Form 10-Q
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
     
þ   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
OR
     
o   TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number: 001-34280
(AMERICAN NATIONAL LOGO)
AMERICAN NATIONAL INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
     
Texas   74-0484030
(State or other jurisdiction of   (I.R.S. employer
incorporation or organization)   identification number)
     
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 o NO þ
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 (§232.405 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 o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer o   Non-accelerated filer þ   Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO þ
As of October 30, 2009, the registrant had 26,820,166 shares of common stock, $1.00 par value per share, outstanding.
 
 

 

 


 

TABLE OF CONTENTS
         
       
 
       
       
 
       
    3  
 
       
    4  
 
       
    5  
 
       
    5  
 
       
    6  
 
       
    7  
 
       
    32  
 
       
    65  
 
       
    65  
 
       
       
 
       
    66  
 
       
    66  
 
       
    66  
 
       
    66  
 
       
    66  
 
       
    66  
 
       
    67  
 
       
    67  
 
       
EXHIBIT INDEX
    68  
 
       
 Exhibit 31.1
 Exhibit 31.2
 Exhibit 32.1
 Exhibit 32.2

 

2


Table of Contents

PART I — FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF INCOME
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
(Unaudited and in thousands, except for per share data)   2009     2008     2009     2008  
PREMIUMS AND OTHER REVENUE
                               
Premiums:
                               
Life
  $ 76,320     $ 75,569     $ 211,638     $ 222,583  
Annuity
    58,284       18,843       149,141       90,489  
Accident and health
    74,428       72,688       224,001       217,765  
Property and casualty
    298,073       292,747       866,989       885,941  
Other policy revenues
    45,292       45,049       133,740       130,494  
Net investment income
    222,266       209,269       630,126       612,725  
Realized investments gains (losses)
    3,252       3,243       (4,809 )     20,374  
Other-than-temporary impairments
    (4,187 )     (205,228 )     (78,335 )     (232,277 )
Other income
    6,619       9,913       27,643       29,641  
 
                       
Total revenues
    780,347       522,093       2,160,134       1,977,735  
 
                       
 
                               
BENEFITS, LOSSES AND EXPENSES
                               
Policy Benefits:
                               
Life
    75,865       69,786       222,131       215,653  
Annuity
    63,776       25,433       170,584       111,137  
Accident and health
    57,217       51,531       178,983       166,581  
Property and casualty
    222,196       223,311       714,041       720,430  
Interest credited to policy account balances
    98,252       80,036       275,554       223,125  
Commissions for acquiring and servicing policies
    114,144       111,724       341,734       369,312  
Other operating costs and expenses
    128,181       145,434       359,721       396,148  
Increase in deferred policy acquisition costs
    (14,351 )     (1,624 )     (48,380 )     (70,972 )
 
                       
Total benefits, losses and expenses
    745,280       705,631       2,214,368       2,131,414  
 
                       
 
                               
Income (loss) from continuing operations before federal income tax, and equity in earnings of unconsolidated affiliates
    35,067       (183,538 )     (54,234 )     (153,679 )
Provision (benefit) for federal income taxes:
                               
Current
    4,564       6,849       (20,541 )     (10,429 )
Deferred
    (1,335 )     (68,807 )     (18,029 )     (52,336 )
 
                       
Total provision (benefit) for federal income taxes
    3,229       (61,958 )     (38,570 )     (62,765 )
 
                               
Equity in earnings (losses) of unconsolidated affiliates, net of tax
    2,110       (1,530 )     (3,007 )     6,466  
 
                       
 
                               
Income (loss) from continuing operations
    33,948       (123,110 )     (18,671 )     (84,448 )
Loss from discontinued operations
          (604 )           (3,050 )
 
                       
Net income (loss)
    33,948       (123,714 )     (18,671 )     (87,498 )
 
                       
Less: Net income attributable to noncontrolling interest
    1,248       1,319       679       1,445  
 
                       
Net income (loss) attributable to American National Insurance Company and Subsidiaries
  $ 32,700     $ (125,033 )   $ (19,350 )   $ (88,943 )
 
                       
 
                               
Amounts attributable to American National Insurance Company common stockholders
                               
Earnings (loss) per share:
                               
Basic
  $ 1.23     $ (4.72 )   $ (0.73 )   $ (3.36 )
Diluted
  $ 1.23     $ (4.69 )   $ (0.73 )   $ (3.34 )
 
                               
Unrestricted common shares outstanding
    26,558,832       26,479,832       26,558,832       26,479,832  
Unrestricted common shares outstanding and dilutive potential common shares
    26,601,368       26,631,908       26,601,368       26,631,908  
See accompanying notes to consolidated financial statements.

 

3


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited and in thousands)
                 
    September 30,     December 31,  
    2009     2008  
ASSETS
               
Investments, other than investments in unconsolidated affiliates
               
Fixed Securities:
               
Bonds held-to-maturity
  $ 7,287,406     $ 6,681,837  
Bonds available-for-sale
    4,188,674       3,820,837  
Preferred stocks
    30,555       48,822  
Equity securities:
               
Common stocks
    991,835       853,530  
Mortgage loans on real estate, net of allowance
    2,096,286       1,877,053  
Policy loans
    360,596       354,398  
Investment real estate, net of accumulated depreciation of $204,333 and $191,435
    590,233       528,905  
Short-term investments
    650,482       295,170  
Other invested assets
    93,859       85,151  
 
           
Total investments
    16,289,926       14,545,703  
 
           
Cash
    93,367       66,096  
Investments in unconsolidated affiliates
    153,910       154,309  
Accrued investment income
    185,874       184,801  
Reinsurance ceded receivables
    405,971       482,846  
Prepaid reinsurance premiums
    56,540       61,433  
Premiums due and other receivables
    299,657       325,019  
Deferred policy acquisition costs
    1,337,152       1,482,664  
Property and equipment, net
    90,617       92,458  
Current federal income taxes
    19,287       68,327  
Deferred federal income taxes
    2,190       195,508  
Other assets
    153,150       159,254  
Separate account assets
    683,796       561,021  
 
           
Total assets
  $ 19,771,437     $ 18,379,439  
 
           
LIABILITIES
               
Policyholder funds
               
Future policy benefits:
               
Life
  $ 2,474,064     $ 2,436,001  
Annuity
    738,825       664,136  
Accident and health
    96,604       96,548  
Policy account balances
    9,248,747       8,295,527  
Policy and contract claims
    1,294,141       1,401,960  
Participating policyholder share
    161,540       149,970  
Other policyholder funds
    954,057       959,134  
 
           
Total policyholder liabilities
    14,967,978       14,003,276  
 
           
Liability for Retirement Benefits
    187,436       184,124  
Notes payable
    122,294       111,922  
Other liabilities
    363,151       376,863  
Separate account liabilities
    683,796       561,021  
 
           
Total liabilities
    16,324,655       15,237,206  
 
           
STOCKHOLDERS’ EQUITY
               
Common stock, $1.00 par value, — Authorized 50,000,000 Issued 30,832,449, Outstanding 26,820,166 shares
    30,832       30,832  
Additional paid-in capital
    11,306       7,552  
Accumulated other comprehensive income (loss)
    108,830       (221,148 )
Retained earnings
    3,384,168       3,414,946  
Treasury stock, at cost
    (98,505 )     (98,326 )
 
           
Total American National stockholders’ equity
    3,436,631       3,133,856  
Noncontrolling interest
    10,151       8,377  
 
           
Total equity
    3,446,782       3,142,233  
 
           
Total liabilities and equity
  $ 19,771,437     $ 18,379,439  
 
           
See accompanying notes to consolidated financial statements.

 

4


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Unaudited and in thousands, except for per share data)
                     
        Nine Months Ended September 30,  
        2009     2008  
   
 
               
Common Stock  
Balance at beginning and end of the period
  $ 30,832     $ 30,832  
   
 
           
   
 
               
Additional Paid-In Capital  
Balance at beginning of the year
    7,552       6,080  
   
Net issuance of treasury shares as restricted stock
    179       (1,139 )
   
Tax benefit on excess restricted stock
    439        
   
Amortization of restricted stock
    3,136       1,854  
   
 
           
   
Balance as of September 30,
  $ 11,306     $ 6,795  
   
 
           
   
 
               
Accumulated Other Comprehensive Income (Loss)  
Balance at beginning of the year
    (221,148 )     145,972  
   
Change in unrealized gains (losses) on marketable securities, net
    377,196       (212,633 )
   
Cumulative adjustment for accounting change — Other-than-temporary impairments on debt securities
    (50,411 )      
   
Foreign exchange adjustments
    539       (191 )
   
Minimum pension liability adjustment
    2,654       (572 )
   
 
           
   
Balance as of September 30,
  $ 108,830     $ (67,424 )
   
 
           
   
 
               
Retained Earnings  
Balance at beginning of the year
    3,414,946       3,653,365  
   
Net loss
    (19,350 )     (88,943 )
   
Cash dividends to common stockholders ($0.77, and $0.77 per share)
    (61,839 )     (61,962 )
   
Cumulative adjustment for accounting change — Other-than-temporary impairments on debt securities
    50,411        
   
 
           
   
Balance as of September 30,
  $ 3,384,168     $ 3,502,460  
   
 
           
   
 
               
Treasury Stock  
Balance at beginning of the year
    (98,326 )     (99,465 )
   
Net issuance of restricted stock
    (179 )     1,139  
   
 
           
   
Balance as of September 30,
  $ (98,505 )   $ (98,326 )
   
 
           
   
 
               
Noncontrolling Interest  
Balance at beginning of the year
    8,377       4,539  
   
Contributions
    817       1,989  
   
Distributions
    (87 )     (393 )
   
Gain attributable to noncontrolling interest
    1,044       2,223  
   
 
           
   
Balance as of September 30,
  $ 10,151     $ 8,358  
   
 
           
   
 
               
Total Equity  
Balance as of September 30,
  $ 3,446,782     $ 3,382,695  
   
 
           
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                 
    Nine Months Ended September 30,  
(Unaudited and in thousands)   2009     2008  
 
               
Net loss
  $ (19,350 )   $ (88,943 )
 
           
 
               
Other comprehensive income (loss), net of tax
               
Change in unrealized gains (losses) on marketable securities, net
    377,196       (212,633 )
Foreign exchange adjustments
    539       (191 )
Minimum pension liability adjustment
    2,654       (572 )
 
           
Total other comprehensive income (loss)
  $ 380,389     $ (213,396 )
 
           
 
               
Total comprehensive income (loss) attributable to American National Insurance Company and Subsidiaries
  $ 361,039     $ (302,339 )
 
           
See accompanying notes to consolidated financial statements.

 

5


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
                 
    Nine Months Ended September 30,  
    2009     2008  
 
               
OPERATING ACTIVITIES
               
Net loss
  $ (19,350 )   $ (88,943 )
Adjustments to reconcile net income/(loss) to net cash provided by operating activities:
               
Realized losses on investments
    83,144       211,903  
Amortization of discounts and premiums on bonds
    12,010       12,195  
Capitalized interest on policy loans and mortgage loans
    (20,705 )     (1,273 )
Depreciation
    26,774       24,274  
Interest credited to policy account balances
    275,554       223,125  
Charges to policy account balances
    (129,201 )     (126,650 )
Deferred federal income tax expense
    18,029       52,336  
Deferral of policy acquisition costs
    (351,349 )     (388,079 )
Amortization of deferred policy acquisition costs
    302,969       317,140  
Equity in earnings (losses) of unconsolidated affiliates
    (4,627 )     9,947  
Changes in:
               
Policyholder funds liabilities
    10,355       347,794  
Reinsurance ceded receivables
    76,875       (101,438 )
Premiums due and other receivables
    25,362       (57,970 )
Accrued investment income
    (1,073 )     (4,861 )
Current federal income tax liability
    49,040       (23,852 )
Liability for retirement benefits
    3,312       872  
Prepaid reinsurance premiums
    4,893       (151,314 )
Other, net
    (7,080 )     (11,308 )
 
           
Net cash provided by operating activities
    354,932       243,898  
 
           
INVESTING ACTIVITIES
               
Proceeds from sales of:
               
Bonds available-for-sale
    33,411       6,132  
Common stocks
    60,908       65,669  
Real estate
    4,837       6,151  
Other invested assets
          4,288  
Proceeds from maturities of:
               
Bonds available-for-sale
    218,595       249,227  
Bonds held-to-maturity
    510,477       464,574  
Principal payments received on:
               
Mortgage loans
    94,670       124,705  
Policy loans
    34,215       6,418  
Purchases of investments:
               
Bonds available-for-sale
    (67,584 )     (721,590 )
Bonds held-to-maturity
    (1,128,081 )     (642,888 )
Common stocks
    (20,517 )     (197,932 )
Real estate
    (80,461 )     (67,701 )
Mortgage loans
    (344,470 )     (470,906 )
Policy loans
    (22,804 )     (12,172 )
Other invested assets
    (10,590 )     (21,941 )
Net decrease (increase) in short-term investments
    (355,312 )     442,943  
Net decrease (increase) in investment in unconsolidated affiliates
    399       (32,386 )
Net increase in property and equipment
    (10,803 )     (14,017 )
 
           
Net cash used in investing activities
    (1,083,110 )     (811,426 )
 
           
FINANCING ACTIVITIES
               
Policyholders’ deposits to policy account balances
    1,771,406       1,563,123  
Policyholders’ withdrawals from policy account balances
    (964,490 )     (1,029,218 )
Increase (decrease) in notes payable
    10,372       (7,457 )
Dividends to stockholders
    (61,839 )     (61,962 )
 
           
Net cash provided by financing activities
    755,449       464,486  
 
           
NET INCREASE (DECREASE) IN CASH
    27,271       (103,042 )
Cash:
               
Beginning of the year
    66,096       134,069  
 
           
Balance as of September 30,
  $ 93,367     $ 31,027  
 
           
See accompanying notes to consolidated financial statements.

 

6


Table of Contents

1. NATURE OF OPERATIONS
American National Insurance Company and its consolidated subsidiaries (collectively “American National”) operate primarily in the insurance industry. Operating on a multiple product line basis, American National offers a broad line of insurance coverage, including individual and group life, health, and annuities; personal lines property and casualty; and credit insurance. In addition, through non-insurance subsidiaries, American National offers mutual funds and invests in real estate. The majority of revenues are generated by the insurance business. Business is conducted in all states and the District of Columbia, as well as Puerto Rico, Guam and American Samoa. Various distribution systems are utilized, including multiple line, independent third-party marketing organizations, home service, credit, and direct sales to the public.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in conformity with (i) U.S. generally accepted accounting principles (“GAAP”) for interim financial information; and (ii) the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for Form 10-Q. In addition to GAAP accounting literature, specific SEC regulation is also applied to the financial statements issued by insurance companies.
The consolidated financial statements and notes for the three and nine months ended September 30, 2009 are unaudited. These financial statements reflect all adjustments which are, in the opinion of management, considered necessary for the fair presentation of the financial position, statements of income and cash flows for the interim periods. In preparing the accompanying financial statements, we have evaluated subsequent events following September 30, 2009 through the financial statements’ filing date of November 6, 2009. These financial statements and notes should be read in conjunction with American National’s Annual Consolidated Financial Statements and related notes incorporated within the amended Form 10 Registration Statement filed with the SEC on July 1, 2009.
All significant inter-company accounts and transactions have been eliminated in consolidation. Investments in unconsolidated affiliates are shown at cost plus equity in undistributed earnings since the dates of acquisition. American National’s prior life insurance business in Mexico, which is reported as discontinued operations, did not have a material impact on revenue for the three and nine months ended September 30, 2009.
Certain reclassifications have been made to prior period amounts to conform to the current period presentation.
The preparation of consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported financial statement balances. Actual results could differ from those estimates. The following estimates have been identified as critical in that they involve a high degree of judgment and are subject to a significant degree of variability:
    Other-than-temporary impairment of investment securities;
 
    Deferred acquisition costs;
 
    Reserves;
 
    Reinsurance recoverable;
 
    Pension and postretirement benefit plans;
 
    Litigation contingencies; and
 
    Federal income taxes.
As of September 30, 2009, American National’s significant accounting policies and practices remain materially unchanged from those disclosed in Note 2 of its 2008 Annual Consolidated Financial Statements incorporated within the amended Form 10 Registration Statement filed with the SEC on July 1, 2009 with the exception of the other-than-temporary impairment (“OTTI”) of debt securities accounting policy.
American National’s accounting policy on OTTI of debt securities was significantly modified due to the April 2009 issuance of new accounting guidance. Under the new policy, an OTTI has occurred for a debt security in an unrealized loss position when American National either (a) has the intent to sell the debt security or (b) it is more likely than not that it will be required to sell the debt security before its anticipated recovery of its amortized costs basis. If either criterion is met, OTTI is recognized in earnings in the amount of the amortized cost basis of the debt security in excess of its fair value, as of the impairment measurement date.

 

7


Table of Contents

For all debt securities in unrealized loss positions which American National does not intend to sell and for which it is not more likely than not that it will be required to sell before its anticipated recovery, American National assesses whether the amortized cost basis of the debt security will be recovered by comparing the net present value of cash flows expected to be collected from the debt security with its amortized cost basis. Management estimates cash flows expected to be collected from the debt security using information based on its historical experience as well as using market observable data, such as industry analyst reports and forecasts, sector credit ratings and other data relevant to the collectability of a security. The net present value of cash flows expected to be collected from the debt security is calculated by discounting management’s best estimate of cash flows expected to be collected on the debt security at the effective interest rate implicit in the debt security when acquired. If the net present value of the cash flows expected to be collected from the debt security is less than the amortized cost basis of the debt security, an OTTI has occurred in the form of a credit loss. The credit loss is recognized in earnings in the amount of excess amortized cost over the net present value of the cash flows expected to be collected from the debt security. If the fair value of the debt security is in excess of its net present value of the cash flows expected to be collected from the debt security at the impairment measurement date, a non-credit loss exists which is recorded in other comprehensive income (loss) in the amount of the fair value of the debt security in excess of the net present value of the cash flows expected to be collected from the debt security.
After the recognition of an OTTI, the debt security is accounted for as if it had been purchased on the measurement date of the OTTI, with an amortized cost basis equal to its previous amortized cost basis less the related OTTI recognized in earnings. The new amortized cost basis of an impaired security is not adjusted for subsequent increases in estimated fair value. Should there be a significant increase in the estimate of cash flows expected to be collected from a previously impaired debt security, the increase would be accounted for prospectively by accreting it as interest income over the remaining life of the debt security.
3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Adoption of New Accounting Standards
In June 2009, the FASB issued accounting guidance contained within Accounting Standards Codification (“ASC”) 105 “GAAP” (formerly Statement of Financial Accounting Standards (“SFAS”) No. 168, “The FASB ASC and the Hierarchy of GAAP — a replacement of FASB Statement No. 162”), (“ASC 105”). This guidance within ASC 105 establishes the FASB ASC as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP in the United States, superseding existing FASB, American Institute of Certified Public Accountants (“AICPA”), Emerging Issues Task Force (“EITF”), and related accounting literature. This guidance is effective for financial statements issued for interim and annual periods ending after September 15, 2009. This guidance was adopted on September 30, 2009 and did not have an impact on American National’s consolidated financial statements, other than changes in references from former accounting standards to ASC references.
Future Adoption of New Accounting Standards
In September 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-12, “Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent)”, (“ASU 2009-12”) which amends ASC Topic 820, Fair Value Measurements and Disclosure (“Topic 820”). ASU 2009-12 provides additional guidance on using the net asset value per share, provided by an investee, when estimating the fair value of an alternate investment that does not have a readily determinable fair value and enhances the disclosures concerning these investments. Examples of alternate investments, within the scope of ASU 2009-12, include investments in hedge funds and private equity, real estate, and venture capital partnerships. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. American National is currently evaluating the impact of adopting ASU 2009-12 on its consolidated financial statements.
In August 2009, the FASB issued ASU No. 2009-05, “Measuring Liabilities at Fair Value”, (“ASU 2009-05”) which amends ASC Topic 820. ASU 2009-05 provides clarification that in circumstances in which a quoted price in an active market for the identical liability is not available, a reporting entity is required to measure fair value using one or more of the following methods: 1) a valuation technique that uses a) the quoted price of the identical liability when traded as an asset or b) quoted prices for similar liabilities or similar liabilities when traded as assets and/or 2) a valuation technique that is consistent with the principles of Topic 820 (e.g. an income approach or market approach). ASU 2009-05 also clarifies that when estimating the fair value of a liability, a reporting entity is not required to adjust to include inputs relating to the existence of transfer restrictions on that liability. ASU 2009-05 is effective for interim and annual periods beginning after September 30, 2009. American National is currently evaluating the impact of adopting ASU 2009-05 on its consolidated financial statements.

