at March 31, 2018 and December 31,2017, respectively.

The total long-term notes payable of the consolidated VIE’s consists of the following (in thousands):

 

Interest rate

  

    Maturity    

   March 31, 2018      December 31, 2017  

LIBOR

   2020    $ 10,129      $ 9,702  

90 day LIBOR + 2.5%

   2021      40,342        40,124  

4% fixed

   2022      86,918        87,632  
     

 

 

    

 

 

 

        Total

      $ 137,389      $ 137,458  
     

 

 

    

 

 

 

 

16


Table of Contents

Note 6 – Real Estate and Other Investments – (Continued)

 

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 consent of all partners. The carrying amount and maximum exposure to loss relating to unconsolidated VIEs follows (in thousands):

 

     March 31, 2018      December 31, 2017  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 322,797      $ 322,797      $ 314,808      $ 314,808  

Mortgage loans

     557,195        557,195        493,014        493,014  

Accrued investment income

     2,128        2,128        1,817        1,817  

As of March 31, 2018, no real estate investments were classified as held for sale.

Note 7 – Derivative Instruments

American National purchases over-the-counter equity-indexed options as economic hedges against fluctuations in the equity markets to which equity-indexed products are exposed. 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):

 

          March 31, 2018      December 31, 2017  

Derivatives Not Designated

as Hedging Instruments

   Location in the Consolidated
Statements of Financial Position
   Number of
Instruments
     Notional
Amounts
     Estimated
Fair Value
     Number of
Instruments
     Notional
Amounts
     Estimated
Fair Value
 

Equity-indexed options

   Other invested assets      488      $ 2,086,850      $ 204,308        468      $ 1,885,600      $ 220,190  

Equity-indexed embedded derivative

   Policyholders’
account balances
     80,420        1,976,400        535,641        76,621        1,819,523        512,526  

 

Derivatives Not Designated

as Hedging Instruments

  

Location in the Consolidated

Statements of Operations

   Gains (Losses) Recognized in Income on Derivatives  
      Three months ended March 31,  
      2018     2017  

Equity-indexed options

  

Net investment income

   $ (14,145   $ 23,133  

Equity-indexed embedded derivative

  

Interest credited to policyholders’ account balances

     13,436       (25,127

 

17


Table of Contents

Note 7 – Derivative Instruments – (Continued)

 

The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by the counterparties. The Company has a policy of only dealing with counterparties we believe are credit worthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less collateral held. The Company maintains master netting agreements with its current active trading partners. As such, a right of offset has been applied to collateral that supports credit risk and has been recorded in the consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.

Information regarding the Company’s exposure to credit loss on the options it holds is presented below (in thousands):

 

          March 31, 2018  

Counterparty

  

Moody/S&P Rating

   Options
Fair Value
     Collateral
Held
     Collateral
Amounts used to
Offset Exposure
     Excess
Collateral
     Exposure Net
of Collateral
 

Barclays

   Baa2/BBB    $ 49,066      $ 49,443      $ 49,066      $ 377      $ —    

Goldman-Sachs

   A3/BBB+      927        1,030        927        103        —    

ING

   Baa1/A-      25,617        25,890        25,617        273        —    

JP Morgan

   A3/A-      190        —          —          —          190  

Morgan Stanley

   A3/BBB+      14,535        14,396        14,396        —          139  

NATIXIS*

   A2/A      38,140        36,980        36,980        —          1,160  

SunTrust

   Baa1/BBB+      36,763        34,040        34,040        —          2,723  

Wells Fargo

   A2/A-      39,070        37,310        37,310        —          1,760  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total       $ 204,308      $ 199,089      $ 198,336      $ 753      $ 5,972  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
          December 31, 2017  

Counterparty

  

Moody/S&P Rating

   Options
Fair Value
     Collateral
Held
     Collateral
Amounts used to
Offset Exposure
     Excess
Collateral
     Exposure Net
of Collateral
 

Barclays

   Baa2/BBB    $ 55,215      $ 56,883      $ 55,215      $ 1,668      $ —    

Goldman-Sachs

   A3/BBB+      956        780        780        —          176  

ING

   Baa1/A-      26,650        27,330        26,650        680        —    

JP Morgan

   A3/A-      189        —          —          —          189  

Morgan Stanley

   A3/BBB+      17,490        18,776        17,490        1,286        —    

NATIXIS*

   A2/A      37,550        33,860        33,860        —          3,690  

SunTrust

   Baa1/BBB+      37,266        36,560        36,560        —          706  

Wells Fargo

   A2/A      44,874        47,230        44,874        2,356        —    
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
Total       $ 220,190      $ 221,419      $ 215,429      $ 5,990      $ 4,761  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Includes collateral restrictions.