 

8


Table of Contents

In June 2009, the FASB issued accounting guidance contained within ASC 810, “Consolidations,” which pertains to the consolidation of variable interest entities (formerly SFAS No. 167, “Amendments to FASB Interpretation No. 46R”), (“ASC 810”). This guidance within ASC 810 requires an analysis to be performed to determine whether a variable interest gives the entity a controlling financial interest in a variable interest entity. This standard requires an ongoing reassessment and eliminates the quantitative approach previously required for determining whether an entity is the primary beneficiary. This standard is effective for fiscal years beginning after November 15, 2009. Accordingly, American National will adopt this standard in fiscal year 2010 and is currently evaluating the impact of its adoption on its consolidated financial statements.
In June 2009, the FASB issued accounting guidance contained within ASC 860, “Transfers and Servicing” (formerly SFAS No. 166, “Accounting for Transfers of Financial Assets”) (“ASC 860”). This guidance within ASC 860 requires enhanced disclosure about transfers of financial assets when companies have continuing exposure to the risk related to transferred financial assets. It eliminates the concept of a qualifying special purpose entity and changes the requirements for derecognizing financial assets. This standard is effective for fiscal years beginning after November 15, 2009. Accordingly, American National will adopt this standard in fiscal year 2010 and is currently evaluating the impact of its adoption on its consolidated financial statements.
In December 2008, the FASB issued accounting guidance contained within ASC 715 “Pension - Disclosure” (formerly FSP FAS No. 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets), (“ASC 715”). The guidance within ASC 715 aims to enhance the transparency surrounding the types of assets and associated risks in an employer’s defined benefit pension or other postretirement plan. This standard requires an employer to disclose information about the valuation of plan assets similar to that required under Topic 820. This standard is effective for fiscal years ending after December 15, 2009. Accordingly, American National will provide the required disclosure in its fiscal year 2009 consolidated financial statements.

 

9


Table of Contents

4. INVESTMENTS
The amortized cost and estimated fair values of investments in held-to-maturity and available-for-sale securities are shown below:
                                 
            Gross     Gross        
            Unrealized     Unrealized     Estimated Fair  
September 30, 2009   Amortized Cost     Gains     Losses     Value  
    (in thousands)  
Debt securities
                               
Bonds held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 21,265     $ 248     $     $ 21,513  
States of the U.S. and political subdivisions of the states
    236,080       11,304       (401 )     246,983  
Foreign governments
    28,991       3,699             32,690  
Corporate debt securities
    6,209,663       323,663       (119,536 )     6,413,790  
Residential mortgage backed securities
    704,014       27,592       (21,718 )     709,888  
Commercial mortgage backed securities
    32,867             (24,643 )     8,224  
Collateralized debt securities
    9,752       63       (905 )     8,910  
Other debt securities
    44,774       2,505       (28 )     47,251  
 
                       
Total bonds held-to-maturity
  $ 7,287,406     $ 369,074     $ (167,231 )   $ 7,489,249  
 
                       
 
                               
Bonds available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    3,444       603             4,047  
States of the U.S. and political subdivisions of the states
    576,818       30,550       (362 )     607,006  
Foreign governments
    5,000       1,395             6,395  
Corporate debt securities
    3,166,894       109,863       (99,919 )     3,176,838  
Residential mortgage backed securities
    364,766       9,690       (7,181 )     367,275  
Collateralized debt securities
    23,891       1,034       (2,242 )     22,683  
Other debt securities
    4,202       228             4,430  
 
                       
Total bonds available-for-sale
  $ 4,145,015     $ 153,363     $ (109,704 )   $ 4,188,674  
 
                       
 
                               
Total debt securities
  $ 11,432,421     $ 522,437     $ (276,935 )   $ 11,677,923  
 
                       
 
                               
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    147,411       51,225       (3,097 )     195,539  
Energy and utilities
    90,664       46,139       (2,358 )     134,445  
Finance
    106,662       53,065       (797 )     158,930  
Healthcare
    86,905       27,804       (2,404 )     112,305  
Industrials
    60,935       25,651       (287 )     86,299  
Information technology
    109,558       39,421       (874 )     148,105  
Materials
    19,073       7,102       (197 )     25,978  
Telecommunication services
    34,812       6,689       (947 )     40,554  
Mutual funds
    83,692       6,065       (77 )     89,680  
 
                       
Total common stock
  $ 739,712     $ 263,161     $ (11,038 )   $ 991,835  
 
                       
Preferred stock
    30,359       5,528       (5,332 )     30,555  
 
                       
Total marketable equity securities
  $ 770,071     $ 268,689     $ (16,370 )   $ 1,022,390  
 
                       
 
                               
Total investments in securities
  $ 12,202,492     $ 791,126     $ (293,305 )   $ 12,700,313  
 
                       
 
                               

10


Table of Contents

                                 
            Gross     Gross        
    Amortized     Unrealized     Unrealized     Estimated Fair  
December 31, 2008   Cost     Gains     Losses     Value  
    (in thousands)  
Debt securities
                               
Bonds held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 11,484     $ 346     $     $ 11,830  
States of the U.S. and political subdivisions of the states
    155,420       4,485       (1,611 )     158,294  
Foreign governments
    28,975       3,481             32,456  
Corporate debt securities
    5,602,250       48,963       (532,544 )     5,118,669  
Residential mortgage backed securities
    735,025       13,557       (39,288 )     709,294  
Commercial mortgage backed securities
    32,110             (24,368 )     7,742  
Collateralized debt securities
    39,768       330       (5,274 )     34,824  
Other debt securities
    76,805       81       (1,292 )     75,594  
 
                       
Total bonds held-to-maturity
  $ 6,681,837     $ 71,243     $ (604,377 )   $ 6,148,703  
 
                       
 
                               
Bonds available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    3,462       900             4,362  
States of the U.S. and political subdivisions of the states
    591,405       6,281       (19,477 )     578,209  
Foreign governments
    5,000       2,332             7,332  
Corporate debt securities
    3,195,355       29,053       (441,400 )     2,783,008  
Residential mortgage backed securities
    427,460       4,355       (14,618 )     417,197  
Collateralized debt securities
    25,649       133       (4,710 )     21,072  
Other debt securities
    11,229             (1,572 )     9,657  
 
                       
Total bonds available-for-sale
  $ 4,259,560     $ 43,054     $ (481,777 )   $ 3,820,837  
 
                       
 
Total debt securities
  $ 10,941,397     $ 114,297     $ (1,086,154 )   $ 9,969,540  
 
                       
 
                               
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    159,068       23,558       (15,093 )     167,533  
Energy and utilities
    97,103       25,105       (8,889 )     113,319  
Finance
    128,866       17,824       (13,048 )     133,642  
Healthcare
    94,807       21,076       (6,380 )     109,503  
Industrials
    72,360       10,786       (9,618 )     73,528  
Information technology
    111,976       7,910       (15,207 )     104,679  
Materials
    30,725       1,685       (6,886 )     25,524  
Telecommunication services
    39,171       5,359       (3,840 )     40,690  
Mutual funds
    86,832       2,389       (4,109 )     85,112  
 
                       
Total common stock
  $ 820,908     $ 115,692     $ (83,070 )   $ 853,530  
 
                       
Preferred stock
    60,718       3,609       (15,505 )     48,822  
 
                       
Total marketable equity securities
  $ 881,626     $ 119,301     $ (98,575 )   $ 902,352  
 
                       
 
Total investments in securities
  $ 11,823,023     $ 233,598     $ (1,184,729 )   $ 10,871,892  
 
                       
The net unrealized losses were primarily related to corporate bonds concentrated within the financial services sector. These net unrealized losses were primarily company specific and due to current credit market conditions.

 

11


Table of Contents

Debt Securities
The amortized cost and estimated fair value, by contractual maturity, of debt securities at September 30, 2009, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
                                 
    Bonds Held-to-Maturity     Bonds Available-for-Sale  
            Estimated Fair             Estimated Fair  
    Amortized Cost     Value     Amortized Cost     Value  
    (in thousands)  
Due in one year or less
  $ 133,071     $ 133,236     $ 134,379     $ 135,270  
 
                               
Due after one year through five years
    3,344,401       3,459,035       1,871,955       1,886,901  
 
                               
Due after five years through ten years
    3,077,303       3,156,312       1,514,999       1,531,206  
 
                               
Due after ten years
    726,780       736,040       613,406       627,008  
 
                       
 
  $ 7,281,555     $ 7,484,623     $ 4,134,739     $ 4,180,385  
 
                               
Without single maturity date
    5,851       4,626       10,276       8,289  
 
                       
 
                               
Total
  $ 7,287,406     $ 7,489,249     $ 4,145,015     $ 4,188,674  
 
                       
For the nine months ended September 30, 2009, securities with an amortized cost of $230,000 were transferred from held-to-maturity to available-for-sale due to evidence of a significant deterioration in the issuers’ creditworthiness. An unrealized loss of $136,000 was established at the time of transfer.
For the nine months ended September 30, 2008, securities with an amortized cost of $91,418,000 were transferred from held-to-maturity to available-for-sale due to evidence of a significant deterioration in the issuers’ creditworthiness. An unrealized loss of $67,383,000 was established at the time of transfer.
Derivative Instruments
American National purchases derivative contracts that serve as economic hedges against fluctuations in the equity markets to which equity indexed annuity products are exposed. Equity indexed annuities include a fixed host annuity contract and an embedded equity derivative. These derivative instruments are not accounted for as hedging under accounting rules. The following table details the gain or loss on derivatives related to equity indexed annuities:
                                         
            Amount of Gain (Loss) Recognized in Income on Derivatives  
Derivatives Not Designated as   Location of Gain (Loss) Recognized in     Three Months Ended September 30,     Nine Months Ended September 30,  
Hedging Instruments   Income on Derivatives     2009     2008     2009     2008  
          (in thousands)  
Equity index options
  Investment income   $ 6,103     $ (4,005 )   $ 4,002     $ (16,741 )
Equity index annuity embedded derivative
  Interest credited to policyholders   $ (5,970 )   $ 2,624     $ (6,708 )   $ 16,942  

 

12


Table of Contents

Unrealized Gains and Losses on Securities
Unrealized gains (losses) on marketable equity securities and bonds available-for-sale, reported in accumulated other comprehensive income (loss), are net of deferred tax liabilities of $97,521,000 and deferred tax assets of $16,538,000 for the periods ended September 30, 2009 and 2008 respectively.
The change in the net unrealized gains (losses) on securities for the nine months ended September 30, 2009 and 2008 are summarized as follows:
                 
    2009     2008  
    (in thousands)  
Bonds available-for-sale
  $ 482,382     $ (244,446 )
Preferred stocks
    12,092       (8,141 )
Common stocks
    219,501       (178,680 )
Amortization of deferred policy acquisition costs
    (193,892 )     94,476  
 
           
 
    520,083       (336,791 )
Provision (benefit) for federal income taxes
    181,497       (117,789 )
 
           
 
  $ 338,586     $ (219,002 )
 
           
Change in unrealized gains (losses) of investments attributable to participating policyholders’ interest
    (11,801 )     6,369  
One time adjustment for the Recognition and Presentation of Other-Than-Temporary Impairments
    50,411        
 
           
Total
  $ 377,196     $ (212,633 )
 
           

 

13


Table of Contents

Gross unrealized losses on investment securities and the fair value of the related securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, as of September 30, 2009 and December 31, 2008, are summarized as follows:
                                                 
    Less than 12 months     12 Months or more     Total  
    Unrealized     Fair     Unrealized     Fair     Unrealized     Fair  
September 30, 2009   Losses     Value     Losses     Value     Losses     Value  
    (in thousands)  
Debt securities
                                               
Bonds held-to-maturity:
                                               
States of the U.S. and political subdivisions of the states
  $ 32     $ 4,689     $ 369     $ 5,960     $ 401     $ 10,649  
Corporate debt securities
    2,979       174,016       116,557       1,095,713       119,536       1,269,729  
Residential mortgage backed securities
    350       22,132       21,368       185,732       21,718       207,864  
Commercial mortgage backed securities
                24,643       8,223       24,643       8,223  
Collateralized debt securities
    905       5,289                   905       5,289  
Other debt securities
    28       3,432                   28       3,432  
 
                                   
Total bonds held-to-maturity
  $ 4,294     $ 209,558     $ 162,937     $ 1,295,628     $ 167,231     $ 1,505,186  
 
                                   
 
                                               
Bonds available-for-sale:
                                               
States of the U.S. and political subdivisions of the states
    5       2,624       357       27,895       362       30,519  
Corporate debt securities
    14,444       170,558       85,475       729,580       99,919       900,138  
Residential mortgage backed securities
    1,717       29,393       5,464       37,414       7,181       66,807  
Collateralized debt securities
    388       2,550       1,854       7,882       2,242       10,432  
 
                                   
Total bonds available-for-sale
  $ 16,554     $ 205,125     $ 93,150     $ 802,771     $ 109,704     $ 1,007,896  
 
                                   
 
                                               
Total debt securities
  $ 20,848     $ 414,683     $ 256,087     $ 2,098,399     $ 276,935     $ 2,513,082  
 
                                   
 
                                               
Marketable equity securities
                                               
Common stock:
                                               
Consumer goods
    920       10,899       2,177       18,545       3,097       29,444  
Energy and utilities
    1,252       10,117       1,106       7,088       2,358       17,205  
Finance
    722       15,178       75       923       797       16,101  
Healthcare
    1,303       20,480       1,101       6,274       2,404       26,754  
Industrials
    26       778       261       6,882       287       7,660  
Information technology
    822       8,886       52       3,516       874       12,402  
Materials
    159       3,495       38       580       197       4,075  
Telecommunications services
    600       4,858       347       3,883       947       8,741  
Mutual funds
    64       2,909       13       271       77       3,180  
 
                                   
Total common stock
  $ 5,868     $ 77,600     $ 5,170     $ 47,962     $ 11,038     $ 125,562  
 
                                   
Preferred stock
    217       4,948       5,115       14,985       5,332       19,933  
 
                                   
Total marketable equity securities
  $ 6,085     $ 82,548     $ 10,285     $ 62,947     $ 16,370     $ 145,495  
 
                                   
 
                                               
Total investments in securities
  $ 26,933     $ 497,231     $ 266,372     $ 2,161,346     $ 293,305     $ 2,658,577  
 
                                   

 

14


Table of Contents

                                                 
    Less than 12 months     12 Months or more     Total  
    Unrealized     Fair     Unrealized     Fair     Unrealized     Fair  
December 31, 2008   Losses     Value     Losses     Value     Losses     Value  
    (in thousands)  
Debt securities
                                               
Bonds held-to-maturity:
                                               
States of the U.S. and political subdivisions of the states
  $ 1,571     $ 21,104     $ 40     $ 383     $ 1,611     $ 21,487  
Corporate debt securities
    280,110       2,685,787       252,434       928,186       532,544       3,613,973  
Residential mortgage backed securities
    31,471       186,404       7,817       50,425       39,288       236,829  
Commercial mortgage backed securities
    24,368       7,742                   24,368       7,742  
Collateralized debt securities
    613       4,785       4,661       23,844       5,274       28,629  
Other debt securities
    1,292       9,566                   1,292       9,566  
 
                                   
Total bonds held-to-maturity
  $ 339,425     $ 2,915,388     $ 264,952     $ 1,002,838     $ 604,377     $ 3,918,226  
 
                                   
 
                                               
Bonds available-for-sale:
                                               
States of the U.S. and political subdivisions of the states
    15,383       274,191       4,094       35,295       19,477       309,486  
Corporate debt securities
    247,590       1,683,287       193,810       643,327       441,400       2,326,614  
Residential mortgage backed securities
    8,067       102,382       6,551       51,327       14,618       153,709  
Collateralized debt securities
    1,822       10,295       2,888       8,529       4,710       18,824  
Other debt securities
    1,572       9,657                   1,572       9,657  
 
                                   
Total bonds available-for-sale
  $ 274,434     $ 2,079,812     $ 207,343     $ 738,478     $ 481,777     $ 2,818,290  
 
                                   
 
                                               
Total debt securities
  $ 613,859     $ 4,995,200     $ 472,295     $ 1,741,316     $ 1,086,154     $ 6,736,516  
 
                                   
 
                                               
Marketable equity securities
                                               
Common stock:
                                               
Consumer goods
    13,717       66,398       1,376       5,014       15,093       71,412  
Energy and utilities
    8,203       24,909       686       2,818       8,889       27,727  
Finance
    12,729       49,150       319       1,190       13,048       50,340  
Healthcare
    5,177       29,429       1,203       5,826       6,380       35,255  
Industrials
    9,496       23,880       122       593       9,618       24,473  
Information technology
    13,859       57,237       1,348       2,583       15,207       59,820  
Materials
    6,665       15,164       221       456       6,886       15,620  
Telecommunications services
    3,838       16,570       2       7       3,840       16,577  
Mutual funds
    4,107       16,775       2       6       4,109       16,781  
 
                                   
Total common stock
  $ 77,791     $ 299,512     $ 5,279     $ 18,493     $ 83,070     $ 318,005  
 
                                   
Preferred stock
    1,238       7,853       14,267       31,835       15,505       39,688  
 
                                   
Total marketable equity securities
  $ 79,029     $ 307,365     $ 19,546     $ 50,328     $ 98,575     $ 357,693  
 
                                   
 
                                               
Total investments in securities
  $ 692,888     $ 5,302,565     $ 491,841     $ 1,791,644     $ 1,184,729     $ 7,094,209  
 
                                   
For all investment securities in an unrealized loss position, including those securities in an unrealized loss position for 12 months or more, American National performs quarterly analyses to determine if an-other-than temporary impairment loss should be recorded for any securities. As of September 30, 2009, the securities above did not meet management’s criteria for other-than temporary impairment. At September 30, 2009, the unrealized losses were primarily the result of the deterioration in credit spreads as well as the continuance of an illiquid market. There were no delinquent coupon payments related to the bonds for which we did not record an other-than-temporary impairment as of September 30, 2009. Even though the duration of the unrealized losses on the securities exceeds one year, American National maintains the intent and ability to hold the securities until either their maturity or their value recovers.

 

15


Table of Contents

Investment Income and Realized Gains (Losses)
Investment income and realized gains (losses) on investments, before federal income taxes, for the three and nine months ended September 30, 2009 and 2008 are summarized as follows:
                                                                 
    Investment Income     Realized Gains/(Losses)     Investment Income     Realized Gains/(Losses)  
    Three Months Ended September 30,     Three Months Ended September 30,     Nine Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008     2009     2008     2009     2008  
    (in thousands)  
Bonds
  $ 160,559     $ 156,446     $ 2,094     $ 46,267     $ 468,289     $ 465,837     $ (1,309 )   $ 49,692  
Preferred stocks
    547       1,596             (47,144 )     2,613       4,547       (1,620 )     (46,590 )
Common stocks
    5,494       6,819       469       8,898       18,195       22,075       (349 )     22,481  
Mortgage loans
    36,303       32,475                   102,612       86,365              
Real estate
    35,929       33,821       1,523             97,994       89,240       1,523       1,739  
Other invested assets
    14,597       4,930       (7 )     (4,083 )     29,581       22,013       280       (4,083 )
 
                                               
 
    253,429       236,087       4,079       3,938       719,284       690,077       (1,475 )     23,239  
Investment expenses
    (31,163 )     (26,818 )                 (89,158 )     (77,352 )            
Decrease (increase) in valuation allowances
                (827 )     (695 )                 (3,334 )     (2,865 )
 
                                               
Total
  $ 222,266     $ 209,269     $ 3,252     $ 3,243     $ 630,126     $ 612,725     $ (4,809 )   $ 20,374  
 
                                               
Other-Than-Temporary Impairment
The following tables summarize other-than-temporary impairments (“OTTI”) for the periods indicated:
                                 
    Three Months Ended September 30,     Nine Months Ended September 30,  
    2009     2008     2009     2008  
    (in thousands)  
Bonds
  $ (4,148 )   $ (146,930 )   $ (10,046 )   $ (163,919 )
Common stocks
    (39 )     (58,298 )     (67,789 )     (68,358 )
Mortgage loans
                (500 )      
 
                       
Total
  $ (4,187 )   $ (205,228 )   $ (78,335 )   $ (232,277 )
 
                       
As discussed in Note 2, certain OTTI losses on bonds are bifurcated into two components: credit losses and non-credit losses. The net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the bond and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the bond prior to impairment. Any remaining difference between the bond’s fair value and amortized cost (“non-credit loss impairments”) is recognized in other comprehensive income.
All OTTIs recognized on bonds were entirely comprised of credit losses; therefore, during the three months ended September 30, 2009, no non-credit loss was recognized in other comprehensive income.
5. CREDIT RISK MANAGEMENT
American National employs a strategy to invest funds at the highest return possible commensurate with sound and prudent investing practices to ensure a well-diversified investment portfolio.

 

16


Table of Contents

Bonds
Management believes American National’s bond portfolio is diversified and of investment grade. The bond portfolio distributed by quality rating at September 30, 2009 and December 31, 2008 is summarized as follows:
                 
    September 30,     December 31,  
    2009     2008  
AAA
    12 %     17 %
AA+
    2 %     1 %
AA
    2 %     6 %
AA-
    4 %     4 %
A+
    8 %     11 %
A
    14 %     16 %
A-
    13 %     13 %
BBB+
    14 %     11 %
BBB
    17 %     12 %
BBB-
    7 %     4 %
BB+ and below
    7 %     5 %
 
           
Total
    100 %     100 %
 
           
Common Stock
American National’s stock portfolio by market sector distribution at September 30, 2009 and December 31, 2008 is summarized as follows:
                 
    September 30,     December 31,  
    2009     2008  
Consumer goods
    20 %     20 %
Financials
    16 %     16 %
Energy and utilities
    13 %     13 %
Information technology
    15 %     13 %
Healthcare
    11 %     13 %
Mutual funds
    9 %     10 %
Industrials
    9 %     8 %
Communications
    4 %     5 %
Materials
    3 %     2 %
 
           
Total
    100 %     100 %
 
           
Mortgage Loans and Investment Real Estate
American National invests primarily in the commercial sector in areas that offer the potential for property value appreciation. Generally, mortgage loans are secured by first liens on income-producing real estate.
Mortgage loans and investment real estate by property type distribution at September 30, 2009 and December 31, 2008 are summarized as follows:
                                 
    Mortgage Loans     Investment Real Estate  
    September 30,     December 31,     September 30,     December 31,  
    2009     2008     2009     2008  
Office buildings
    32 %     30 %     17 %     18 %
Industrial
    27 %     25 %     40 %     45 %
Shopping centers
    18 %     21 %     24 %     23 %
Hotels and motels
    16 %     17 %     2 %     2 %
Other
    4 %     4 %     15 %     11 %
Commercial
    3 %     3 %     2 %     1 %
 
                       
Total
    100 %     100 %     100 %     100 %
 
                       

 

17


Table of Contents

American National has a diversified portfolio of mortgage loans and real estate properties. Mortgage loans and real estate investments by geographic distribution at September 30, 2009 and December 31, 2008 are as follows:
                                 
    Mortgage Loans     Investment Real Estate  
    September 30,     December 31,     September 30,     December 31,  
    2009     2008     2009     2008  
West South Central
    23 %     22 %     62 %     64 %
East North Central
    19 %     22 %     9 %     6 %
South Atlantic
    20 %     17 %     16 %     16 %
Pacific
    11 %     13 %     3 %     2 %
Middle Atlantic
    8 %     10 %            
Mountain
    5 %     5 %           1 %
New England
    4 %     5 %            
East South Central
    6 %     4 %     9 %     10 %
West North Central
    4 %     2 %     1 %     1 %
 
                       
Total
    100 %     100 %     100 %     100 %
 
                       

 

18


Table of Contents

6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments at September 30, 2009 and December 31, 2008 are as follows:
                                 
    September 30, 2009     December 31, 2008  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
    (in thousands)  
Financial assets:
                               
Fixed maturities
                               
Held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 21,265     $ 21,513     $ 11,484     $ 11,830  
States of the U.S. and political subdivisions of the states
    236,080       246,983       155,420       158,294  
Foreign governments
    28,991       32,690       28,975       32,456  
Corporate debt securities
    6,209,663       6,413,790       5,602,250       5,118,669  
Residential mortgage backed securities
    704,014       709,888       735,025       709,294  
Commercial mortgage backed securities
    32,867       8,224       32,110       7,742  
Collateralized debt securities
    9,752       8,910       39,768       34,824  
Other debt securities
    44,774       47,251       76,805       75,594  
 
                       
Total fixed maturities, held-to-maturity
  $ 7,287,406     $ 7,489,249     $ 6,681,837     $ 6,148,703  
 
                       
Available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    4,047       4,047       4,362       4,362  
States of the U.S. and political subdivisions of the states
    607,006       607,006       578,209       578,209  
Foreign governments
    6,395       6,395       7,332       7,332  
Corporate debt securities
    3,176,838       3,176,838       2,783,008       2,783,008  
Residential mortgage backed securities
    367,275       367,275       417,197       417,197  
Collateralized debt securities
    22,683       22,683       21,072       21,072  
Other debt securities
    4,430       4,430       9,657       9,657  
 
                       
Total fixed maturities, available-for-sale
  $ 4,188,674     $ 4,188,674     $ 3,820,837     $ 3,820,837  
 
                       
Total fixed maturities
  $ 11,476,080     $ 11,677,923     $ 10,502,674     $ 9,969,540  
 
                       
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    195,539       195,539       167,533       167,533  
Energy and utilities
    134,445       134,445       113,319       113,319  
Finance
    158,930       158,930       133,642       133,642  
Healthcare
    112,305       112,305       109,503       109,503  
Industrials
    86,299       86,299       73,528       73,528  
Information technology
    148,105       148,105       104,679       104,679  
Materials
    25,978       25,978       25,524       25,524  
Mutual funds
    89,680       89,680       85,112       85,112  
Telecommunication services
    40,554       40,554       40,690       40,690  
Preferred stock
    30,555       30,555       48,822       48,822  
 
                       
Total marketable equity securities
  $ 1,022,390     $ 1,022,390     $ 902,352     $ 902,352  
 
                       
Options
    20,437       20,437       6,157       6,157  
Mortgage loans on real estate
    2,096,286       2,076,607       1,877,053       1,891,895  
Policy loans
    360,596       360,596       354,398       354,398  
Short-term investments
    650,482       650,482       295,170       295,170  
 
                       
Total financial assets
  $ 15,626,271     $ 15,808,435     $ 13,937,804     $ 13,419,512  
 
                       
Financial liabilities:
                               
Investment contracts
    7,557,144       7,557,144       6,626,561       6,626,561  
Liability for embedded derivatives of equity indexed annuities
    18,513       18,513       6,208       6,208  
Notes payable
    122,294       122,294       111,922       111,922  
 
                       
Total financial liabilities
  $ 7,697,951     $ 7,697,951     $ 6,744,691     $ 6,744,691  
 
                       
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. An asset or liability’s classification 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. American National defines active markets based on average trading volume for equity securities. The size of the bid/ask spread is used as an indicator of market activity for fixed maturity securities.

 

19


Table of Contents

      Level 2   Quoted prices in markets that are not active or inputs that are observable either 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.
American National has analyzed the third-party pricing services valuation methodologies and related inputs, and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3.
American National utilizes a pricing service to estimate fair value measurements for approximately 99.0% of fixed maturity securities. The pricing service utilizes market quotations for fixed maturity securities that have quoted prices in active markets. Since fixed maturities 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, the pricing service uses an Option Adjusted Spread model to develop prepayment and interest rate scenarios.
The pricing service evaluates each asset class based on relevant market information, relevant 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 by the pricing service and the techniques applied by the pricing service to produce quotes that represent the fair value of a specific security. The review of the pricing service’s methodology confirms the service is utilizing information from organized transactions or a technique that represents a market participant’s assumptions. American National does not adjust quotes received by the pricing service.
The pricing service utilized by American National has indicated that it will only produce an estimate of fair value if there is objectively verifiable information available. If the pricing service discontinues pricing an investment, American National would be required to produce an estimate of fair value using some of the same methodologies as the pricing service, but would have to make assumptions for market based inputs that are unavailable due to market conditions.
The fair value estimates of most fixed maturity investments including municipal bonds are based on observable market information rather than market quotes. Accordingly, the estimates of fair value for such fixed maturities provided by the pricing service are included in the amount disclosed in Level 2 of the hierarchy.
Additionally, American National holds a small amount of fixed maturities that have characteristics that make them unsuitable for matrix pricing. For these fixed securities, a quote from a 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. The pricing of certain private placement debt also includes significant non-observable inputs, the internally determined credit rating of the security and an externally provided credit spread, and are classified in Level 3.
For public common and preferred stocks, American National receives prices from a nationally recognized pricing service that are based on observable market transactions and these securities are disclosed in Level 1. For certain preferred stock held, current market quotes in active markets are unavailable. In these instances, American National receives an estimate of fair value from the pricing service that provides fair value estimates for the fixed maturity securities. The service utilizes some of the same methodologies to price the preferred stocks as it does for the fixed maturities. These estimates for equity securities are disclosed in Level 2.

 

20


Table of Contents

Some assets and liabilities do not fit the hierarchical model for determining fair value. For policy loans, the carrying amount approximates their fair value, because the policy loans cannot be separated from the policy contract. The fair value of investment contract liabilities is determined in accordance with GAAP rules on insurance products and is estimated using a discounted cash flow model, assuming the companies’ current interest rates on new products. The carrying value for these contracts approximates their fair value. The carrying amount for notes payable approximates their fair value.
The following tables provide quantitative disclosures regarding fair value hierarchy measurements of our financial assets and liabilities at September 30, 2009 and December 31, 2008:
                                 
            Fair Value Measurement at September 30, 2009 Using:  
            Quoted Prices     Significant        
            in Active     Other     Significant  
    Fair Value at     Markets for     Observable     Unobservable  
    September 30,     Identical Assets     Inputs     Inputs  
    2009     (Level 1)     (Level 2)     (Level 3)  
    (in thousands)  
Financial assets:
                               
Fixed maturities
                               
Held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 21,513     $     $ 21,513     $  
States of the U.S. and political subdivisions of the states
    246,983             246,983        
Foreign governments
    32,690             32,690        
Corporate debt securities
    6,413,790             6,405,013       8,777  
Residential mortgage backed securities
    709,888             706,487       3,401  
Commercial mortgage backed securities
    8,224             8,224        
Collateralized debt securities
    8,910             744       8,166  
Other debt securities
    47,251             47,251        
 
                       
Total fixed maturities, held-to-maturity
  $ 7,489,249     $     $ 7,468,905     $ 20,344  
 
                       
Available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    4,047             4,047        
States of the U.S. and political subdivisions of the states
    607,006             607,006        
Foreign governments
    6,395             6,395        
Corporate debt securities
    3,176,838             3,159,410       17,428  
Residential mortgage backed securities
    367,275             367,258       17  
Commercial mortgage backed securities
                       
Collateralized debt securities
    22,683             20,973       1,710  
Other debt securities
    4,430             4,430        
 
                       
Total fixed maturities, available-for-sale
  $ 4,188,674     $     $ 4,169,519     $ 19,155  
 
                       
Total fixed maturities
  $ 11,677,923     $     $ 11,638,424     $ 39,499  
 
                       
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    195,539       195,539              
Energy and utilities
    134,445       134,445              
Finance
    158,930       158,930              
Healthcare
    112,305       112,305              
Industrials
    86,299       86,299              
Information technology
    148,105       148,105              
Materials
    25,978       25,978              
Mutual funds
    89,680       89,680              
Telecommunication services
    40,554       40,554              
Preferred stock
    30,555       29,589             966  
 
                       
Total marketable equity securities
  $ 1,022,390     $ 1,021,424     $     $ 966  
 
                       
Options
    20,437                   20,437  
Mortgage loans on real estate
    2,076,607             2,076,607        
Short-term investments
    650,482             650,482        
 
                       
Total financial assets
  $ 15,447,839     $ 1,021,424     $ 14,365,513     $ 60,902  
 
                       
Financial liabilities:
                               
Liability for embedded derivatives of equity indexed annuities
    18,513                   18,513  
 
                       
Total financial liabilities
  $ 18,513     $     $     $ 18,513  
 
                       

 

21


Table of Contents

                                 
            Fair Value Measurement at December 31, 2008 Using:  
            Quoted Prices     Significant        
            in Active     Other     Significant  
    Fair Value at     Markets for     Observable     Unobservable  
    December 31,     Identical Assets     Inputs     Inputs  
    2008     (Level 1)     (Level 2)     (Level 3)  
    (in thousands)  
Financial assets:
                               
Fixed maturities
                               
Held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 11,830     $     $ 11,830     $  
States of the U.S. and political subdivisions of the states
    158,294             158,294        
Foreign governments
    32,456             32,456        
Corporate debt securities
    5,118,669             5,111,068       7,601  
Residential mortgage backed securities
    709,294             705,491       3,803  
Commercial mortgage backed securities
    7,742             7,742        
Collateralized debt securities
    34,824             26,117       8,707  
Other debt securities
    75,594             75,584       10  
 
                       
Total fixed maturities, held-to-maturity
  $ 6,148,703     $     $ 6,128,582     $ 20,121  
 
                       
Available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    4,362             4,362        
States of the U.S. and political subdivisions of the states
    578,209             578,209        
Foreign governments
    7,332             7,332        
Corporate debt securities
    2,783,008             2,752,640       30,368  
Residential mortgage backed securities
    417,197             407,753       9,444  
Commercial mortgage backed securities
                       
Collateralized debt securities
    21,072             18,062       3,010  
Other debt securities
    9,657             9,657        
 
                       
Total fixed maturities, available-for-sale
  $ 3,820,837     $     $ 3,778,015     $ 42,822  
 
                       
Total fixed maturities
  $ 9,969,540     $     $ 9,906,597     $ 62,943  
 
                       
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    167,533       167,533              
Energy and utilities
    113,319       113,319              
Finance
    133,642       133,642              
Healthcare
    109,503       109,503              
Industrials
    73,528       73,528              
Information technology
    104,679       104,679              
Materials
    25,524       25,524              
Mutual funds
    85,112       85,112              
Telecommunication services
    40,690       40,690              
Preferred stock
    48,822       27,566             21,256  
 
                       
Total marketable equity securities
  $ 902,352     $ 881,096     $     $ 21,256  
 
                       
Options
    6,157                   6,157  
Mortgage loans on real estate
    1,891,895             1,891,895        
Short-term investments
    295,170             295,170        
 
                       
Total financial assets
  $ 13,065,114     $ 881,096     $ 12,093,662     $ 90,356  
 
                       
Financial liabilities:
                               
Liability for embedded derivatives of equity indexed annuities
    6,208                   6,208  
 
                       
Total financial liabilities
  $ 6,208     $     $     $ 6,208  
 
                       

 

22


Table of Contents

For assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period, a reconciliation of the beginning and ending balances are as follows:
         
    Fair Value Measurements Using Significant  
    Unobservable Inputs  
    Level 3 Totals  
    (in thousands)  
Beginning balance — January 1, 2009
  $ 84,148  
Net losses included in other comprehensive income (loss)
    6,589  
Net fair value change for derivatives included in net income (loss)
    (13,494 )
Purchases, sales, and settlements of derivatives (net)
    9,883  
Transfers into Level 3
    175  
Transfers out of Level 3
    (44,912 )
 
     
Ending balance — September 30, 2009
    42,389  
 
     
The unrealized loss for the nine months ended September 30, 2009 of Level 3 assets was $6,589,000. There were no unrealized gains in Level 3 assets at September 30, 2009.
The transfers into Level 3 were the result of securities no longer being priced by the third-party pricing service. As the securities were priced by a third-party service, inputs were used that are observable or derived from market data which resulted in classification of these assets as Level 2. In accordance with American National’s pricing methodology, these securities are being valued with similar techniques as the pricing service; however, company developed data is used in the process, which results in unobservable inputs, and a corresponding transfer into Level 3. The transfers out of level 3 were comprised of $20.8 million of sales, $13.8 million of maturities, and $10.3 million of transfers into Level 2.
7. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs as of September 30, 2009 and December 31, 2008, and premiums for the nine month periods ended September 30, 2009 and 2008 are summarized as follows:
                                 
    Life     Accident     Property        
    & Annuity     & Health     & Casualty     Total  
    (in thousands)  
Balance at December 31, 2008
  $ 1,269,308     $ 74,870     $ 138,486     $ 1,482,664  
 
                       
Additions
    146,776       12,117       192,456       351,349  
Amortization
    (105,811 )     (16,379 )     (180,779 )     (302,969 )
Effect of change in unrealized loss on available-for-sale securities
    (193,892 )                 (193,892 )
 
                       
Net changes
    (152,927 )     (4,262 )     11,677       (145,512 )
 
                       
 
                               
Balance at September 30, 2009
  $ 1,116,381     $ 70,608     $ 150,163     $ 1,337,152  
 
                       
 
                               
Premiums for the nine months ended:
                               
September 30, 2009
  $ 360,779     $ 224,001     $ 866,989     $ 1,451,769  
 
                       
September 30, 2008
  $ 313,072     $ 217,765     $ 885,941     $ 1,416,778  
 
                       
Commissions paid to agents comprise the majority of the additions to deferred policy acquisition costs for each year.