 

18


Table of Contents

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

Net investment income is shown below (in thousands):

 

     Three months ended March 31,  
     2018      2017  

Bonds

   $ 140,095      $ 134,350  

Dividends on equity securities

     9,440        8,732  

Net unrealized losses on equity securities

     (32,630      —    

Mortgage loans

     63,868        57,704  

Real estate

     4,283        (1,195

Options

     (14,145      23,133  

Other invested assets

     5,128        5,779  
  

 

 

    

 

 

 

Total

   $ 176,039      $ 228,503  
  

 

 

    

 

 

 

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

 

     Three months ended March 31,  
     2018      2017  

Bonds

   $ 667      $ 3,504  

Equity securities

     1,055        11,360  

Mortgage loans

     302        (1,626

Real estate

     83        788  

Other invested assets

     (8      (18
  

 

 

    

 

 

 

Total

   $ 2,099      $ 14,008  
  

 

 

    

 

 

 

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

 

     Three months ended March 31,  
     2018      2017  

Bonds

   $ —        $ (6,000

Equity securities

     (1,595      (783
  

 

 

    

 

 

 

Total

   $ (1,595    $ (6,783
  

 

 

    

 

 

 

 

19


Table of Contents

Note 9 – Fair Value of Financial Instruments

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

 

     March 31, 2018      December 31, 2017  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 7,915,973      $ 7,963,724      $ 7,552,959      $ 7,774,353  

Fixed maturity securities, bonds available-for-sale

     6,145,010        6,145,010        6,145,308        6,145,308  

Equity securities

     1,770,753        1,770,753        1,784,226        1,784,226  

Equity-indexed options

     204,308        204,308        220,190        220,190  

Mortgage loans on real estate, net of allowance

     4,920,041        4,961,466        4,749,999        4,811,006  

Policy loans

     374,930        374,930        377,103        377,103  

Short-term investments

     284,456        284,456        658,765        658,765  

Separate account assets

     939,605        939,605        969,764        969,764  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 22,555,076      $ 22,644,252      $ 22,458,314      $ 22,740,715  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,844,880      $ 9,844,880      $ 8,990,771      $ 8,990,771  

Embedded derivative liability for equity-indexed contracts

     535,641        535,641        512,526        512,526  

Notes payable

     137,389        137,389        137,458        137,458  

Separate account liabilities

     939,605        939,605        969,764        969,764  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 11,457,515      $ 11,457,515      $ 10,610,519      $ 10,610,519  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

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

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

 

20


Table of Contents

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

 

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

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

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

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

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

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

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

 

21


Table of Contents

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

 

Embedded Derivative— The amounts reported within policyholder contract deposits include equity linked interest crediting rates based on the S&P 500 index within index annuities and indexed life. The following unobservable inputs are used for measuring the fair value of the embedded derivatives associated with the policyholder contract liabilities:

 

    Lapse rate assumptions are determined by company experience. Lapse rates are generally assumed to be lower during a contract’s surrender charge period and then higher once the surrender charge period has ended. Decreases to the assumed lapse rates generally increase the fair value of the liability as more policyholders persist to collect the crediting interest pertaining to the indexed product. Increases to the lapse rate assumption will have the inverse effect decreasing the fair value.

 

    Mortality rate assumptions vary by age and by gender based on company and industry experience. Decreases to the assumed mortality rates increase the fair value of the liabilities as more policyholders earn crediting interest. Increases to the assumed mortality rates decrease the fair value as higher decrements reduce the potential for future interest credits.

 

    Equity volatility assumptions begin with current market volatilities and grow to long-term values. Increases to the assumed volatility will increase the fair value of liabilities, as future projections will produce higher increases in the linked index. At March 31, 2018 and December 31, 2017, the one year implied volatility used to estimate embedded derivative value was 18.0% and 13.7%, respectively.

Fair values of indexed life and annuity liabilities are calculated using the discounted cash flow technique. Shown below are the significant unobservable inputs used to calculate the Level 3 fair value of the embedded derivatives within policyholder contract deposits (in millions, except range percentages):

 

     Fair Value              
     March 31, 2018      December 31, 2017     

Unobservable Input

   Range  

Indexed Annuities

   $ 524.7      $ 498.3      Lapse Rate      1-66%  
         Mortality Multiplier      90-100%  
         Equity Volatility      7-30%  

Indexed Life

     10.9        14.2      Equity Volatility      7-30%  

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, 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 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.