 

23


Table of Contents

8. LIABILITY FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Activity in the liability for accident and health and property and casualty unpaid claims and claim adjustment expenses are summarized as shown below:
                 
    2009     2008  
    (in thousands)  
Balance at January 1
  $ 1,310,272     $ 1,256,698  
Less reinsurance recoverables
    377,692       363,140  
 
           
Net beginning balance
    932,580       893,558  
 
           
Incurred related to:
               
Current year
    863,902       883,836  
Prior years
    (5,229 )     (27,299 )
 
           
Total incurred
    858,673       856,537  
 
           
Paid related to:
               
Current year
    502,882       505,222  
Prior years
    340,093       314,904  
 
           
Total paid
    842,975       820,126  
 
           
Net balance at September 30
    948,278       929,969  
Plus reinsurance recoverables
    273,091       434,276  
 
           
Balance at September 30
  $ 1,221,369     $ 1,364,245  
 
           
The balances at September 30 are included in policy and contract claims in the consolidated statements of financial position.
The potential uncertainty generated by volatility in loss development profiles is adjusted for through the selection of loss development factor patterns for each line of insurance. The net and gross reserve calculations have shown redundancies for the last several years as a result of losses emerging favorably compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred losses and loss adjustment expenses attributable to insured events of prior years decreased by approximately $5,000,000 for the nine months ended September 30, 2009 and $27,000,000 for the same period in 2008.
9. NOTES PAYABLE
At September 30, 2009 and December 31, 2008, American National’s real estate holding companies were partners in affiliates that had notes payable to third-party lenders totaling $122,294,000 and $111,922,000, respectively. These notes have interest rates ranging from 5.15% to 8.07% and maturities from 2010 to 2016. Each note is secured by the real estate owned through the respective affiliated entity, and American National’s liability for these notes is limited to the amount of its investment in the respective affiliate, which totaled $18,735,000 and $13,226,000 at September 30, 2009 and December 31, 2008, respectively.
10. FEDERAL INCOME TAXES
The federal income tax provisions vary from the amounts computed when applying the statutory federal income tax rate. A reconciliation of the effective tax rate of the companies to the statutory federal income tax rate for the three and nine months ended September 30, 2009 and 2008 is as follows:
                                                                 
    Three Months Ended     Nine Months Ended  
    September 30,     September 30,  
    2009     2008     2009     2008  
    Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  
    (dollar amounts in thousands)  
Income tax expense (benefit) on pre-tax income
  $ 12,274       35.0 %   $ (64,238 )     35.0 %   $ (18,982 )     35.0 %   $ (53,788 )     35.0 %
Tax-exempt investment income
    (2,423 )     (6.9 )     (2,268 )     1.2       (7,127 )     13.1       (6,580 )     4.3  
Dividend exclusion
    (3,736 )     (10.7 )     (2,052 )     1.1       (10,158 )     18.7       (9,144 )     6.0  
Miscellaneous tax credits, net
    (1,520 )     (4.3 )     (1,130 )     0.6       (4,706 )     8.7       (3,528 )     2.3  
Other items, net
    (1,366 )     (3.9 )     7,730       (4.2 )     2,403       (4.4 )     10,275       (6.7 )
 
                                               
 
  $ 3,229       9.2 %   $ (61,958 )     33.7 %   $ (38,570 )     71.1 %   $ (62,765 )     40.9 %
 
                                               

 

24


Table of Contents

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities at September 30, 2009 and December 31, 2008 are as follows:
                 
    September 30,     December 31,  
    2009     2008  
    (in thousands)  
DEFERRED TAX ASSETS:
               
Marketable securities, principally due to impairment losses
  $ 114,772     $ 138,455  
Marketable securities, principally due to net unrealized losses
          146,192  
Investment in real estate and other invested assets, principally due to investment valuation allowances
    1,142       1,279  
Policyholder funds, principally due to policy reserve discount
    200,902       187,277  
Policyholder funds, principally due to unearned premium reserve
    33,130       30,716  
Non-qualified pension
    28,951       27,630  
Participating policyholders’ surplus
    28,535       28,615  
Pension
    37,513       36,968  
Commissions and other expenses
    15,961       24,395  
Other assets
    16,359       8,518  
 
           
Net deferred tax assets
  $ 477,265     $ 630,045  
 
           
 
               
DEFERRED TAX LIABILITIES:
               
Marketable securities, principally due to net unrealized gains
    (103,209 )      
Investment in bonds, principally due to accrual of discount on bonds
    (5,515 )     (18,221 )
Deferred policy acquisition costs, due to difference between GAAP and tax amortization methods
    (360,464 )     (410,939 )
Property, plant and equipment, principally due to difference between GAAP and tax depreciation methods
    (5,887 )     (5,377 )
 
           
Net deferred tax liabilities
    (475,075 )     (434,537 )
 
           
Total deferred tax
  $ 2,190     $ 195,508  
 
           
Income tax related interest expense is included with the “Other operating costs and expenses” in the Consolidated Statements of Income. No interest expense has been incurred as of September 30, 2009, while $133,000 in interest was recognized as of September 30, 2008. No provision has provided for penalties related to American National’s uncertain tax positions.
The statute of limitations for the examination of federal income tax returns by the Internal Revenue Service for years 2005 to 2008 has either been extended or has not expired. 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.
11. COMPONENTS OF COMPREHENSIVE INCOME (LOSS)
The items included in comprehensive income (loss), other than net income (loss), are unrealized gains and losses on available-for-sale securities (net of deferred acquisition costs), foreign exchange adjustments and pension liability adjustments. The details on the unrealized gains and losses included in comprehensive income (loss), and the related tax effects thereon, are as follows:
                         
    Before     Federal        
    Federal     Income Tax     Net of Federal  
    Income Tax     Expense     Income Tax  
    (in thousands)  
September 30, 2009
                       
Unrealized gain
  $ 713,975     $ 284,034     $ 429,941  
Less: reclassification adjustment for net losses realized in net income
    (81,146 )     (28,401 )     (52,745 )
 
                 
Net unrealized gain component of comprehensive income
  $ 632,829     $ 255,633     $ 377,196  
 
                 
 
                       
September 30, 2008
                       
Unrealized loss
  $ (431,267 )   $ (310,954 )   $ (120,313 )
Less: reclassification adjustment for net losses realized in net income
    (142,030 )     (49,710 )     (92,320 )
 
                 
Net unrealized loss component of comprehensive income
  $ (573,297 )   $ (360,664 )   $ (212,633 )
 
                 

 

25


Table of Contents

12. STOCKHOLDERS’ EQUITY AND NONCONTROLLING INTERESTS
Common Stock
American National has only 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 were as follows:
                         
    September 30,     December 31,     September 30,  
    2009     2008     2008  
Common Stock
                       
Shares issued
    30,832,449       30,832,449       30,832,449  
Treasury shares
    4,012,283       4,013,616       4,013,616  
Restricted shares
    261,334       339,001       339,001  
 
                 
Unrestricted outstanding shares
    26,558,832       26,479,832       26,479,832  
 
                 
Stock-Based Compensation
American National has one stock-based compensation plan. Under this plan, American National can grant Non-Qualified Stock Options, Stock Appreciation Rights, Restricted Stock Awards, Performance Awards, Incentive Awards and any combination of these. 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.
The plan provides for the award of Restricted Stock. Awards entitle the participant to full dividend and voting rights. 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 feature a graded vesting schedule in the case of the retirement of an award holder. Eight awards of restricted stock have been granted, with a total of 340,334 shares granted at an exercise price of zero. These awards result in compensation expense to American National over the vesting period. The amount of compensation expense recorded was $3,052,445 for the nine months ended September 30, 2009 and $2,694,000 for the 12 months ended December 31, 2008. On August 1, 2009 the restrictions on 60,000 shares of Restricted Stock expired.
The plan provides for the award of Stock Appreciation Rights (SAR). The SARs give the holder the right to compensation based on the difference between the price of a share of stock on the grant date and the price on the exercise date. The SARs vest at a rate of 20% per year for 5 years and expire 5 years after the vesting period. American National uses the average of the high and low price on the last trading day of the period to calculate the fair value and compensation expense for SARs. The fair value of the SARs was $13,000 at September 30, 2009 and $16,000 at December 31, 2008. Compensation expense (income) was recorded totaling $20,000 for the nine months ended September 30, 2009 and ($1,777,000) for the year ended December 31, 2008.
SAR and Restricted Stock (RS) information for September 30, 2009 and December 31, 2008 and 2007 is as follows:
                                 
            SAR Weighted-             RS Weighted-  
            Average Price per             Average Price  
    SAR Shares     Share     RS Shares     per Share  
Outstanding at December 31, 2007
    96,724     $ 97.84       253,000     $ 4.40  
 
                       
Granted
    96,917       115.92       86,001        
Exercised
    (4,109 )     81.30              
 
                       
Outstanding at December 31, 2008
    189,532     $ 107.44       339,001     $ 3.28  
 
                       
Granted
    2,999       66.76       1,333        
Exercised
    (1,100 )     57.00       (79,000 )      
Canceled
    (6,630 )     107.45              
 
                       
Outstanding at September 30, 2009
    184,801     $ 107.08       261,334     $  
 
                       
The weighted-average contractual remaining life for the 184,801 SARs outstanding as of September 30, 2009, is 6.9 years. The weighted-average exercise price for these shares is $107.08 per share. Of the shares outstanding, 87,768 are exercisable at a weighted-average exercise price of $101.27 per share.
The weighted-average contractual remaining life for the 261,334 Restricted Stock shares outstanding as of September 30, 2009, is 5.8 years. The weighted-average exercise price for these shares is $0 per share. None of the shares outstanding was exercisable.

 

26


Table of Contents

Earnings (Loss) Per Share
Basic earnings per share was calculated using the number of shares outstanding of 26,558,832 at September 30, 2009 and 26,479,832 at December 31, 2008. The Restricted Stock resulted in diluted earnings per share as follows. Due to the net losses incurred in 2009 and 2008, diluted earnings per share are equal to basic earnings per share.
                         
    September 30,     December 31,     September 30,  
    2009     2008     2008  
Unrestricted shares outstanding
    26,558,832       26,479,832       26,479,832  
Incremental shares from restricted stock
    42,536       137,625       152,076  
 
                 
Total shares for diluted calculations
    26,601,368       26,617,457       26,631,908  
Diluted earnings (losses) per share
    ($0.73 )     ($5.82 )     ($3.34 )
 
                 
Dividends
American National’s payment of dividends to stockholders is restricted by statutory regulations. Generally, 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 statutory net gain from operations on an annual, non-cumulative basis. Additionally, insurance companies are not permitted to distribute the excess of stockholders’ equity, as determined on a GAAP basis over that determined on a statutory basis. At September 30, 2009 and December 31, 2008, American National’s statutory capital and surplus was $1,776,726,000 and $1,804,712,000, respectively.
Generally, the same restrictions on amounts that can transfer in the form of dividends, loans, or advances apply to American National’s insurance subsidiaries.
At September 30, 2009, approximately $1,360,071,000 of American National’s consolidated stockholders’ equity represents net assets of its insurance subsidiaries, compared to $1,297,226,000 at December 31, 2008. Any transfer of these net assets to American National would be subject to statutory restrictions and approval.
Noncontrolling Interests
American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company that is owned by its policyholders. However, the company has a management agreement which effectively gives complete control of County Mutual to American National. As a result, County Mutual is included in the consolidated financial statements. The interest that the policyholders of County Mutual have in the financial position of County Mutual is reflected as a noncontrolling interest totaling $6,750,000 at September 30, 2009 and December 31, 2008.
American National’s subsidiary, ANTAC, Inc., is a partner in various joint ventures. ANTAC exercises significant control or ownership of these joint ventures, resulting in their consolidation into the American National consolidated financial statements. As a result of the consolidation, the interest of the other partners of the joint ventures is shown as noncontrolling interest. Noncontrolling interests were a net liability of $3,401,000 and $1,627,000 at September 30, 2009 and December 31, 2008, respectively.
13. SEGMENT INFORMATION
American National and its subsidiaries are engaged principally in the insurance business. Management organizes the business into five operating segments:
    The Life segment markets whole, term, universal, variable and credit life insurance on a national basis primarily through employee, independent and multiple line agents, direct marketing channels and independent third-party marketing organizations.
 
    The Annuity segment develops sells and supports fixed, equity-indexed, and variable annuity products. These products are primarily sold through independent agents and brokers, but are also sold through employee agents, financial institutions and multiple line agents.
 
    The Health segment’s primary lines of business are Medicare Supplement, medical expense, employer medical stop loss, true group, other supplemental health products and credit disability insurance. Health products are typically distributed through employee agents, exclusive agents, independent agents and Managing General Underwriters.

 

27


Table of Contents

    The Property and Casualty segment writes auto, homeowners, agribusiness, and other personal and commercial insurance. These products are primarily sold through multiple line exclusive agents. Credit related property insurance is also written through independent agents.
 
    The Corporate and Other business segment consists of net investment income on the capital not allocated to the insurance lines and the operations of non-insurance lines of business. This segment also provides mutual fund products.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Many of the principal factors that drive the profitability of each operating segment are separate and distinct. All income and expense amounts specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Income and expenses not specifically attributable to policy transactions are allocated to each segment as follows:
    Net investment income from fixed income assets (bonds and mortgage loans) is allocated based on the funds generated by each line of business at the average yield available from these fixed income assets at the time such funds become available.
 
    Net investment income from all other assets is allocated to the operating segments in accordance with the amount of equity invested in each segment, with the remainder going to Corporate and Other.
 
    Expenses are allocated to the lines based upon various factors, including premium and commission ratios within the respective operating segments.
 
    All of the realized gains and losses are allocated to the Corporate and Other segment. The risk of realized losses is charged to the insurance segments through a monthly default charge with the income from the charge allocated to the Corporate and Other segment to compensate it for any potential realized losses that would be recorded. The default charge rate is set as a percentage of the asset base that supports each of the insurance segments, with the rate set depending on the risk level of the asset involved.
 
    Equity in earnings of unconsolidated affiliates is allocated to Corporate and Other.
 
    Federal income taxes have been applied to the net earnings of each segment based on a fixed tax rate. Any difference between the amount allocated to the segments and the total federal income tax amount is allocated to Corporate and Other.
Segment operating income provides pertinent and advantageous information to investors, as it represents the basis on which American National’s business performance is internally assessed by its chief operating decision makers. During the third quarter of 2008, the chief operating decision makers redefined the segment reporting structure to better align it with their current processes for assessing business performance and allocating resources. In previous financial reporting periods, operating segments were aggregated based on marketing distribution channels. In accordance with the performance measurements used by the chief operating decision makers, the segment reporting has been reorganized into five operating segments according to the type of insurance products sold or services rendered. The segment reporting for prior periods has been restated to reflect the change in business segments.
The following tables summarizes American National’s key financial measures used by the chief operating decision makers, including operating results and allocation of assets as of and for the three and nine months ended September 30, 2009 and 2008:
                                                 
                            Property     Corporate        
(Three Months Ended September 30, 2009)   Life     Annuity     Health     & Casualty     & Other     Total  
    (in thousands)  
Premiums and other revenues:
                                               
Premiums
  $ 76,320     $ 58,284     $ 74,428     $ 298,073     $     $ 507,105  
Other policy revenues
    41,569       3,723                         45,292  
Net investment income
    55,724       118,963       4,031       16,171       27,377       222,266  
Other income
    948       (2,168 )     2,729       856       4,254       6,619  
 
                                   
Total operating revenues
    174,561       178,802       81,188       315,100       31,631       781,282  
 
                                   
Realized investment losses
                            (935 )     (935 )
 
                                   
Total revenues
    174,561       178,802       81,188       315,100       30,696       780,347  
 
                                   
 
                                               
Benefits, losses and expenses:
                                               
Policy benefits
    75,865       63,776       57,217       222,196             419,054  
Interest credited to policy account balances
    13,932       84,320                         98,252  
Commissions for acquiring and servicing policies
    25,241       21,807       11,226       55,862       8       114,144  
Other operating costs and expenses
    48,000       14,511       15,267       33,788       16,615       128,181  
Decrease (increase) in deferred policy acquisition costs
    (177 )     (9,650 )     423       (4,947 )           (14,351 )
 
                                   
Total benefits, losses and expenses
    162,861       174,764       84,133       306,899       16,623       745,280  
 
                                   
Income (loss) from continuing operations before federal income tax, and equity in earnings of unconsolidated affiliates
  $ 11,700     $ 4,038     $ (2,945 )   $ 8,201     $ 14,073     $ 35,067  
 
                                   

 

28


Table of Contents

                                                 
                            Property     Corporate        
(Three Months Ended September 30, 2008)   Life     Annuity     Health     & Casualty     & Other     Total  
    (in thousands)  
Premiums and other revenues:
                                               
Premiums
  $ 75,569     $ 18,843     $ 72,688     $ 292,747     $     $ 459,847  
Other policy revenues
    40,094       4,955                         45,049  
Net investment income
    57,151       98,319       4,183       13,977       35,639       209,269  
Other income
    977       (1,506 )     3,459       2,461       4,522       9,913  
 
                                   
Total operating revenues
    173,791       120,611       80,330       309,185       40,161       724,078  
 
                                   
Realized investment losses
                            (201,985 )     (201,985 )
 
                                   
Total revenues
    173,791       120,611       80,330       309,185       (161,824 )     522,093  
 
                                   
 
                                               
Benefits, losses and expenses:
                                               
Policy benefits
    69,786       25,433       51,531       223,311             370,061  
Interest credited to policy account balances
    15,784       64,252                         80,036  
Commissions for acquiring and servicing policies
    30,358       10,791       11,491       59,084             111,724  
Other operating costs and expenses
    65,809       10,438       23,713       41,491       3,983       145,434  
Decrease (increase) in deferred policy acquisition costs
    (7,583 )     5,672       1,503       (1,216 )           (1,624 )
 
                                   
Total benefits, losses and expenses
    174,154       116,586       88,238       322,670       3,983       705,631  
 
                                   
Income (loss) from continuing operations before federal income tax, and equity in earnings of unconsolidated affiliates
  $ (363 )   $ 4,025     $ (7,908 )   $ (13,485 )   $ (165,807 )   $ (183,538 )
 
                                   
                                                 
                            Property     Corporate        
(Nine Months Ended September 30, 2009)   Life     Annuity     Health     & Casualty     & Other     Total  
    (in thousands)  
Premiums and other revenues:
                                               