 

22


Table of Contents

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

 

Quantitative Disclosures

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

 

     Fair Value Measurement as of March 31, 2018  
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 278,666      $ —        $ 278,666      $ —    

Foreign governments

     4,522        —          4,522        —    

Corporate debt securities

     7,405,532        —          7,405,532        —    

Residential mortgage-backed securities

     273,091        —          273,091        —    

Collateralized debt securities

     619        —          619        —    

Other debt securities

     1,294        —          1,294        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,963,724        —          7,963,724        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     28,612        —          28,612        —    

U.S. states and political subdivisions

     871,712        —          871,712        —    

Foreign governments

     6,287        —          6,287        —    

Corporate debt securities

     5,203,065        —          5,203,065        —    

Residential mortgage-backed securities

     31,552        —          31,552        —    

Collateralized debt securities

     3,782        —          3,782        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     6,145,010        —          6,145,010        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,749,378        1,749,260        —          118  

Preferred stock

     21,375        21,375        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,770,753        1,770,635        —          118  
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     204,308        —          —          204,308  

Mortgage loans on real estate

     4,961,466        —          4,961,466        —    

Policy loans

     374,930        —          —          374,930  

Short-term investments

     284,456        —          284,456        —    

Separate account assets

     939,605        —          939,605        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 22,644,252      $ 1,770,635      $ 20,294,261      $ 579,356  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 9,844,880      $ —        $ —        $ 9,844,880  

Embedded derivative liability for equity-indexed contracts

     535,641        —          —          535,641  

Notes payable

     137,389        —          —          137,389  

Separate account liabilities

     939,605        —          939,605        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 11,457,515      $ —        $ 939,605      $ 10,517,910  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

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

 

     Fair Value Measurement as of December 31, 2017  
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 279,395      $ —        $ 276,450      $ 2,945  

Foreign governments

     4,593        —          4,593        —    

Corporate debt securities

     7,232,327        —          7,232,327        —    

Residential mortgage-backed securities

     255,243        —          255,243        —    

Collateralized debt securities

     954        —          954        —    

Other debt securities

     1,841        —          1,841        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,774,353        —          7,771,408        2,945  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     27,898        —          27,898        —    

U.S. states and political subdivisions

     897,047        —          897,047        —    

Foreign governments

     6,460        —          6,460        —    

Corporate debt securities

     5,192,927        —          5,192,927        —    

Residential mortgage-backed securities

     14,717        —          14,717        —    

Collateralized debt securities

     3,818        —          3,818        —    

Other debt securities

     2,441        —          2,441        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     6,145,308        —          6,145,308        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,760,627        1,760,499        —          128  

Preferred stock

     23,599        23,599        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,784,226        1,784,098        —          128  
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     220,190        —          —          220,190  

Mortgage loans on real estate

     4,811,006        —          4,811,006        —    

Policy loans

     377,103        —          —          377,103  

Short-term investments

     658,765        —          658,765        —    

Separate account assets

     969,764        —          969,764        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 22,740,715      $ 1,784,098      $ 20,356,251      $ 600,366  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,990,771      $ —        $ —        $ 8,990,771  

Embedded derivative liability for equity-indexed contracts

     512,526        —          —          512,526  

Notes payable

     137,458        —          —          137,458  

Separate account liabilities

     969,764        —          969,764        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,610,519      $ —        $ 969,764      $ 9,640,755  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

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

 

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

Beginning balance, 2018

   $ —        $ 220,190      $ 512,526  

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

     —          —          —    

Net fair value change included in realized gains (losses)

     —          —          —    

Net loss for derivatives included in net investment income

     —          (14,145      —    

Net change included in interest credited

     —          —          (13,436

Purchases, sales and settlements or maturities

        

Purchases

     —          16,928        —    

Sales

     —          —          —    

Settlements or maturities

     —          (18,665      —    

Premiums less benefits

     —          —          36,551  

Gross transfers into Level 3

     —          —          —    

Gross transfers out of Level 3

     —          —          —    
  

 

 

    

 

 

    

 

 

 

Ending balance at March 31, 2018

   $ —        $ 204,308      $ 535,641  
  

 

 

    

 

 

    

 

 

 

Beginning balance, 2017

   $ 14,264      $ 156,479      $ 314,330  

Total realized and unrealized investment losses included in other comprehensive income

     (4,467      —          —    

Net fair value change included in realized gains (losses)

     —          —          —    

Net gain for derivatives included in net investment income

     —          23,058        —    

Net change included in interest credited

     —          —          25,127  

Purchases, sales and settlements or maturities

        

Purchases

     —          7,552        —    

Sales

     (1,957      —          —    

Settlements or maturities

     (3,010      (12,831      —    

Premiums less benefits

     —          —          7,177  

Carry value transfers in

     15,000        —       

Gross transfers into Level 3

     382        —          —    

Gross transfers out of Level 3

     (2,883      —          —    
  

 

 

    

 

 

    

 

 

 

Ending balance at March 31, 2017

   $ 17,329      $ 174,258      $ 346,634  
  

 

 

    

 

 

    

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized losses of $24,627,000 and gains of $17,028,000, relating to assets still held at March 31, 2018, and 2017, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies during the periods presented. The transfers into Level 3 during the three months ended March 31, 2017 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. Unless information is obtained from the brokers that indicate observable inputs were used in their pricing, there are not enough observable inputs to enable American National to classify the securities priced by the brokers as other than Level 3. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The inputs used by the brokers include recent transactions in the security, similar bonds with same name, ratings, maturity and structure, external dealer quotes in the security, Bloomberg evaluated pricing and prior months pricing. None of them are observable to American National as of March 31, 2018. The transfers out of Level 3 during the three months ended March 31, 2017 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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Note 10 – Deferred Policy Acquisition Costs

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

 

     Life     Annuity     Accident
& Health
    Property &
Casualty
    Total  

Beginning balance, 2018

   $ 791,276     $ 426,497     $ 36,806     $ 119,265     $ 1,373,844  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     32,624       29,517       2,812       76,640       141,593  

Amortization

     (26,181     (20,644     (3,900     (73,902     (124,627

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

     13,556       6,498       —         —         20,054  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     19,999       15,371       (1,088     2,738       37,020  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2018

   $ 811,275     $ 441,868     $ 35,718     $ 122,003     $ 1,410,864  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 incurred but not reported (“IBNR”) claims and claims that have been reported but not settled. 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, less 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. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. There have been no significant changes in methodologies or assumptions used to calculate the liability for unpaid claims and claim adjustment expenses.

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

 

     Three months ended March 31,  
     2018      2017  

Unpaid claims balance, beginning

   $ 1,199,233      $ 1,140,723  

Less reinsurance recoverables

     237,439        216,903  
  

 

 

    

 

 

 

Net beginning balance

     961,794        923,820  
  

 

 

    

 

 

 

Incurred related to

     

Current

     266,225        282,862  

Prior years

     (10,548      (29,054
  

 

 

    

 

 

 

Total incurred claims

     255,677        253,808  
  

 

 

    

 

 

 

Paid claims related to

     

Current

     101,617        107,669  

Prior years

     141,147        127,397  
  

 

 

    

 

 

 

Total paid claims

     242,764        235,066  
  

 

 

    

 

 

 

Net balance

     974,707        942,562  

Plus reinsurance recoverables

     221,734        195,836  
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,196,441      $ 1,138,398  
  

 

 

    

 

 

 

The net and gross reserve calculations have shown favorable development as a result of favorable loss emergence compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred claims attributable to insured events of prior years decreased by approximately $10,548,000 during the first three months of 2018 and decreased by approximately $29,054,000 during the first three months of 2017. This reflected lower-than-anticipated losses in the first three months of 2018 related to accident years prior to 2018 in multi-peril, other commercial, and business owner and commercial package policy lines of business.

For short-duration health insurance claims, the total of IBNR plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses at March 31, 2018 was $34,751,000.

 

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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 March 31,  
     2018     2017  
     Amount     Rate     Amount     Rate*  

Income tax expense before tax on equity in earnings of unconsolidated affiliates*

   $ 4,365       21.6   $ 15,630       28.9

Tax on equity in earnings of unconsolidated affiliates

     (114     (0.6     3,325       6.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total expected income tax expense at the statutory rate

     4,251       21.0       18,955       35.0  

Tax-exempt investment income

     (843     (4.2     (1,832     (3.4

Deferred tax change

     (309     (1.5     (767     (1.4

Dividend exclusion

     (985     (4.9     (1,842     (3.4

Miscellaneous tax credits, net

     (2,213     (10.9     (2,257     (4.2

Low income housing tax credit expense

     1,252       6.2       1,253       2.3  

Other items, net

     36       0.2       181       0.3  
  

 

 

   

 

 

   

 

 

   

 

 

 

Provision for federal income tax before interest expense

     1,189       5.9       13,691       25.2  

Interest expense

     —         —         44       0.1  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 1,189       5.9   $ 13,735       25.3
  

 

 

   

 

 

   

 

 

   

 

 

 

 

* Prior year revised to reflect adoption of the new accounting standard issued March 2017. For details, see Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements.

American National made income tax payments of $7,000,000 during the three months ended March 31, 2018 and made no income tax payments for the same period in 2017.

Management believes that a sufficient taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of March 31, 2018 and 2017. There are no operating or capital loss carryforwards that will expire by December 31, 2018.

American National’s federal income tax returns for years 2014 to 2016 are subject to examination by the Internal Revenue Service. The years 2005 to 2013 have been closed by the Internal Revenue Service and we have received $48.0 million in refunds related to 2013, 2014, 2015, and 2016. 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 or interest were established during 2018 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 (Loss)

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

 

     Net Unrealized
Gains (Losses)
on Securities
    Defined
Benefit
Pension Plan
Adjustments
    Foreign
Currency
Adjustments
    Accumulated
Other
Comprehensive
Income (Loss)
 

Beginning balance, 2018

   $ 716,878     $ (72,772   $ (1,890   $ 642,216  

Amounts reclassified from AOCI (net of tax expense $26 and expense $210)

     100       789       —         889  

Unrealized holding losses arising during the period (net of tax benefit $30,091)

     (113,203     —         —         (113,203

Unrealized adjustment to DAC (net of tax expense $3,777)

     16,277       —         —         16,277  

Unrealized losses on investments attributable to participating policyholders’ interest (net of tax expense $1,460)