Premiums
  $ 211,638     $ 149,141     $ 224,001     $ 866,989     $     $ 1,451,769  
Other policy revenues
    122,420       11,320                         133,740  
Net investment income
    166,510       331,607       12,080       49,941       69,988       630,126  
Other income
    1,868       295       7,757       5,308       12,415       27,643  
 
                                   
Total operating revenues
    502,436       492,363       243,838       922,238       82,403       2,243,278  
 
                                   
Realized investment losses
                            (83,144 )     (83,144 )
 
                                   
Total revenues
    502,436       492,363       243,838       922,238       (741 )     2,160,134  
 
                                   
 
                                               
Benefits, losses and expenses:
                                               
Policy benefits
    222,131       170,584       178,983       714,041             1,285,739  
Interest credited to policy account balances
    44,140       231,414                         275,554  
Commissions for acquiring and servicing policies
    68,931       77,790       34,038       160,967       8       341,734  
Other operating costs and expenses
    138,712       43,794       46,834       93,271       37,110       359,721  
Decrease (increase) in deferred policy acquisition costs
    152       (41,117 )     4,262       (11,677 )           (48,380 )
 
                                   
Total benefits, losses and expenses
    474,066       482,465       264,117       956,602       37,118       2,214,368  
 
                                   
Income (loss) from continuing operations before federal income tax, and equity in earnings of unconsolidated affiliates
  $ 28,370     $ 9,898     $ (20,279 )   $ (34,364 )   $ (37,859 )   $ (54,234 )
 
                                   
                                                 
                            Property     Corporate        
(Nine Months Ended September 30, 2008)   Life     Annuity     Health     & Casualty     & Other     Total  
    (in thousands)  
Premiums and other revenues:
                                               
Premiums
  $ 222,583     $ 90,489     $ 217,765     $ 885,941     $     $ 1,416,778  
Other policy revenues
    114,790       15,704                         130,494  
Net investment income
    169,805       278,917       12,416       52,924       98,663       612,725  
Other income
    2,758       (4,550 )     10,145       6,849       14,439       29,641  
 
                                   
Total operating revenues
    509,936       380,560       240,326       945,714       113,102       2,189,638  
 
                                   
Realized investment losses
                            (211,903 )     (211,903 )
 
                                   
Total revenues
    509,936       380,560       240,326       945,714       (98,801 )     1,977,735  
 
                                   
 
                                               
Benefits, losses and expenses:
                                               
Policy benefits
    215,653       111,137       166,581       720,430             1,213,801  
Interest credited to policy account balances
    47,814       175,311                         223,125  
Commissions for acquiring and servicing policies
    102,762       60,758       32,090       173,702             369,312  
Other operating costs and expenses
    170,759       32,910       53,530       100,372       38,577       396,148  
Decrease (increase) in deferred policy acquisition costs
    (46,783 )     (18,257 )     4,641       (10,573 )           (70,972 )
 
                                   
Total benefits, losses and expenses
    490,205       361,859       256,842       983,931       38,577       2,131,414  
 
                                   
Income (loss) from continuing operations before federal income tax, and equity in earnings of unconsolidated affiliates
  $ 19,731     $ 18,701     $ (16,516 )   $ (38,217 )   $ (137,378 )   $ (153,679 )
 
                                   

 

29


Table of Contents

14. COMMITMENTS AND CONTINGENCIES
In the ordinary course of their operations, American National had commitments outstanding at September 30, 2009, to purchase, expand or improve real estate, to fund mortgage loans, and to purchase other invested assets aggregating $305,563,000, of which $281,182,000 is expected to be funded in 2009. The remaining balance of $24,381,000 will be funded in 2010 and beyond. As of September 30, 2009, all of the mortgage loan commitments have interest rates that are fixed.
Guarantees
In the normal course of business, American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on the bank loan, American National would be obligated to pay off the loan. However, since the cash value of the life insurance policies always equals or exceeds the balance of the loans, management does not foresee any loss on the guarantees. The total amount of the guarantees outstanding as of September 30, 2009, was approximately $206,513,000, while the total cash values of the related life insurance policies was approximately $209,889,000.
Litigation
As previously disclosed in filings with the Securities and Exchange Commission, American National was a defendant in a lawsuit which proposed to certify one or more classes of persons who contended that American National allegedly violated various provisions of the Fair Labor Standards Act and the California Labor Code, engaged in unfair business practices, fraud and deceit, conversion, and negligent misrepresentation with respect to certain of its sales agents (Dulanto v. American National Insurance Company, C.D. Cal., filed October 31, 2008). Upon plaintiff’s motion, the Court dismissed the class allegations in this lawsuit leaving only the plaintiff’s individual claims against the company. The plaintiff sought statutory penalties, restitution, interest, penalties, attorneys’ fees, punitive damages and injunctive relief in an unspecified amount. As noted in American National’s Form 10-Q filed with the Securities and Exchange Commission on August 7, 2009, the parties reached an agreement to resolve the remaining claims in this lawsuit. This lawsuit has since been settled and the complaint dismissed. American National had previously reserved an adequate amount for settlement of this lawsuit.
There have been no other material changes to the legal proceedings described in American National’s Form 10-Q filed with the Securities and Exchange Commission on August 7, 2009.
15. RELATED PARTY TRANSACTIONS
American National has entered into recurring transactions and agreements with certain related parties as a part of its ongoing operations. These include mortgage loans, management contracts, agency commission contracts, marketing agreements, health insurance contracts, legal services, and insurance contracts. The impact on the consolidated financial statements of the significant related party transactions as of September 30, 2009, is shown below:
             
Related Party   Financial Statement Line Impacted   September 30, 2009  
        (in thousands)  
Gal-Tex Hotel Corporation
  Mortgage loans on real estate   $ 12,095  
Gal-Tex Hotel Corporation
  Investment income     674  
Gal-Tex Hotel Corporation
  Other operating costs and expenses     253  
Moody Insurance Group, Inc.
  Commissions     2,271  
Moody Insurance Group, Inc.
  Other operating costs and expenses     174  
National Western Life Ins. Co.
  Accident and health premiums     130  
National Western Life Ins. Co.
  Other operating costs and expenses     891  
Moody Foundation
  Accident and health premiums     102  
Greer, Herz and Adams, LLP
  Other operating costs and expenses     6,613  

 

30


Table of Contents

16. SUBSEQUENT EVENTS
Included in American National’s investment portfolio are debt securities issued by CIT Group (“CIT”) with an amortized cost of $74.0 million consisting of $56.7 million of senior bonds and $17.3 million of CIT Canada notes, as of September 30, 2009.
As a result of our September 30, 2009 quarterly analysis and credit review for our investment portfolio, we concluded that no other-than-temporary impairment should be recorded for the CIT securities.
On October 28, 2009, CIT secured important agreements in order to enable a prepackaged bankruptcy plan. It obtained a $4.5 billion loan from several investors, including the bondholders who lent it $3.0 billion this past summer. It also reached an accord with Goldman Sachs that would preserve a $2.1 billion loan even through bankruptcy protection, while paying only a portion of a $1.0 billion termination fee. On October 30, 2009 CIT also received a new $1.0 billion line of credit from it largest investor Carl Icahn enabling the company to borrow from the line on or before the end of this year.
On November 1, 2009, CIT announced that it had entered into the prepackaged bankruptcy plan that would enable it to emerge from bankruptcy court protection by the end of 2009. The prepackaged bankruptcy is estimated to give all holders of senior bonds seventy cents on the dollar in new notes as well as shares of stock in the reorganized company.
American National will closely monitor CIT’s situation, and re-evaluate CIT’s situation as necessary. Based on our current assessment, we expect to recover the amortized cost basis of the securities American National holds as of September 30, 2009 through the combination of the new bonds and the additional shares of stock.

 

31


Table of Contents

ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Set forth on the following pages is management’s discussion and analysis (“MD&A”) of the financial condition and results of operations for the three and nine months ended September 30, 2009 and September 30, 2008 of American National Insurance Company and its subsidiaries (referred to in this document as “we”, “our”, “us”, or the “Company” ). Such information should be read in conjunction with our consolidated financial statements together with the notes to the consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q and our amended Form 10/A Registration Statement filed on July 1, 2009 (“Form 10 Registration Statement”) with the Securities and Exchange Commission (“SEC”).
Forward-Looking Statements
Certain statements contained herein are forward-looking statements. The forward-looking statements contained herein are made pursuant to the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and include estimates and assumptions related to economic, competitive and legislative developments. Forward looking statements may be identified by words such as “expects”, “intends”, “anticipates”, “plans”, “believes”, “estimates”, “will” or words of similar meaning; and include, but are not limited to, statements regarding the outlook of our business and financial performance. These forward looking statements are subject to change and uncertainty which are, in many instances, beyond our control and, have been made based upon our expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be anticipated. These forward-looking statements are not a guarantee of future performance and involve risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements. These factors include among others:
    international economic and financial crises, including the performance and fluctuations of fixed income, equity, real estate, credit, capital and other financial markets;
 
    interest rate fluctuations;
 
    estimates of our reserves for future policy benefits and claims;
 
    differences between actual experience regarding mortality, morbidity, persistency, surrender experience, interest rates or market returns, property and casualty frequency, severity, claim reporting and settlement patterns, and the assumptions we use in pricing our products, establishing liabilities and reserves or for other purposes;
 
    changes in our assumptions related to deferred policy acquisition costs, valuation of business acquired or goodwill;
 
    changes in our claims-paying or credit ratings;
 
    investment losses and defaults;
 
    competition in our product lines and for personnel;
 
    changes in tax law;
 
    regulatory or legislative changes;
 
    adverse determinations in litigation or regulatory matters and our exposure to contingent liabilities, including in connection with our divestiture or winding down of businesses;
 
    domestic or international military actions, natural or man-made disasters, including terrorist activities or pandemic disease, or other events resulting in catastrophic loss of life and/or property;
 
    ineffectiveness of risk management policies and procedures in identifying, monitoring and managing risks;
 
    effects of acquisitions, divestitures and restructurings, including possible difficulties in integrating and realizing the projected results of acquisitions;
 
    changes in statutory or U.S. Generally Accepted Accounting Principles (“GAAP”) practices or policies; and
 
    changes in assumptions for retirement expense.

 

32


Table of Contents

We describe these risks and uncertainties in greater detail in Item IA, Risk Factors, in our amended Form 10 Registration Statement filed with the SEC on July 1, 2009. It has never been a matter of corporate policy for us to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. Additionally, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable events.
Overview
American National Insurance Company has more than 100 years of experience. We have maintained our home office in Galveston, Texas since our founding in 1905. Our core businesses are life insurance, annuities, and property and casualty; however, we also offer individual and group health insurance, pension services, and mutual funds. Within our property and casualty business, we offer insurance for personal lines, agribusiness, and targeted commercial exposures. We provide personalized service to approximately eight million policyholders throughout the United States, the District of Columbia, Puerto Rico, Guam, and American Samoa. Our total assets and stockholders’ equity as of September 30, 2009 were $19.8 billion and $3.4 billion, respectively, and at December 31, 2008 were $18.4 billion and $3.1 billion, respectively.
General Trends
There were no material changes to the general trends we are experiencing, as discussed in the MD&A included in our amended Form 10 filed with the SEC on July 1, 2009.
Critical Accounting Estimates
We have prepared unaudited interim consolidated financial statements on the basis of U.S. GAAP. In addition to GAAP accounting literature, insurance companies have to apply specific SEC regulation to the financial statements. The preparation of financial statements in accordance with GAAP requires us to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and their accompanying notes. Actual results could differ from results reported using those estimates.
We have identified the following estimates as critical to our business operations and the understanding of the results of our operations, as they involve a higher degree of judgment and are subject to a significant degree of variability: evaluation of other-than-temporary impairments on securities; deferred policy acquisition costs; reserves; valuation of policyholder liabilities and associated reinsurance recoverables; pension and other postretirement benefit obligations; contingencies relating to corporate litigation and regulatory matters; and federal income taxes.
Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity, persistency, expenses, interest rates, and property and casualty 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 be different from those reported in the consolidated financial statements.
For a discussion of the critical accounting estimates, see the MD&A in our amended Form 10 Registration Statement filed with the SEC on July 1, 2009. There were no material changes in accounting policies from December 31, 2008, with the exception of changes made to our other-than-temporary impairment of debt securities accounting policy. Refer to Item 1, Note 2 to the Consolidated Financial Statements included in this report for a discussion on the other-than-temporary impairment of debt securities accounting policy.
Recently Issued Accounting Pronouncements
Refer to Item 1, Note 3 to the Consolidated Financial Statements for a discussion on “Adoption of New Accounting Standards” and “Future Adoption of New Accounting Standards.”

 

33


Table of Contents

Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the three and nine months ended September 30, 2009 and 2008. For a discussion of our segment results, see Results of Operations and Related Information by Segment. The following table sets forth the consolidated results of operations:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (in thousands)  
Revenues:
                                               
Premiums
  $ 507,105     $ 459,847     $ 47,258     $ 1,451,769     $ 1,416,778     $ 34,991  
Other policy revenues
    45,292       45,049       243       133,740       130,494       3,246  
Net investment income
    222,266       209,269       12,997       630,126       612,725       17,401  
Realized investment gains (losses)
    (935 )     (201,985 )     201,050       (83,144 )     (211,903 )     128,759  
Other income
    6,619       9,913       (3,294 )     27,643       29,641       (1,998 )
 
                                   
Total revenues
    780,347       522,093       258,254       2,160,134       1,977,735       182,399  
 
                                   
 
                                               
Benefits and expenses:
                                               
Policy benefits
    419,054       370,061       48,993       1,285,739       1,213,801       71,938  
Interest credited to policy account balances
    98,252       80,036       18,216       275,554       223,125       52,429  
Commissions
    114,144       111,724       2,420       341,734       369,312       (27,578 )
Other operating costs and expenses
    128,181       145,434       (17,253 )     359,721       396,148       (36,427 )
Change in deferred policy acquisition costs
    (14,351 )     (1,624 )     (12,727 )     (48,380 )     (70,972 )     22,592  
 
                                   
Total benefits and expenses
    745,280       705,631       39,649       2,214,368       2,131,414       82,954  
 
                                   
 
                                               
Income (loss) before other items and federal income taxes
  $ 35,067     $ (183,538 )   $ 218,605     $ (54,234 )   $ (153,679 )   $ 99,445  
 
                                   
Three Months ended September 30, 2009 compared with the Three Months ended September 30, 2008 — Consolidated
Consolidated revenues increased $258.2 million to $780.3 million for the three months ended September 30, 2009 from $522.1 million for the same period in 2008. This increase was primarily due to the investment losses realized during the third quarter of 2008 with limited comparable losses realized in 2009 and a $47.3 million increase in premiums.
Consolidated benefits and expenses increased $39.7 million to $745.3 million for the three months ended September 30, 2009 compared to $705.6 million for the same period in 2008. This change was primarily due to the higher benefits from our annuity products, partially offset by a decrease in catastrophe losses in our property and casualty business.
Nine Months ended September 30, 2009 compared with the Nine Months ended September 30, 2008 — Consolidated
Consolidated revenues increased $182.4 million to $2.2 billion for the nine months ended September 30, 2009 from $2.0 billion for the same period in 2008. This increase was primarily due to significant investment losses realized during the third quarter of 2008 that did not occur in 2009.
Consolidated benefits and expenses increased $83.0 million to approximately $2.2 billion for the nine months ended September 30, 2009 compared to approximately $2.1 billion for the same period in 2008. This change was primarily due to benefits on deferred annuity policy account balances, partially offset by decreased catastrophe losses in our property and casualty business from record amounts in 2008.

 

34


Table of Contents

RESULTS OF OPERATIONS AND RELATED INFORMATION BY SEGMENT
Life
The Life segment markets traditional life insurance products such as whole life and term life, and interest sensitive life insurance products such as universal life and variable universal life. These products are marketed on a nationwide basis through employee agents, multiple line agents, independent agents and brokers and direct marketing channels.
Life segment financial results for the periods indicated were as follows:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (in thousands)  
Revenues:
                                               
Premiums
  $ 76,320     $ 75,569     $ 751     $ 211,638     $ 222,583     $ (10,945 )
Other policy revenues
    41,569       40,094       1,475       122,420       114,790       7,630  
Net investment income
    55,724       57,151       (1,427 )     166,510       169,805       (3,295 )
Other income
    948       977       (29 )     1,868       2,758       (890 )
 
                                   
Total revenues
    174,561       173,791       770       502,436       509,936       (7,500 )
 
                                   
 
                                               
Benefits and expenses:
                                               
Policy benefits
    75,865       69,786       6,079       222,131       215,653       6,478  
Interest credited to policy account balances
    13,932       15,784       (1,852 )     44,140       47,814       (3,674 )
Commissions
    25,241       30,358       (5,117 )     68,931       102,762       (33,831 )
Other operating costs and expenses
    48,000       65,809       (17,809 )     138,712       170,759       (32,047 )
Change in deferred policy acquisition costs
    (177 )     (7,583 )     7,406       152       (46,783 )     46,935  
 
                                   
Total benefits and expenses
    162,861       174,154       (11,293 )     474,066       490,205       (16,139 )
 
                                   
 
                                               
Income before other items and federal income taxes
  $ 11,700     $ (363 )   $ 12,063     $ 28,370     $ 19,731     $ 8,639  
 
                                   
Overall, earnings increased $12.1 million and $8.6 million to $11.7 million and $28.4 million for the three and nine months ended September 30, 2009, respectively, from a loss of $0.4 million and a gain of $19.7 million for the same periods in 2008. During 2009 there was an increase in earnings which was primarily a result of a decline in expenses due to lower commissions and other operating costs and expenses. The decrease in the other operating costs and expenses during the quarter is primarily a result of a reserve established in 2008 for two lawsuits.
During the second quarter of 2009, we paid premium refunds as the result of a class action settlement made by us in May, 2007. The refunds on the credit life product resulted in issuing $12.9 million in settlement payments comprised of credit life premium refunds and other related damages and fees, to certain previously insured persons. The Life segment was fully reserved for this settlement and did not incur any related impact to its income (loss) from operations during the nine months ended September 30, 2009. However, during the second quarter of 2009, several categories of the statement of income were impacted by the recording of the settlement as follows: premiums were decreased by $4.5 million, other income was decreased by $0.8 million, commissions were decreased by $0.9 million, and other operating costs and expenses were decreased by $4.5 million. For additional information on this settlement, refer to the discussion of the Perkins litigation in our Commitments and Contingencies footnote within the Notes to the Consolidated Financial Statements in our amended Form 10 Registration Statement, filed with the SEC on July 1, 2009.
Three and Nine Months ended September 30, 2009 compared with the Three and Nine Months ended September 30, 2008 — Life
Premiums
Premiums increased $0.8 million to $76.3 million for the three months ended September 30, 2009 and decreased $10.9 million to $211.6 million for the nine months ended September 30, 2009 compared to the same periods in 2008. For the nine months ended September 30, 2009, we recorded a reversal of $4.5 million premium related to the previously noted settlement payments. Excluding the effect of the settlement payments, premiums decreased $6.4 million for the nine months ended September 30, 2009. The decrease is primarily due to a reduction in credit life sales and an increase in ceded reinsurance premiums.