     5,493       —         —         5,493  

Foreign currency adjustment (net of tax benefit $97)

     —         —         (366     (366

Cumulative effect of changes in accounting (net of tax benefit $356,847)

     (637,376     —         —         (637,376
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2018

   $ (11,831   $ (71,983   $ (2,256   $ (86,070
  

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2017

   $ 547,138     $ (88,603   $ (2,636   $ 455,899  

Amounts reclassified from AOCI (net of tax benefit $1,547 and expense $826)

     (2,873     1,534       —         (1,339

Unrealized holding gains arising during the period (net of tax expense $34,927)

     64,864       —         —         64,864  

Unrealized adjustment to DAC (net of tax benefit $2,596)

     (2,848     —         —         (2,848

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $1,740)

     (3,231     —         —         (3,231

Foreign currency adjustment (net of tax expense $60)

     —         —         112       112  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2017

   $ 603,050     $ (87,069   $ (2,524   $ 513,457  
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 14 – Stockholders’ Equity and Noncontrolling Interests

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

 

     March 31, 2018      December 31, 2017  

Common stock

     

Shares issued

     30,832,449        30,832,449  

Treasury shares

     (3,894,108      (3,900,565
  

 

 

    

 

 

 

Outstanding shares

     26,938,341        26,931,884  

Restricted shares

     (74,000      (74,000
  

 

 

    

 

 

 

Unrestricted outstanding shares

     26,864,341        26,857,884  
  

 

 

    

 

 

 

Stock-based compensation

American National has a 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. To date, only SAR, RS and RSU awards have been made. All awards are subject to review and approval by the Board Compensation Committee 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 were made to certain officers meeting established performance objectives, and grants are made to 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, 2017

     2,586      $ 106.70        74,000      $ 110.19        52,765     $ 106.26  

Granted

     —          —          —          —          —         —    

Exercised

     —          —          —          —          (33,699     104.39  

Forfeited

     —          —          —          —          —         —    

Expired

     —          —          —          —          —         —    
  

 

 

       

 

 

       

 

 

   

Outstanding at March 31, 2018

     2,586      $ 106.70        74,000      $ 110.19        19,066     $ 109.56  
  

 

 

       

 

 

       

 

 

   

 

     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     0.30        4.23        0.77  

Exercisable shares

     2,586        N/A        N/A  

Weighted-average exercise price

   $ 106.70      $ 110.19      $ 109.56  

Weighted-average exercise price exercisable shares

     106.70        N/A        N/A  

Compensation expense (credit)

        

Three months ended March 31, 2018

   $ (28,000    $ 201,000      $ (211,000

Three months ended March 31, 2017

     (35,000      207,000        130,000  

Fair value of liability award

        

March 31, 2018

   $ 33,000        N/A      $ 1,528,000  

December 31, 2017

     63,000        N/A        6,376,000  

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 74,000 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, cash or a combination of both. RSUs granted vest after a one-year or 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 March 31,  
     2018      2017  

Weighted average shares outstanding

     26,889,151        26,899,648  

Incremental shares from RS awards and RSUs

     75,204        72,480  
  

 

 

    

 

 

 

Total shares for diluted calculations

     26,964,355        26,972,128  
  

 

 

    

 

 

 

Net income attributable to American National (in thousands)

   $ 18,777      $ 39,840  

Basic earnings per share

   $ 0.70      $ 1.48  

Diluted earnings per share

   $ 0.70      $ 1.48  

Statutory Capital and Surplus

Risk Based Capital (“RBC”) is a measure insurance regulators use to evaluate the capital adequacy of American National Insurance Company and its insurance subsidiaries. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level at least 200% of the authorized control level RBC are required to take certain actions. At March 31, 2018 and December 31, 2017, American National Insurance Company’s statutory capital and surplus was $3,244,268,000 and $3,293,474,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2018 and December 31, 2017, 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 $69,096,000 and $66,625,000 at March 31, 2018 and December 31, 2017, respectively. 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):

 

     March 31, 2018      December 31, 2017  

Statutory capital and surplus

     

Life insurance entities

   $ 2,075,945      $ 2,141,573  

Property and casualty insurance entities

     1,172,698        1,162,761  

 

     Three months ended March 31,  
     2018      2017  

Statutory net income

     

Life insurance entities

   $ 3,263      $ 2,467  

Property and casualty insurance entities

     13,058        6,811  

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by insurance law. 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 without prior approval of the Texas Department of Insurance to pay total dividends of $329,347,000 during 2018. 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 owned by its policyholders. American National has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at March 31, 2018 and December 31, 2017.

American National Insurance Company and its subsidiaries exercise 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 $1,346,000 and $2,262,000 at March 31, 2018 and December 31, 2017, respectively.

 

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Table of Contents

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.

The accounting policies of the segments are the same as those described in Note 2 to American National’s 2017 annual report on Form 10-K. All revenues and expenses specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Revenues and expenses not specifically attributable to policy transactions are allocated to each segment as follows:

 

    Recurring income from bonds and mortgage loans is allocated based on the assets allocated to each line of business at the average yield available from these assets.