 

35


Table of Contents

Other Policy Revenues
Other policy revenues increased $1.5 million to $41.6 million for the three months ended September 30, 2009 and $7.6 million to $122.4 million for the nine months ended September 30, 2009 compared to the same periods in 2008. The increases were due to higher mortality charges and fees, which are primarily a result of sales of universal life products in 2008.
Net Investment Income
Net investment income decreased $1.4 million to $55.7 million for the three months ended September 30, 2009 and $3.3 million to $166.5 million for the nine months ended September 30, 2009 compared to the same periods in 2008. These decreases were primarily due to the increased amount of cash we held and lower account values on interest sensitive products. Refer to the Investments discussion for further analysis.
Policy Benefits
Policy benefits increased $6.1 million to $75.9 million for the three month period ended September 30, 2009 from $69.8 million for the same period in 2008. In the nine months ended September 30, 2009, policy benefits increased $6.5 million to $222.1 million compared to the same period in 2008. These increases were a result of higher death claims in the prior period.
Commissions
Commissions decreased $5.1 million to $25.2 million for the three months ended September 30, 2009 and $33.8 million to $68.9 million for the nine months ended September 30, 2009 compared to the same periods in 2008. We recorded a reversal of $0.9 million related to the previously noted settlement payments. Excluding the effect of the settlement payments, commissions decreased $32.9 million for the nine months ended September 30, 2009. The decreases can be primarily attributed to lower first year universal life premiums in our Independent Marketing Group.
Other Operating Costs and Expenses
Other operating costs and expenses decreased $17.8 million to $48.0 million for the three months ended September 30, 2009 and $32.0 million to $138.7 million for the nine months ended September 30, 2009 compared to the same periods in 2008. We recorded a reversal of $4.5 million related to the previously noted settlement payments. Excluding the effect of the settlement payments, other operating costs and expenses decreased $27.5 million for the nine months ended September 30, 2009. The decreases for the three and nine months ended September 30, 2009 were primarily due to the reduction in Credit Life and Multiple Line marketing division operating costs, which are related to the establishment of the lawsuits reserve in the third quarter of 2008. A portion of the decrease can be attributed to the decline in production bonuses due to lower sales in 2009 and a planned decrease in marketing expenses from our Direct Marketing area.
Change in Deferred Policy Acquisition Costs
We incur significant costs in connection with acquiring new business. Such costs are capitalized as deferred policy acquisition costs (“DAC”) and are amortized over the life of the policy. The following table presents the components of the change in DAC for the three and nine months ended September 30, 2009 and 2008:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (in thousands)  
Acquisition costs capitalized
  $ 19,757     $ 26,272     $ (6,515 )   $ 54,881     $ 111,934     $ (57,053 )
Amortization of DAC
    (19,580 )     (18,689 )     (891 )     (55,033 )     (65,151 )     10,118  
 
                                   
Change in DAC
  $ 177     $ 7,583     $ (7,406 )   $ (152 )   $ 46,783     $ (46,935 )
 
                                   
Acquisition costs capitalized decreased $6.5 million to $19.8 million for the three months ended September 30, 2009 and $57.1 million to $54.9 million for the nine months ended September 30, 2009 compared to the same periods in 2008. These decreases are primarily related to the decrease in commission expenses and acquisition costs related to lower sales of our universal life products.
The amortization of DAC as a percentage of gross profits for the nine months ended September 30, 2009 remained relatively flat at 41.2% compared to 42.5% in the same period in 2008.

 

36


Table of Contents

An increase in the lapse rate would cause an acceleration in DAC amortization/ (write-off); therefore controlling the lapse rate is an important measure of company performance. Average lapse/surrender rates in the Life segment have remained relatively unchanged with an annualized rate of 10.4% in the nine months ended September 30, 2009 compared to 10.2% in the same period in 2008.
The following table summarizes changes in the Life segment’s direct in-force amounts and direct policy counts:
                 
    As of September 30,     As of September 30,  
    2009     2008  
    (in thousands)  
Life Insurance in-force:
               
Traditional life
  $ 46,270,129     $ 46,606,991  
Interest sensitive life
    23,151,676       23,449,047  
 
           
Total life insurance in-force
  $ 69,421,805     $ 70,056,038  
 
           
                 
    As of September 30,     As of September 30,  
    2009     2008  
    (in thousands)  
Number of policies:
               
Traditional life
    2,366,373       2,514,677  
Interest sensitive life
    173,770       174,673  
 
           
Total life insurance policies
    2,540,143       2,689,350  
 
           
Life insurance in-force decreased $449.1 million to $69.4 billion in the nine months ended September 30, 2009 compared to an increase of $1.4 billion to $70.1 billion for the period ended September 30, 2008.

 

37


Table of Contents

Annuity
The Annuity segment develops, sells, and supports a variety of immediate and deferred annuities, including fixed, equity-indexed and variable products. We sell these products through independent agents, brokers, financial institutions, and employee agents.
Annuity segment financial results for the periods indicated were as follows:
                                                    
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (in thousands)  
Revenues:
                                               
Premiums
  $ 58,284     $ 18,843     $ 39,441     $ 149,141     $ 90,489     $ 58,652  
Other policy revenues
    3,723       4,955       (1,232 )     11,320       15,704       (4,384 )
Net investment income
    118,963       98,319       20,644       331,607       278,917       52,690  
Other income (loss)
    (2,168 )     (1,506 )     (662 )     295       (4,550 )     4,845  
 
                                   
Total revenues
    178,802       120,611       58,191       492,363       380,560       111,803  
 
                                   
 
                                               
Benefits and expenses:
                                               
Policy benefits
    63,776       25,433       38,343       170,584       111,137       59,447  
Interest credited to policy account balances
    84,320       64,252       20,068       231,414       175,311       56,103  
Commissions
    21,807       10,791       11,016       77,790       60,758       17,032  
Other operating costs and expenses
    14,511       10,438       4,073       43,794       32,910       10,884  
Change in deferred policy acquisition costs
    (9,650 )     5,672       (15,322 )     (41,117 )     (18,257 )     (22,860 )
 
                                   
Total benefits and expenses
    174,764       116,586       58,178       482,465       361,859       120,606  
 
                                   
 
                                               
Income before other items and federal income taxes
  $ 4,038     $ 4,025     $ 13     $ 9,898     $ 18,701     $ (8,803 )
 
                                   
Earnings remained relatively flat for the three months ended September 30, 2009 compared to the same period in 2008. For the nine months ended September 30, 2009, earnings decreased $8.8 million, compared to the same period in 2008. The decrease in the nine months ended September 30, 2009 was primarily due to increased operating costs and expenses. These costs increased $4.1 million and $10.9 million to $14.5 million and $43.8 million for the three and nine months ended September 30, 2009, respectively. These are discussed in further detail below.
Three and Nine Months ended September 30, 2009 compared with the Three and Nine Months ended September 30, 2008 — Annuity
Premiums
Annuity premium and deposit amounts received during the three and nine months ended September 30, 2009 and 2008 are shown in the table below:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (in thousands)  
Fixed deferred annuity
  $ 287,528     $ 185,239     $ 102,289     $ 1,429,434     $ 1,233,331     $ 196,103  
Equity indexed deferred annuity
    56,497       17,878       38,619       119,701       61,305       58,396  
Variable deferred annuity
    26,221       22,909       3,312       67,452       83,112       (15,660 )
Single premium immediate annuity (SPIA)
    60,197       20,773       39,424       153,687       95,131       58,556  
 
                                   
Total
    430,443       246,799       183,644       1,770,274       1,472,879       297,395  
 
                                               
Less: policy deposits
    (372,159 )     (227,956 )     (144,203 )     (1,621,133 )     (1,382,390 )     (238,743 )
 
                                   
 
                                               
Total earned premiums
  $ 58,284     $ 18,843     $ 39,441     $ 149,141     $ 90,489     $ 58,652  
 
                                   
Fixed deferred annuity premiums and deposits increased $102.3 million to $287.5 million for the three months ended September 30, 2009 and $196.1 million to $1.4 billion for the nine months ended September 30, 2009 compared to the same periods in 2008. Equity indexed annuity premiums and deposits increased by $38.6 million to $56.5 million for the three months ended September 30, 2009 and $58.4 million to $119.7 million for the nine months ended September 30, 2009 as compared to the same periods in 2008. For the third quarter and nine months ended 2009, we continue to see an increase in sales of our fixed annuity products, primarily as a result of lower rates on competitive products such as CD’s and money market funds.

 

38


Table of Contents

Premiums from single premium immediate annuities increased $39.4 million to $60.2 million for the three months ended September 30, 2009 and $58.6 million to $153.7 million for the nine months ended September 30, 2009 compared to the same periods in 2008. As noted in our fixed annuity discussion, our single premium immediate annuity premiums and deposits have also benefited from the lower rates on the various competitive fixed products.
Variable deferred annuity premiums and deposits increased $3.3 million to $26.2 million for the three months ended September 30, 2009 and decreased $15.7 million to $67.5 million for the nine months ended September 30, 2009 compared to the same periods in 2008. We believe the decline in the nine months ended September 30, 2009 is a continuation of investors seeking the safety of less volatile financial investments.
Other Policy Revenues
Other policy revenues declined to $3.7 million and $11.3 million for the three and nine months ended September 30, 2009, respectively, compared to $5.0 million and $15.7 million for the same periods in 2008, respectively. Income from surrender charges fell during the third quarter of 2009, as there was a change in the mix of surrenders between those which incurred surrender charges and those where policyholders utilized optional penalty-free withdrawal provisions.
Net Investment Income
Net Investment income increased to $119.0 million and $331.6 million for the three and nine months ended September 30, 2009, respectively compared to $98.3 million and $278.9 million for the same periods in 2008, respectively. The increase in the three and nine months ended September 30, 2009 was largely a result of an increase in fixed deferred annuity account values compared to the same periods in 2008. The increase in invested assets and the change in the derivative hedge total return (realized and unrealized gain/ (loss)) also added to the increases in net investment income. Refer to the Investments discussion for further analysis of net investment income.
Realized and unrealized gains or losses on the derivative hedge portfolio that supports the equity index annuities portfolio are recognized in earnings as investment income. Equity indexed annuities include a fixed host annuity contract and an embedded equity derivative option. The gain or loss on the embedded option is recognized in earnings as interest credited to policyholders. The following table details the gain or loss on derivatives related to equity indexed annuities (in thousands):
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
 
                                               
Derivative hedge gain/ (loss) included in net investment income
  $ 6,103     $ (4,005 )   $ 10,108     $ 4,002     $ (16,741 )   $ 20,743  
 
                                   
 
                                               
Embedded derivative gain/ (loss) included in interest credited
  $ (5,970 )   $ 2,624     $ (8,594 )   $ (6,708 )   $ 16,942     $ (23,650 )
 
                                   

 

39


Table of Contents

Interest Spread and Account Values
The table below shows the interest spreads for our annuity products.
                 
    Nine Months Ended September 30,  
    2009     2008  
    (dollar amounts in thousands)  
Fixed deferred annuity
               
Interest spread:
               
Dollar amount
  $ 85,299     $ 83,382  
Annualized rate
    1.54 %     1.71 %
 
               
Variable deferred annuity
               
Mortality and expense charge:
               
Dollar amount
  $ 2,942     $ 3,619  
Annualized rate
    1.14 %     1.21 %
 
               
Single premium immediate annuity (SPIA)
               
Gross interest and mortality margins:
               
Dollar amount
  $ 5,404     $ 1,717  
Annualized rate
    0.98 %     0.33 %
 
               
Total annuity:
               
Gross interest margins including SPIA mortality:
               
Dollar amount
  $ 93,645     $ 88,718  
Annualized rate
    1.59 %     1.70 %
Interest Spreads: The profits on fixed deferred annuity contracts and single premium immediate annuities are driven by interest spreads and, to a lesser extent, other policy fees. Target interest margins vary by product depending on such factors as the level and term of interest guarantees, interest bonuses, level of commissions, length of surrender charge periods and the level of inherent risk.
As shown in the table above, interest spreads on fixed deferred annuities decreased 17 basis points to 1.54% for the nine months ended September 30, 2009 from 1.71% for the same period in 2008. The portion of supporting assets comprised of cash holdings is a significant factor here. For the nine months ended September 30, 2009, our cash position increased from 4.09% to 4.97% of the portfolio. The yield on cash decreased 186 basis points from 3.63% in the nine months ended September 2008 to 1.77% in the nine months ended September 2009.
The average rate for variable annuity mortality and expense charges decreased 7 basis points for the nine months ended September 30, 2009 from 1.21% for the same period in 2008.

 

40


Table of Contents

Account Values: In addition to interest margins, we monitor account values and changes in account values as a key indicator of the performance of our Annuity segment. The table below shows the account values and the changes in these values as a result of net inflows, fees, interest credited and market value changes for the nine months ended September 30, 2009 and 2008.
                         
    Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)  
    (in thousands)  
Fixed deferred annuity:
                       
Account value, beginning of period
  $ 6,918,365     $ 6,210,456     $ 707,909  
Net inflows
    705,327       423,979       281,348  
Fees
    (8,365 )     (12,068 )     3,703  
Interest credited
    228,960       174,220       54,740  
 
                 
Account value, end of period
  $ 7,844,287     $ 6,796,587     $ 1,047,700  
 
                 
 
                       
Variable deferred annuity:
                       
Account value, beginning of period
  $ 309,011     $ 429,505     $ (120,494 )
Net inflows
    13,735       21,604       (7,869 )
Fees
    (2,942 )     (3,619 )     677  
Change in market value and other
    60,943       (77,378 )     138,321  
 
                 
Account value, end of period
  $ 380,747     $ 370,112     $ 10,635  
 
                 
 
                       
Single premium immediate annuity:
                       
Reserve, beginning of period
  $ 701,141     $ 693,137     $ 8,004  
Net inflows
    51,816       (15,614 )     67,430  
Interest and mortality
    23,709       26,257       (2,548 )
 
                 
Reserve, end of period
  $ 776,666     $ 703,780     $ 72,886  
 
                 
Fixed Deferred Annuity: For the nine months ended September 30, 2009, account values associated with fixed deferred annuities increased $925.9 million to $7.8 billion, compared to an increase of $586.1 million to $6.8 billion for the same period in 2008. The change in account value for 2009 was attributable to net inflows of $705.3 million and interest credited of $229.0 million less fees of $8.4 million. Sales of fixed deferred annuity products rose to $1.4 billion for the nine months ended September 30, 2009 compared to $1.2 billion in the same period of 2008. The sales of these products continued to increase in 2009 as rates on competing fixed products declined.
Fees charged against account values decreased $3.7 million to $8.4 million for the nine months ended September 30, 2009 compared to $12.1 million for the same period in 2008. These fees include withdrawal charges levied against policies being partially withdrawn or fully surrendered. Income from surrender charges continues to decline as we had a change in the mix of surrenders from 2008 to 2009 between products which earned surrender charges and products which include an option for certain penalty-free surrenders.
Variable Deferred Annuity: For the nine months ended September 30, 2009, variable deferred annuity account values increased $71.7 million to $380.7 million, compared to a decrease of $59.4 million to $370.1 million for the same period in 2008. The increase in account value for the nine months ended September 30, 2009 was mainly due to market appreciation. The decrease in value for the nine months ended September 30, 2008 is primarily a result of the weak financial markets in 2008.
Single Premium Immediate Annuity: For the nine months ended September 30, 2009, single premium immediate annuity reserves increased $75.5 million to $776.7 million, compared to an increase of $10.6 million to $703.8 million for the same period in 2008. This increase is due to reserves established on inflows from new sales and increases in reserves on existing policies due to interest and mortality charges. Net inflows for the nine months ended September 30, 2009 were $51.8 million, compared to net outflows of $15.6 million for the same period in 2008.
Policy Benefits
Benefits consist of annuity payments and reserve increases on single premium immediate annuity contracts. These benefits increased $38.3 million to $63.8 million for the three months ended September 30, 2009 and $59.4 million to $170.6 million for the nine months ended September 30, 2009 compared to the same periods in 2008. The changes for the three and nine months are primarily due to an increase in single premium immediate annuity in-force volume resulting from increased single premium immediate annuity sales.

 

41


Table of Contents

Interest Credited to Policy Account Balances
Interest credited increased $20.1 million to $84.3 million for the three months ended September 30, 2009 and $56.1 million to $231.4 million for the nine months ended September 30, 2009 compared to the same periods in 2008. The increases in 2009 are primarily due to higher average fixed deferred annuity account balances and the change in embedded derivative total return (embedded derivative gain/ (loss)).
Commissions
Commissions increased $11.0 million to $21.8 million for the three months ended September 30, 2009 and $17.0 million to $77.8 million for the nine months ended September 30, 2009 compared to the same periods in 2008. The changes in the third quarter and nine months ended are primarily a result of increased sales of fixed deferred, equity indexed, and single premium immediate annuities.
Other Operating Costs and Expenses
Other operating costs and expenses increased $4.1 million to $14.5 million for the three months ended September 30, 2009 and $10.9 million to $43.8 million for the nine months ended September 30, 2009 compared to the same periods in 2008. These increases are attributable to defined benefit pension costs, fees incurred for compliance with Sarbanes-Oxley Act requirements, and information technology enhancements. We also experienced higher marketing expenses in our Independent Marketing Group, from increased sales.
Change in Deferred Policy Acquisition Costs
The following table presents the components of the change in DAC for the three and nine months ended September 30, 2009 and 2008:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (in thousands)  
Acquisition costs capitalized
  $ 27,055     $ 14,452     $ 12,603     $ 91,897     $ 73,995     $ 17,902  
Amortization of DAC
    (17,405 )     (20,124 )     2,719       (50,780 )     (55,738 )     4,958  
 
                                   
Change in DAC
  $ 9,650     $ (5,672 )   $ 15,322     $ 41,117     $ 18,257     $ 22,860  
 
                                   
Acquisition costs capitalized increased $12.6 million to $27.1 million for the three months ended September 30, 2009 and $17.9 million to $91.9 million for the nine months ended September 30, 2009 compared to the same periods in 2008. The increases in 2009 were the result of commissions and other costs related to increased sales of fixed annuities.
The amortization of DAC as a percentage of gross profits for the nine months ended September 30, 2009 and 2008 was 66.0% and 64.9%, respectively. The slight change in the ratio was primarily driven by lower gross profits in 2009.

 

42


Table of Contents

Health
The Health segment is primarily focused on supplemental and limited benefit coverage products including Medicare Supplement insurance for the aged population as well as cancer and hospital surgical for the general population. Other health products include credit accident and health, employer-based stop loss, major medical and others.
Health segment financial results for the periods indicated were as follows:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
                (in thousands)                    
Revenues:
                                               
Premiums
  $ 74,428     $ 72,688     $ 1,740     $ 224,001     $ 217,765     $ 6,236  
Net investment income
    4,031       4,183       (152 )     12,080       12,416       (336 )
Other income
    2,729       3,459       (730 )     7,757       10,145       (2,388 )
 
                                   
Total revenues
    81,188       80,330       858       243,838       240,326       3,512  
 
                                   
 
                                               
Benefits and expenses:
                                               
Policy benefits
    57,217       51,531       5,686       178,983       166,581       12,402  
Commissions
    11,226       11,491       (265 )     34,038       32,090       1,948  
Other operating costs and expenses
    15,267       23,713       (8,446 )     46,834       53,530       (6,696 )
Change in deferred policy acquisition costs
    423       1,503       (1,080 )     4,262       4,641       (379 )
 
                                   
Total benefits and expenses
    84,133       88,238       (4,105 )     264,117       256,842       7,275  
 
                                   
 
                                               
(Loss) from operations before other items and federal income taxes
  $ (2,945 )   $ (7,908 )   $ 4,963     $ (20,279 )   $ (16,516 )   $ (3,763 )
 
                                   
The Health segment experienced losses from operations of $2.9 million and $20.3 million for the three and nine months ended September 30, 2009, respectively, as compared to losses of $7.9 million and $16.5 million, respectively, for the same periods in 2008. During the three months ended September 30, 2009, the decrease in losses was due primarily to a decrease in other operating costs and expenses in comparison to 2008 when a reserve was established for a class action lawsuit (discussed below). There was also an increase in premiums earned on our hospital surgical and Medicare supplement products. The aforementioned decreases in losses were partially offset by an increase in policy benefits due to a high level of claims incurred in our major medical and Medicare supplement product lines for the three months ended September 30, 2009. During the nine months ended September 30, 2009, the decrease in earnings was primarily due to an increase in policy benefits attributable to growth in claims incurred on the Medicare supplement and hospital surgical product lines, which was partially offset by an increase in hospital surgical premiums and the absence of the legal reserve discussed above. These items are discussed in further detail below.
During the second quarter of 2009, we paid premium refunds as a result of a class action settlement made by us in May, 2007. The refunds on the credit accident and health product resulted in issuing $12.4 million of settlement payments comprised of credit accident and health premium refunds and other related damages and fees, to certain previously insured persons. The Health segment was fully reserved for this settlement and did not incur any related impact to its (loss) from operations during the nine months ended September 30, 2009. However, during the second quarter of 2009, several categories of the consolidated statements of income were impacted by the recording of the settlement as follows: premiums decreased by $4.3 million, other income decreased by $0.8 million, commissions decreased by $0.9 million, and other operating costs and expenses decreased by $4.3 million. For additional information on this settlement, refer to the discussion of the Perkins litigation in our Commitments and Contingencies footnote within the Notes to the Consolidated Financial Statements in our amended Form 10 Registration Statement, filed with the SEC on July 1, 2009.

 

43


Table of Contents

The following tables summarize key data for the Health segment:
                                 
    Three months ended September 30, 2009     Three months ended September 30, 2008  
    Premiums     Premiums  
    Dollars     Percentage     Dollars     Percentage  
    (dollar amounts in thousands)  
Medicare supplement
  $ 32,517       43.7 %   $ 29,786       41.0 %
Managing general underwriter
    3,280       4.4 %     3,507       4.8 %
Group
    8,280       11.1 %     7,804       10.7 %
Major medical
    7,007       9.4 %     9,384       12.9 %
Hospital surgical
    12,886       17.3 %     10,544       14.5 %
Long term care
    497       0.7 %     581       0.8 %
Supplemental insurance
    2,037       2.7 %     2,040       2.8 %
Credit accident and health
    5,924       8.0 %     6,787       9.3 %
All other
    2,000       2.7 %     2,255       3.2 %
 
                       
Total
  $ 74,428       100 %   $ 72,688       100 %
 
                       
                                 
    As of September 30, 2009     As of September 30, 2008  
    Certificates / Policies     Certificates / Policies  
    Number     Percentage     Number     Percentage  
Medicare supplement
    58,804       8.5 %     59,533       8.1 %
Managing general underwriter
    116,227       16.8 %     137,008       18.5 %
Group
    18,878       2.7 %     19,435       2.6 %
Major medical
    3,834       0.6 %     5,459       0.7 %
Hospital surgical
    15,790       2.3 %     14,708       2.0 %
Long term care
    1,929       0.3 %     2,094       0.3 %
Supplemental insurance
    97,743       14.1 %     112,573       15.2 %
Credit accident and health
    311,738       45.1 %     315,188       42.7 %
All other
    66,612       9.6 %     72,918       9.9 %
 
                       
Total
    691,555       100 %     738,916       100 %
 
                       
Three Months ended September 30, 2009 compared with the Three Months ended September 30, 2008 - Health
Premiums
The Health segment’s earned premiums were $74.4 million for the three months ended September 30, 2009, compared to $72.7 million earned for the same period in 2008. The increase was primarily attributable to increased sales of our hospital surgical and Medicare supplement products. We continue to focus our marketing efforts primarily on our hospital surgical and Medicare supplement products. The foregoing increase was partially offset by a decline in the sales of our major medical product which we expect to continue in the near term.
Net Investment Income
Net investment income remained relatively flat at approximately $4.0 million and $4.2 million for the three months ended September 30, 2009 and 2008, respectively. Refer to the Investments discussion for further analysis.
Policy Benefits
The benefit ratio increased to 76.9% for the three months ended September 30, 2009, from 70.9% for same period in 2008. High levels of claims on the major medical and Medicare supplement products were primary contributors to the increase in the benefit ratio. The benefit ratio increase also reflects major medical and Medicare supplement products’ benefits costs outpacing their earned premium. This increase was partially offset by an improvement in the hospital surgical benefit ratio as a result of premium rate increases implemented during 2009.

 

44


Table of Contents

Commissions
Commissions decreased by $0.3 million to $11.2 million for the three months ended September 30, 2009, from $11.5 million for the same period in 2008. This decrease was primarily due to a decline in premiums earned on our credit accident and health product which was caused by a decrease in the volume of business written through automobile dealers due to the tight credit markets.
Other Operating Costs and Expenses
Other operating costs and expenses decreased by $8.4 million to $15.3 million for the three months ended September 30, 2009 from $23.7 million for the same period in 2008. The decrease was primarily attributed to a reserve for the previously noted settlement payments being established in 2008. The foregoing decrease was partially offset by information technology consulting fees and legal expenses associated with health claims incurred in the three months ended September 30, 2009.
Change in Deferred Policy Acquisition Costs
The following table presents the components of the change in DAC expense for the three months ended September 30, 2009 and 2008:
                         
    Three Months Ended September 30,     Increase/  
    2009     2008     (Decrease)  
    (in thousands)  
 
                       
Acquisition costs capitalized
  $ 6,197     $ 5,592     $ 605  
Amortization of DAC
    (6,620 )     (7,095 )     475  
 
                 
Change in DAC
  $ (423 )   $ (1,503 )   $ 1,080  
 
                 
The change in DAC expense was $0.4 million for the three months ended September 30, 2009, compared to $1.5 million for the same period in 2008. The change was primarily attributed to an increase in acquisition costs capitalized which was related to sales of our credit accident and health products. This increase in acquisition costs capitalized was due to a shift in sales by producers earning lower commission rates to producers earning higher commission rates. Generally, we expect the change in DAC expense to continue to follow changes in the in-force block by policy duration.
As of September 30, 2009, the Health segment related DAC was $70.6 million compared to $75.3 million as of September 30, 2008. The decrease in DAC primarily reflects a reversal of acquisition costs previously capitalized and related amortization expense associated with the previously noted settlement payments.
Nine Months ended September 30, 2009 compared with the Nine Months ended September 30, 2008 — Health
                                 
    Premiums  
    Nine months ended September 30, 2009     Nine months ended September 30, 2008  
    Dollars     Percentage     Dollars     Percentage  
    (dollar amounts in thousands)  
Medicare supplement
  $ 92,695       41.4 %   $ 90,691       41.6 %
Managing general underwriter
    17,021       7.6 %     10,151       4.7 %
Group
    25,271       11.3 %     25,185       11.6 %
Major medical
    22,944       10.2 %     30,170       13.9 %
Hospital surgical
    37,960       16.9 %     27,820       12.8 %
Long term care
    1,567       0.7 %     2,086       1.0 %
Supplemental insurance
    6,243       2.8 %     6,338       2.9 %
Credit accident and health
    13,873       6.2 %     18,507       8.5 %
All other
    6,427       2.9 %     6,817       3.0 %
 
                       
Total
  $ 224,001       100 %   $ 217,765       100 %
 
                       

 

45


Table of Contents

Premiums
The Health segment’s earned premiums increased $6.2 million or 2.9% to $224.0 million for the nine month period ended September 30, 2009, compared to $217.8 million earned for the same period in 2008. Related to the previously noted settlement payments, we recorded a reversal of $4.3 million. Excluding the effect of the settlement payments, premiums increased $10.5 million during the nine months ended September 30, 2009. The increase was primarily attributable to an increase in premiums earned on our hospital surgical product as well as a one-time realized premium associated with the unwinding of an MGU agreement. The timing of the premium recognition for this pool was based on the timing of the settlements and participation based allocation in the first quarter of 2009. The aforementioned earned premium increases were partially offset by a decrease in premium earned on our major medical product, due to the run-off of the product.
As expected, major medical business continues to lapse in favor of less comprehensive hospital surgical coverage. As of September 30, 2009, there were about 3,800 major medical policies in-force compared to about 5,500 as of September 30, 2008, a decrease of 29.8%. We expect the major medical policies in-force to continue to decline at the current pace. This line of business is no longer competitively priced and new sales have diminished. However, major medical premiums will continue to influence Health segment results since the average premium per policy from this product may be at least twice that of other products sold. The decline in major medical is offset by the increase in hospital surgical policies to about 15,800 as of September 30, 2009 from 14,700 as of September 30, 2008. Medicare supplement policies decreased slightly by 1.2% to about 58,800 policies in-force as of September 30, 2009 from about 59,500 policies in-force as of September 30, 2008. We anticipate that Medicare supplement and hospital surgical policies will continue to be the main drivers of top line growth in 2009.
Net Investment Income
Net investment income remained relatively flat at approximately $12.1 million and $12.4 million for the nine months ended September 30, 2009 and 2008, respectively. Refer to the Investments discussion for further analysis.
Policy Benefits
The benefit ratio increased to 79.9% for the nine months ended September 30, 2009 from 76.5% for same period in 2008. The benefit ratio increase primarily reflects the Medicare supplement and hospital surgical products’ percentage increase of benefit costs outpacing the percentage increase in the related earned premium. Much of the increase was attributable to growth in the volume of claims incurred on the hospital surgical and major medical product line. The increase in claims on the hospital surgical line primarily resulted from aggressive rates and underwriting practices in prior periods. Rate increases to the hospital surgical line were made over the last two years, and we anticipate that these rate increases will positively impact our benefits ratio in the remainder of 2009. Our major medical product line also contributed to the increase in the benefit ratio as a result of two significantly large claims which were incurred earlier in 2009. Corrective rate actions to the hospital surgical and major medical lines continue to be made and we anticipate that these rate increases will continue to positively impact our benefits ratio for the remainder of 2009 and into 2010. The benefit ratios for these products improved by 10.0% in the second quarter and 12.0% in the third quarter of 2009. The 2008 results were impacted by expenses associated with litigation involving one MGU that resulted in $8.9 million of reinsurance write offs in the first quarter of 2008. We have terminated our relationship with this particular MGU.
Commissions
Commissions increased by $1.9 million to $34.0 million for the nine months ended September 30, 2009, from $32.1 million for the same period in 2008. This increase is primarily associated with the increase in premium from MGUs during the first quarter of 2009, as noted above, and an increase in premium earned on our hospital surgical line. The foregoing increase was partially offset by a decrease in commission due to a reduction in new production of our credit accident and health products.
Other Operating Costs and Expenses
Other operating costs and expenses decreased by $6.7 million to $46.8 million for the nine months ended September 30, 2009 from $53.5 million for the same period in 2008. We recorded a reversal of $4.3 million related to the settlement payments noted above. Excluding the effect of the settlement payments, other operating costs and expenses decreased $2.4 million during the nine months ended September 30, 2009. The decrease was primarily attributed to the absence of a legal reserve for the previously noted settlement payments which was established in September 2008. The foregoing decrease was partially offset by increases in an excise tax on reinsured foreign premiums, employee benefits, information technology consulting fees and a one-time marketing expense of $2.6 million for the write-off for agents’ balances as part of reconciliations performed in the second quarter of 2009.

 

46


Table of Contents

Change in Deferred Policy Acquisition Costs
The following table presents the components of the change in DAC expense for the nine months ended September 30, 2009 and 2008:
                         
    Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)  
    (in thousands)  
 
                       
Acquisition costs capitalized
  $ 12,117     $ 15,736     $ (3,619 )
Amortization of DAC
    (16,379 )     (20,377 )     3,998  
 
                 
Change in DAC
  $ (4,262 )   $ (4,641 )   $ 379  
 
                 
The change in DAC expense was $4.3 million for the nine months ended September 30, 2009 compared to $4.6 million for the same period in 2008. The change was primarily driven by a reversal of acquisition costs previously capitalized and related amortization expense associated with the previously noted settlement payments. Generally, we expect the change in DAC expense to continue to follow changes in the in-force block by policy duration.
As of September 30, 2009, the Health related DAC was $70.6 million compared to $75.3 million as of September 30, 2008. The decrease in DAC reflects a reversal of acquisition costs previously capitalized and related amortization expense associated with the previously noted settlement payments as well as a reduction in the acquisition costs capitalized due to the decline in new production of our credit accident and health product.
Property and Casualty
We write Property and Casualty business through our Multiple Line agents and Credit Insurance Division agents. We evaluate our Property and Casualty insurance operations based on the total underwriting results (net premiums earned less incurred losses and loss expenses, policy acquisition costs and other underwriting expenses) and the ratios noted in the table below.
Property and Casualty segment financial results for the periods indicated were as follows:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (dollar amounts in thousands)  
Revenues:
                                               
 
                                               
Net premiums written
  $ 303,609     $ 297,549     $ 6,060     $ 907,085     $ 916,398     $ (9,313 )
 
                                   
 
                                               
Net premiums earned
    298,073       292,747       5,326       866,989       885,941       (18,952 )
Net investment income
    16,171       13,977       2,194       49,941       52,924       (2,983 )
Other income
    856       2,461       (1,605 )     5,308       6,849       (1,541 )
 
                                   
Total revenues
    315,100       309,185       5,915       922,238       945,714       (23,476 )
 
                                   
 
                                               
Benefits and expenses:
                                               
Policy benefits
    222,196       223,311       (1,115 )     714,041       720,430       (6,389 )
Commissions
    55,862       59,084       (3,222 )     160,967       173,702       (12,735 )
Other operating costs and expenses
    33,788       41,491       (7,703 )     93,271       100,372       (7,101 )
Change in deferred policy acquisition costs
    (4,947 )     (1,216 )     (3,731 )     (11,677 )     (10,573 )     (1,104 )
 
                                   
Total benefits and expenses
    306,899       322,670       (15,771 )     956,602       983,931       (27,329 )
 
                                   
 
                                               
Income/(loss) from operations before other items and federal income taxes
  $ 8,201     $ (13,485 )   $ 21,686     $ (34,364 )   $ (38,217 )   $ 3,853  
 
                                   
 
                                               
Loss ratio
    74.5 %     76.3 %     (1.8 )     82.4 %     81.3 %     1.1  
Underwriting expense ratio
    28.4 %     33.9 %     (5.5 )     28.0 %     29.7 %     (1.7 )
 
                                   
Combined ratio
    102.9 %     110.2 %     (7.3 )     110.4 %     111.0 %     (0.6 )
 
                                   
Property and Casualty earnings increased $21.7 million and $3.9 million for the three and nine months ended September 30, 2009, respectively, as compared to the same periods in 2008. The changes are primarily due to a decrease in catastrophe losses. In addition, for the three months ended September 30, 2009, premiums increased which reversed the trend that produced an overall decrease in premiums for the nine months ended September 30, 2009. These are discussed in further detail below.

 

47


Table of Contents

Three Months ended September 30, 2009 compared with the Three Months ended September 30, 2008 — Property & Casualty
Net Premiums Written and Earned
Net premiums written increased $6.1 million to $303.6 million for the three months ended September 30, 2009 from $297.5 million for the same period in 2008. This change was primarily due to a $10.7 million increase in homeowners’ premium as rate increases implemented during the last twelve months begin to take effect. This increase was offset by a $2.8 million decrease in our Workers’ Compensation product due to lower payrolls during this period of high unemployment and a $2.2 million decrease in our auto business due to continued high levels of competition.
Net premiums earned increased $5.4 million to $298.1 million for the three months ended September 30, 2009 from $292.7 million for the three months ended September 30, 2008. This increase is driven primarily by our homeowners’ business, as rate increases assigned to policies continue to take effect and raise our average premium per policy. The increase is offset by a continued decline in Auto premiums as noted above.
Net Investment Income
Net investment income increased by $2.2 million to $16.2 million for the three months ended September 30, 2009 from $14.0 million for the same period in 2008. This increase was due to the decreased amount of cash we held during the three months ended September 30, 2009 compared to the same period in 2008. Refer to the Investments discussion for further analysis.
Policy Benefits
Policy benefits include claim losses and loss adjustment expenses (“LAE”) incurred on property and casualty policies. The third quarter of 2009 saw an improvement in the catastrophe loss experience from the very high levels experienced in the previous year. Relative to 2008, fewer and less severe catastrophes occurred during the third quarter in 2009. For the three months ended September 30, 2009 and 2008, we experienced net catastrophe losses of $22.9 million on nine catastrophes and $38.1 million on ten catastrophes, respectively. These catastrophe losses contributed 7.7% to the loss ratio for the third quarter of 2009, compared to 13.0% for the same period in 2008. The loss ratios were 74.5% and 76.3% for the three months ended September 30, 2009 and 2008, respectively, with the improvement from catastrophe losses being offset by the increase in frequency and severity of personal auto claims experience.
For the three months ended September 30, 2009, net unfavorable prior year loss and LAE development was $3.2 million compared to $7.9 million of net unfavorable prior year loss and LAE development and improvement of $4.7 million from the same period in 2008, as a result of worse than expected paid and incurred loss emergence across commercial multi-peril lines of business offset by savings on catastrophe claims.
Commissions and Change in Deferred Policy Acquisition Costs
                         
    Three Months Ended September 30,        
    2009     2008     Increase/ (Decrease)  
    (in thousands)  
Commissions
  $ 55,862     $ 59,084     $ (3,222 )
Change in deferred policy acquisition costs
    (4,947 )     (1,216 )     (3,731 )
 
                 
Commissions and change in deferred acquisition costs
  $ 50,915     $ 57,868     $ (6,953 )
 
                 
Commissions decreased $3.2 million to $55.9 million for the three months ended September 30, 2009 from $59.1 million for the same period in 2008. This decrease was primarily the result of a $2.2 million decrease in credit related insurance commissions due to a shift toward products with lower commission structures. Commissions decreased further as a result of decreases in our personal and commercial auto policies for the three months ended September 30, 2009.
The change in deferred acquisition costs for the three months ended September 30, 2009 was $3.7 million, which represented an increase to deferred policy acquisition costs and a decrease in expenses for the period compared to the same period in the prior year. This was primarily driven by a change in our deferral estimates during the second quarter of 2009, deferring less in some policies and more in others in order to improve our consistency among subsidiaries.