 

    Net investment income from all other assets is allocated to the insurance segments in accordance with the amount of capital allocated to each segment, with the remainder recorded in the Corporate and Other business segment.

 

    Expenses are allocated based upon various factors, including premium and commission ratios of the operating segments.

 

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Note 15 – Segment Information – (Continued)

 

The results of operations measured as the income before federal income tax and other items by operating segments are summarized below (in thousands):

 

     Three months ended March 31, 2018  
     Life     Annuity     Accident 
& Health
     Property
& Casualty
    Corporate
& Other
    Total  

Premiums and other revenues

             

Premiums

   $ 81,376     $ 70,616     $ 41,015      $ 351,973     $ —       $ 544,980  

Other policy revenues

     67,731       3,608       —          —         —         71,339  

Net investment income

     57,768       113,480       2,354        15,861       (13,424     176,039  

Net realized investment gains

     —         —         —          —         504       504  

Other income

     755       725       5,157        2,063       1,813       10,513  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     207,630       188,429       48,526        369,897       (11,107     803,375  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

             

Policyholder benefits

     98,546       84,746       —          —         —         183,292  

Claims incurred

     —         —         28,140        242,490       —         270,630  

Interest credited to policyholders’ account balances

     16,265       54,280       —          —         —         70,545  

Commissions for acquiring and servicing policies

     39,520       30,004       6,016        69,156       —         144,696  

Other operating expenses

     50,950       11,319       10,358        47,801       9,966       130,394  

Change in deferred policy acquisition costs

     (6,443     (8,873     1,088        (2,738     —         (16,966
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     198,838       171,476       45,602        356,709       9,966       782,591  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before federal income tax and other items

   $ 8,792     $ 16,953     $ 2,924      $ 13,188     $ (21,073   $ 20,784  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 
     Three months ended March 31, 2017  
     Life     Annuity     Accident 
& Health
     Property
& Casualty
    Corporate
& Other
    Total  

Premiums and other revenues

             

Premiums

   $ 77,474     $ 29,809     $ 37,039      $ 327,450     $ —       $ 471,772  

Other policy revenues

     59,909       3,543       —          —         —         63,452  

Net investment income

     62,209       139,677       2,507        14,040       10,070       228,503  

Net realized investment gains

     —         —         —          —         7,225       7,225  

Other income

     616       665       4,346        1,938       1,280       8,845  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     200,208       173,694       43,892        343,428       18,575       779,797  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

             

Policyholder benefits

     101,166       43,989       —          —         —         145,155  

Claims incurred

     —         —         24,380        227,530       —         251,910  

Interest credited to policyholders’ account balances

     15,405       80,603       —          —         —         96,008  

Commissions for acquiring and servicing policies

     34,810       17,284       5,890        67,508       —         125,492  

Other operating expenses

     49,183       10,688       10,230        46,282       9,678       126,061  

Change in deferred policy acquisition costs

     (7,857     (2,631     1,332        (331     —         (9,487
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     192,707       149,933       41,832        340,989       9,678       735,139  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before federal income tax and other items

   $ 7,501     $ 23,761     $ 2,060      $ 2,439     $ 8,897     $ 44,658  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

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Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at March 31, 2018, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $916,728,000 of which $664,335,000 is expected to be funded in 2018 with the remainder funded in 2019 and beyond.

American National has a $100,000,000 short-term variable rate borrowing facility containing a $55,000,000 sub-feature for the issuance of letters of credit. Borrowings under the facility are at the discretion of the lender and would be used only for funding working capital requirements. The combination of borrowings and outstanding letters of credit cannot exceed $100,000,000 at any time. As of March 31, 2018 and December 31, 2017, the outstanding letters of credit were $3,047,000 and $4,586,000, respectively, and there were no borrowings on this facility. This facility expires on October 31, 2018. American National expects it will be able to be renewed on substantially equivalent terms upon expiration.

Guarantees

American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on a bank loan, American National would be obligated to pay off the loan. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of March 31, 2018, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $211,003,000.

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.

 

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Note 17 – Related Party Transactions

American National has entered into recurring transactions and agreements with certain related parties. These include mortgage loans, management contracts, agency commission contracts, marketing agreements, accident and health insurance contracts, and legal services. The impact on the consolidated financial statements of significant related party transactions is shown below (in thousands):

 

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

March 31,

    December 31,  

Related Party

  

Financial Statement Line Impacted

   2018      2017      2018     2017  

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 400      $ 373      $ 1,823     $ 2,223  

Gal-Tex Hotel Corporation

   Net investment income      38        66        11       13  

Greer, Herz & Adams, LLP

   Other operating expenses      2,607        2,527        (483     (386

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 a subsidiary of Gal-Tex, which is collateralized by a hotel property in San Antonio, Texas. This loan is current as to principal and interest payments. The Moody Foundation owns 34.0% of Gal-Tex and 22.75% of American National, and the Libbie Shearn Moody Trust owns 50.2% of Gal-Tex and 37.01% of American National.

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

The following pages provide management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three months ended March 31, 2018 and 2017 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 2017 Annual Report on Form 10-K filed with the SEC on February 28, 2018, 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;

 

    potential ineffectiveness of our internal controls over financial reporting;

 

    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 supplemental healthcare business;

 

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Table of Contents
    Litigation and Regulation Risk Factors

 

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

 

    significant changes in government regulation;

 

    changes in tax law;

 

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

 

    Reinsurance and Counterparty Risk Factors

 

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

 

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

 

    Other Risk Factors

 

    potentially adverse rating agency actions; and

 

    control of our company by a small number of stockholders.

Overview

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

General Trends

American National had no material changes to the general trends, as discussed in the MD&A included in our 2017 Annual Report on Form 10-K filed with the SEC on February 28, 2018.

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 judgment 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 2017 Annual Report on Form 10-K filed with the SEC on February 28, 2018. There have been no material changes in accounting policies since December 31, 2017.

Recently Issued Accounting Pronouncements

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

 

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Consolidated Results of Operations

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

 

     Three months ended March 31,         
     2018      2017      Change  

Premiums and other revenues

        

Premiums

   $ 544,980      $ 471,772      $ 73,208  

Other policy revenues

     71,339        63,452        7,887  

Net investment income

     176,039        228,503        (52,464

Realized investments gains (losses), net

     504        7,225        (6,721

Other income

     10,513        8,845        1,668  
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     803,375        779,797        23,578  
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     183,292        145,155        38,137  

Claims incurred

     270,630        251,910        18,720  

Interest credited to policyholders’ account balances

     70,545        96,008        (25,463

Commissions for acquiring and servicing policies

     144,696        125,492        19,204  

Other operating expenses

     130,394        126,061        4,333  

Change in deferred policy acquisition costs (1)

     (16,966      (9,487      (7,479
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     782,591        735,139        47,452  
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 20,784      $ 44,658      $ (23,874
  

 

 

    

 

 

    

 

 

 

 

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

Earnings

Earnings decreased during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in net investment income attributable to a $32.6 million unrealized loss on equity securities and a decrease in realized investment gains, partially offset by an increase in property and casualty earnings attributable to a lower combined ratio. Net investment income for the three months ended March 31, 2018 included unrealized losses on equity securities as a result of our adoption of new accounting guidance which impacted the first quarter of 2018, but not the first quarter of 2017.

Life

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

 

     Three months ended March 31,         
     2018      2017      Change  

Premiums and other revenues

        

Premiums

   $ 81,376      $ 77,474      $ 3,902  

Other policy revenues

     67,731        59,909        7,822  

Net investment income

     57,768        62,209        (4,441

Other income

     755        616        139  
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     207,630        200,208        7,422  
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     98,546        101,166        (2,620

Interest credited to policyholders’ account balances

     16,265        15,405        860  

Commissions for acquiring and servicing policies

     39,520        34,810        4,710  

Other operating expenses

     50,950        49,183        1,767  

Change in deferred policy acquisition costs (1)

     (6,443      (7,857      1,414  
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     198,838        192,707        6,131  
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 8,792      $ 7,501      $ 1,291  
  

 

 

    

 

 

    

 

 

 

 

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

 

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Earnings

Current operating income of $8.8 million is $1.3 million higher than prior year. Premiums continued to show strong growth, as did benefits, which were consistent with that growth. Decreases in liabilities helped to offset the expected increase in benefits.

Premiums and other revenues

Premiums increased during the three months ended March 31, 2018 compared to 2017 primarily due to continued growth in renewal premium on traditional life products.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies.

Life insurance sales

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

 

     Three months ended March 31,         
     2018      2017      Change  

Traditional Life

   $ 15,011      $ 14,265      $ 746  

Universal Life

     5,909        5,325        584  

Indexed UL

     7,463        5,909        1,554  
  

 

 

    

 

 

    

 

 

 

Total Recurring

   $ 28,383      $ 25,499      $ 2,884  
  

 

 

    

 

 

    

 

 

 

Single and excess(1)

   $ 463      $ 601      $ (138

Credit life(1)

     1,958        2,086        (128

 

(1)  These are weighted amounts representing 10% of single and excess premiums and 31% of credit life premiums. In 2018, credit life weighting changed from 15% to 31% due to an increase in monthly outstanding balance; 2017 amounts have been updated for comparison purposes.

Life insurance sales measure activity associated with gaining new insurance business in the current period, and includes deposits received related to interest sensitive life and universal life-type products. Whereas GAAP premium revenues are associated with policies sold in current and prior periods, and deposits received related to interest sensitive life and universal life-type products are recorded in a policyholder account which is reflected as a liability. Therefore, a reconciliation of premium revenues and insurance sales is not meaningful.

Life insurance sales increased for all major lines during the three months ended March 31, 2018 compared to 2017.

 

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Table of Contents

Benefits, losses and expenses

Policyholder benefits decreased during the three months ended March 31, 2018 compared to 2017 primarily due to a decrease in participating policyholders’ interest.

Commissions increased during the three months ended March 31, 2018 compared to 2017 which was commensurate with the increase in life sales.

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

 

     Three months ended March 31,         
     2018      2017      Change  

Acquisition cost capitalized

   $ 32,624      $ 29,046      $ 3,578  

Amortization of DAC

     (26,181      (21,189      (4,992
  

 

 

    

 

 

    

 

 

 

Change in DAC

   $ 6,443      $ 7,857      $ (1,414
  

 

 

    

 

 

    

 

 

 

Policy in-force information

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

 

     March 31,
2018
     December 31,
2017
     Change  

Life insurance in-force

        

Traditional life

   $ 74,836,261      $ 73,452,519      $ 1,383,742  

Interest-sensitive life

     30,058,596        29,648,405        410,191  
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 104,894,857      $ 103,100,924      $ 1,793,933  
  

 

 

    

 

 

    

 

 

 

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

 

     March 31,
2018
     December 31,
2017
     Change  

Number of policies in-force

        

Traditional life

     1,728,413        1,800,425        (72,012

Interest-sensitive life

     235,047        232,251        2,796  
  

 

 

    

 

 

    

 

 

 

Total number of policies

     1,963,460        2,032,676        (69,216
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the three months ended March 31, 2018 compared to December 31, 2017 due to increased sales, despite a reduction of policies in-force. The reduction in policies in-force reflects continued termination of lower face amount policies.

 

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Annuity

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

 

     Three months ended March 31,         
     2018      2017      Change  

Premiums and other revenues

        

Premiums

   $ 70,616      $ 29,809      $ 40,807  

Other policy revenues

     3,608        3,543        65  

Net investment income

     113,480        139,677        (26,197

Other income

     725        665        60  
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     188,429        173,694        14,735  
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     84,746        43,989        40,757  

Interest credited to policyholders’ account balances

     54,280        80,603        (26,323

Commissions for acquiring and servicing policies

     30,004        17,284        12,720  

Other operating expenses

     11,319        10,688        631  

Change in deferred policy acquisition costs (1)

     (8,873      (2,631      (6,242
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     171,476        149,933        21,543  
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 16,953      $ 23,761      $ (6,808
  

 

 

    

 

 

    

 

 

 

 

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

Earnings

Earnings were lower during the three months ended March 31, 2018 compared to 2017 primarily due to an increase in DAC amortization. The increase in DAC amortization resulted from an increase in surrenders compared to the very favorable surrenders experienced in the same period in 2017.

Premiums and other revenues

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

 

     Three months ended March 31,         
     2018      2017      Change  

Fixed deferred annuity

   $ 79,126      $ 147,202      $ (68,076

Single premium immediate annuity

     78,133        36,177        41,956  

Equity-indexed deferred annuity

     273,771        132,901        140,870  

Variable deferred annuity

     15,673        20,306        (4,633
  

 

 

    

 

 

    

 

 

 

Total premium and deposits

     446,703        336,586        110,117  

Less: Policy deposits

     376,087        306,777        69,310  
  

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 70,616      $ 29,809      $ 40,807  
  

 

 

    

 

 

    

 

 

 

Sales strengthened during the three months ended March 31, 2018 compared to 2017 led by the equity indexed products. These are deposit type contracts and do not contribute to earned premiums. Earned premiums are reflective of single premium immediate annuity sales which increased during the three months ended March 31, 2018 compared to 2017.

 

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Table of Contents

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

 

     Three months ended March 31,  
     2018      2017  

Fixed deferred and equity-indexed annuity

     

Account value, beginning of period

   $ 10,033,354      $ 9,118,350  

Net inflows

     281,657        212,995  

Surrenders

     (172,562      (199,701

Fees

     (1,862      (1,882

Interest credited

     52,056        79,001  
  

 

 

    

 

 

 

Account value, end of period

     10,192,643        9,208,763  
  

 

 

    

 

 

 

Single premium immediate annuity

     

Reserve, beginning of period

     1,691,502        1,566,440  

Net inflows

     30,680        (8,110

Interest and mortality

     13,420        15,136  
  

 

 

    

 

 

 

Reserve, end of period

     1,735,602        1,573,466  
  

 

 

    

 

 

 

Variable deferred annuity

     

Account value, beginning of period

     381,902        392,345  

Net inflows

     15,456        17,004  

Surrenders

     (28,262      (40,037

Fees

     (1,092      (1,155

Change in market value and other

     (548      20,454  
  

 

 

    

 

 

 

Account value, end of period

     367,456        388,611  
  

 

 

    

 

 

 

Total account value, end of period

   $ 12,295,701      $ 11,170,840  
  

 

 

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