 

48


Table of Contents

Other Operating Costs and Expenses
Other operating costs and expenses decreased $7.7 million to $33.8 million for the three months ended September 30, 2009 from $41.5 million for the same period in 2008. The decrease was due to the Farm Bureau lawsuit resulting in a one-time accrual of $7.4 million in expenses during the third quarter of 2008. For additional information on this lawsuit, refer to our Commitments and Contingencies footnote within the Notes to the Consolidated Financial Statements in our amended Form 10 Registration Statement, filed with the SEC on July 1, 2009.
The underwriting expense ratio decreased to 28.4% for the three months ended September 30, 2009 from 33.9% for the same period in 2008. The decrease in the underwriting expense ratio during the third quarter of 2009, as compared to the same period in 2008, was primarily the result of the lawsuit expense noted above, combined with a greater amount of expenses being deferred through our updated deferral estimates noted in the discussion of “Commissions and Changes in Deferred Policy Acquisition Costs” above.
Products
The following table shows net premiums written and earned and key ratios for our auto, homeowners, agribusiness, credit related property and other policies for the three months ended September 30, 2009, and 2008:
                                                 
    Automobile     Homeowner     Agribusiness     Credit Related     Other     Total  
    (dollar amounts in thousands)  
Three Months Ended September 30, 2009      
 
Net premiums written
  $ 136,595     $ 62,075     $ 26,714     $ 39,723     $ 38,502     $ 303,609  
 
                                   
 
                                               
Net premiums earned
  $ 138,212     $ 56,229     $ 26,730     $ 35,889     $ 41,013     $ 298,073  
 
                                   
 
                                               
Loss ratio
    75.0 %     92.3 %     86.1 %     37.5 %     73.5 %     74.5 %
Underwriting expense ratio
    23.6 %     21.9 %     36.3 %     61.9 %     19.1 %     28.4 %
 
                                   
Combined ratio
    98.6 %     114.2 %     122.4 %     99.4 %     92.6 %     102.9 %
 
                                   
 
                                               
Three Months Ended September 30, 2008
                                               
 
                                               
Net premiums written
  $ 138,746     $ 51,409     $ 26,731     $ 38,451     $ 42,212     $ 297,549  
 
                                   
 
                                               
Net premiums earned
  $ 141,642     $ 45,632     $ 26,862     $ 34,730     $ 43,881     $ 292,747  
 
                                   
 
                                               
Loss ratio
    64.4 %     128.8 %     67.3 %     37.1 %     96.7 %     76.3 %
Underwriting expense ratio
    27.7 %     41.4 %     34.7 %     66.1 %     20.5 %     33.9 %
 
                                   
Combined ratio
    92.1 %     170.2 %     102.0 %     103.2 %     117.2 %     110.2 %
 
                                   
The following is a discussion of our most significant products:
Automobile: Net premiums earned decreased $3.4 million, or 2.4%, for the three months ended September 30, 2009 compared to the same period in 2008, due to continued price competition. Rate reductions in certain policies have begun to take effect, while rate increases in others have caused a loss of policies, resulting in a slight decrease in both the number of policies and the average premium per policy.
The loss ratio for the period ended September 30, 2009 and 2008 increased 10.6% to 75.0% from 64.4% for the same period in 2008. The combined ratios for the three months ended September 30, 2009 and 2008 were 98.6% and 92.1%, respectively. The increase in the combined ratio was primarily the result of an increase in severity of auto claims, offset by the reduction in our underwriting expense ratio to 23.6% from 27.7%. This reduction in underwriting expense was primarily driven by the change in the deferral methodology discussed above, which decreased the auto expense for the quarter by $6.5 million.
Homeowners: Net premiums earned increased $10.6 million to $56.2 million for the three months ended September 30, 2009 from $45.6 million for the same period in 2008. This increase is a result of rate increases to policies that are beginning to take effect and increase our average premium per policy.

 

49


Table of Contents

The loss ratios for the three months ended September 30, 2009 and 2008 were 92.3% and 128.8%, respectively. The significant improvement in the loss ratio for 2009 compared to 2008 is due to the decreased level of catastrophe losses during the third quarter of 2009 as compared to the high levels we experienced in 2008. Net catastrophe losses for all lines of business combined in the third quarter of 2009 were $22.9 million, compared to approximately $38.1 million for the same period in 2008. The underwriting expense ratio experienced a significant decline, decreasing to 21.9% from 41.4% for the three months ended September 30, 2009 and 2008, respectively. This decrease was primarily the result of the lawsuit expense noted in the “Other Operating Costs and Expenses” discussion above, combined with a greater amount of expenses being deferred through our updated deferral estimates noted in the discussion of “Commissions and Changes in Deferred Policy Acquisition Costs” above.
Agribusiness: Premium earned remained flat for the three months ended September 30, 2009 and 2008. The loss ratios for the three months ended September 30, 2009 and 2008 were 86.1% and 67.3%, respectively. The change in the loss ratio reflects an increase in policy benefits of $5.0 million, or 27.4%, primarily due to an increase in non-catastrophe events.
Credit related property: Net premiums earned increased to $35.9 million from $34.7 million for the three months ended September 30, 2009 and 2008, respectively. The increase in revenue is due to an increase in our Collateral Protection line of business as lenders move to protect their consumer lending products, offset by the decrease in our Guaranteed Auto Protection (“GAP”) product as a result of a continued decline in auto sales. GAP insurance covers the amount of indebtedness in excess of the insured value of the car. With the decline in auto sales fewer transactions take place, reducing our opportunity to sell this product.
The loss ratios for the three months ended September 30, 2009 and 2008 were 37.5% and 37.1%, respectively, while the expense ratios were 61.9%, and 66.1%, respectively. The slight increase in the loss ratio is attributable to a continued increase in the frequency and severity of GAP claims during the third quarter of 2009 and the decrease in the underwriting expense ratio was due to the one time lawsuit expense during third quarter 2008 noted in the “Other Operating Costs and Expenses” section above.
Nine Months ended September 30, 2009 compared with the Nine Months ended September 30, 2008 — Property & Casualty
Net Premiums Written and Earned
Net premiums written decreased $9.3 million to $907.1 million for the nine months ended September 30, 2009 from $916.4 million for the same period in 2008. This change was primarily due to a $13.6 million decrease in auto net premiums written, and a $5.6 million decrease in workers’ compensation insurance net written premium partially offset by a $13.0 million increase in homeowner premiums.
The decrease in auto business is due to continued high levels of competition in this line. The decrease we are experiencing in workers compensation net written premium is due to the current economic environment as lower payrolls result in lower premiums written and earned. We expect this to continue in the short-term until the economy shows signs of recovery and job growth and payrolls begin to rebound. The increase in homeowners’ premium is due to rate increases beginning to take effect, increasing our average premium per policy by approximately 10.0% for the nine months ended September 30, 2009 as compared to the same period in 2008.
Net premiums earned decreased $18.9 million to $867.0 million for the nine months ended September 30, 2009 from $885.9 million for the nine months ended September 30, 2008. This decrease was primarily the result of a $20.4 million decrease in auto premiums earned, and a $3.8 million decrease in workers’ compensation, offset by a $2.9 million increase in homeowners’ premiums; all as noted above.
Net Investment Income
Net investment income decreased by $3.0 million to $49.9 million for the nine months ended September 30, 2009 from $52.9 million for the same period in 2008. This decrease was due to the increased amount of cash in our investment portfolio during the nine months ended September 30, 2009 compared to the same period in 2008. As investing opportunities arise, we are reinvesting the cash held in primarily fixed maturity securities. Refer to the Investments discussion for further analysis.
Policy Benefits
Policy benefits decreased $6.4 million to $714.0 million for the nine months ended September 30, 2009 from $720.4 million for the same period in 2008. The decrease was due to a $31.8 million improvement in the record catastrophe loss experience from the previous year as fewer and less severe catastrophes occurred during the nine months ended September 30, 2009, compared to the same period in 2008. We experienced net catastrophe losses of $88.9 million on twenty-six catastrophes during the nine months ended September 30, 2009 and $120.7 million on thirty-five catastrophes during the nine months ended September 30, 2008. This improvement was offset by an increase in the claim experience of our auto lines by $11.0 million, workers’ compensation insurance product of $3.6 million, and an increase of $3.3 million from our credit insurance products. These are discussed in further detail in the “Products” discussion below.

 

50


Table of Contents

The loss ratios were 82.4% and 81.3% for the nine months ended September 30, 2009 and 2008, respectively. The primary factor in the increased loss ratio was lower net earned premiums and increased benefits in certain products during 2009 as compared to 2008, offset by the decrease in catastrophe losses. Catastrophe losses contributed 10.3% and 13.6% to the loss ratio for the first nine months of 2009 and 2008, respectively.
For the nine months ended September 30, 2009, net favorable prior year loss and LAE development was $16.0 million compared to $25.3 million of net favorable prior year loss and LAE development for the same period in 2008, as a result of better than expected paid and incurred loss emergence across several lines of business (personal auto, commercial auto, agribusiness and commercial multi-peril lines) as well as savings on catastrophe claims. This favorable emergence was offset by adverse development for the workers’ compensation and homeowners’ lines of business.
Commissions and Change in Deferred Policy Acquisition Costs
                         
    Nine Months Ended September 30,        
    2009     2008     Increase/ (Decrease)  
    (in thousands)  
Commissions
  $ 160,967     $ 173,702     $ (12,735 )
Change in deferred policy acquisition costs
    (11,677 )     (10,573 )     (1,104 )
 
                 
Commissions and change in deferred acquisition costs
  $ 149,290     $ 163,129     $ (13,839 )
 
                 
Commissions decreased $12.7 million to $161.0 million for the nine months ended September 30, 2009 from $173.7 million for the same period in 2008. This decrease was primarily the result of a $9.4 million decrease in credit related insurance commissions due to a shift toward products with lower commission structures. Commissions on personal and commercial auto policies for the nine months ended September 30, 2009 also decreased as compared to the same period in 2008 due to reductions in net earned premiums.
The change in deferred acquisition costs for the nine months ended September 30, 2009 was $1.1 million, which represented a reduction to deferred policy acquisition costs and a decrease in expenses for the period. This was primarily driven by changes in the product mix within our credit related property lines towards products that have lower commission structures, resulting in fewer additions to DAC as compared to the same period in 2008.
Other Operating Costs and Expenses
Other operating costs and expenses decreased $7.1 million to $93.3 million for the nine months ended September 30, 2009 from $100.4 million for the same period in 2008. The underwriting expense ratio decreased slightly to 28.0% from 29.7% for the nine months ended September 30, 2009 and 2008, respectively. This was primarily the result of a certain lawsuit resulting in a one-time accrual of $7.4 million in expenses during the third quarter of 2008 noted in our three month discussion above.

 

51


Table of Contents

Products
The following table shows net premiums written and earned and key ratios for our auto, homeowners, agribusiness, credit related property and other policies for the nine months ended September 30, 2009, and 2008:
                                                 
    Automobile     Homeowner     Agribusiness     Credit Related     Other     Total  
    (dollar amounts in thousands)  
Nine Months Ended September 30, 2009      
 
Net premiums written
  $ 418,002     $ 165,821     $ 79,293     $ 109,025     $ 134,944     $ 907,085  
 
                                   
 
                                               
Net premiums earned
  $ 406,010     $ 154,047     $ 79,322     $ 104,748     $ 122,862     $ 866,989  
 
                                   
 
                                               
Loss ratio
    79.7 %     116.9 %     95.3 %     41.7 %     74.1 %     82.4 %
Underwriting expense ratio
    21.1 %     22.4 %     36.2 %     60.8 %     24.4 %     28.0 %
 
                                   
Combined ratio
    100.8 %     139.3 %     131.5 %     102.5 %     98.5 %     110.4 %
 
                                   
 
                                               
Nine Months Ended September 30, 2008
                                               
 
                                               
Net premiums written
  $ 431,639     $ 152,841     $ 79,490     $ 110,511     $ 141,917     $ 916,398  
 
                                   
 
                                               
Net premiums earned
  $ 426,426     $ 151,122     $ 78,644     $ 101,059     $ 128,690     $ 885,941  
 
                                   
 
                                               
Loss ratio
    73.3 %     125.1 %     100.0 %     39.9 %     77.4 %     81.3 %
Underwriting expense ratio
    23.5 %     29.7 %     32.6 %     64.7 %     21.2 %     29.7 %
 
                                   
Combined ratio
    96.8 %     154.8 %     132.6 %     104.6 %     98.6 %     111.0 %
 
                                   
The following is a discussion of our most significant products:
Automobile: Net premiums earned decreased $20.4 million, or 4.8%, for the nine months ended September 30, 2009 compared to the same period in 2008, due to continued competition in the product line. Rate increases are now being implemented which should result in improved operating results for the remainder of 2009 and into 2010. The end result should be a better priced and higher quality product line.
The loss ratios for the period ended September 30, 2009 and 2008 were 79.7% and 73.3%, respectively. The increase of the ratio is primarily due to the decrease in premiums noted above, and the increase in the severity of claims. The increase in loss severity is due to increased bodily injury claims, increased litigation costs and increased property damage liabilities. The combined ratios for the nine months ended September 30, 2009 and 2008 were 100.8% and 96.8%, respectively.
Homeowners: Net premiums earned increased $2.9 million to $154.0 million for the nine months ended September 30, 2009 from $151.1 million for the same period in 2008. The increase in premiums is due to rate increases across the entirety of our product line. The increase in premiums is partially offset by the approximately 4,500 in-force policy decrease during the first nine months of 2009 as compared to 2008. The rate actions combined with our focus on increasing insured values on existing policies should result in a higher quality product line.
The loss ratios for the nine months ended September 30, 2009 and 2008 were 116.9% and 125.1%, respectively. The decrease in the loss ratio for 2009 compared to 2008 is due to the decrease in catastrophe losses, offset by lower net premiums earned during the first half of the year. The underwriting expense ratio decreased to 22.4% from 29.7% for the nine months ended September 30, 2009 and 2008, respectively. This decrease was primarily the result of the lawsuit expense noted in the “Other Operating Costs and Expenses” discussion above, combined with a greater amount of expenses being deferred through our updated deferral estimates noted in the discussion of “Commissions and Changes in Deferred Policy Acquisition Costs” above.
Agribusiness: Net premiums earned increased slightly to $79.3 million for the nine months ended September 30 2009, compared to the same period in 2008. This increase is primarily the result of rate increases initiated during the prior year that are being earned in the first three quarters of 2009, and a slight increase in the number of policies.
The loss ratios for the nine months ended September 30, 2009 and 2008 were 95.3% and 100.0%, respectively. The change in the loss ratio reflects an improvement in our underwriting and lower catastrophe losses in this line, equating to $3.1 million less of policy benefit expense during the first three quarters of 2009. This also represents expected variability in this line, which is sensitive to the frequency and severity of storm and weather related losses. Our focus on disciplined underwriting will assist us in achieving the profitability potential of this product in the long term.

 

52


Table of Contents

Credit related property: Net premiums earned were $104.7 million and $101.1 million for the nine months ended September 30, 2009 and 2008, respectively. The increase in revenue is due to an increase in our collateral protection line of business as lenders move to protect their consumer lending products, offset by the decrease in our GAP product as a result of declining auto sales. We expect the current economic recession combined with increased lending standards to continue the reduction in the demand for credit and credit related insurance products. However, as credit standards are tightened, we expect to write higher quality business and to continue to add new business partners as the economy shows signs of recovery. In the current economic environment, we expect our collateral protection product to continue to grow until the economy begins to recover, at which time we expect the sales of our GAP products to increase.
The loss ratios for the nine months ended September 30, 2009 and 2008 were 41.7% and 39.9%, respectively, while the expense ratios were 60.8%, and 64.7%, respectively. The increase in the loss ratio is attributable to an increase in frequency and severity of GAP claims during the first three quarters of 2009 as compared to the same period in 2008, as policy benefits in this line increased 75.5% to $10.4 million during this time. Slowing auto sales have driven down the replacement values of most vehicles, thus creating a larger difference between a vehicle’s value and its indebtedness. The decrease in the expense ratio mainly reflects a decrease in commission expense relative to earned premium as compared to the prior year. This is attributable to a shift in product mix during the first three quarters of 2009 towards products that have lower commission structures.
Corporate & Other
Corporate and Other primarily includes the capital not allocated to support our insurance business segments. Investments include publicly traded equities, real estate, mortgage loans, high-yield bonds, venture capital partnerships, mineral interests and tax-advantaged instruments. Refer to the Investments discussion for further analysis. Our registered investment advisor subsidiary also manages a family of mutual funds and earns management fees, which are insignificant to the overall segment results.
Corporate and Other segment financial results for the periods indicated were as follows:
                                                 
    Three Months Ended September 30,     Increase/     Nine Months Ended September 30,     Increase/  
    2009     2008     (Decrease)     2009     2008     (Decrease)  
    (in thousands)  
Revenues:
                                               
 
                                               
Net investment income
  $ 27,377     $ 35,639     $ (8,262 )   $ 69,988     $ 98,663     $ (28,675 )
(Loss) from sale of investments, net
    (935 )     (201,985 )     201,050       (83,144 )     (211,903 )     128,759  
Other income
    4,254       4,522       (268 )     12,415       14,439       (2,024 )
 
                                   
Total revenues
    30,696       (161,824 )     192,520       (741 )     (98,801 )     98,060  
 
                                   
 
                                               
Benefits and expenses:
                                               
Other operating costs and expenses
    16,623       3,983       12,640       37,118       38,577       (1,459 )
 
                                   
Total benefits and expenses
    16,623       3,983       12,640       37,118       38,577       (1,459 )
 
                                   
 
                                               
Income/(loss) from operations before other items and federal income taxes
  $ 14,073     $ (165,807 )   $ 179,880     $ (37,859 )   $ (137,378 )   $ 99,519  
 
                                   
Three Months and Nine Months ended September 30, 2009 compared with the Three Months and Nine Months ended September 30, 2008
Total income (loss) from operations before other items and federal income taxes increased $179.9 million and $99.5 million to a gain of $14.1 million and a loss of $37.9 million for the three and nine months ended September 30, 2009, respectively, from losses of $165.8 million and $137.4 million for the same periods in 2008. We recorded other-than-temporary impairments of $4.2 million and $78.3 million on security investments during the three and nine months ended September 30, 2009, respectively, due to market volatility.
In accordance with our investment asset allocation process, the illiquid credit market and the other-than-temporary impairments recorded required us to reallocate some invested assets, including additional cash, from the Corporate and Other segment to the insurance segments in 2009. The reallocation resulted in a decrease in net investment income for the Corporate and Other segment.

 

53


Table of Contents

We issue participating life insurance policies in which our policyholders share in our investment gains and/or losses. In the nine months ended September 30, 2009, we allocated a portion of our realized losses to participating policyholders. The allocation is done through an adjustment to other operating costs and expenses in our Corporate and Other segment and resulted in the other operating costs and expenses for the three and nine months ended September 30, 2009 being significantly lower when compared to the same periods in 2008.
Liquidity and Capital Resources
Liquidity
Our liquidity requirements have been and are expected to continue to be met by funds from operations. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Our current liquidity position is considered to be sufficient to meet anticipated demands over the next twelve months.
                 
    Nine Months Ended September 30,  
    2009     2008  
    (in thousands)  
Net cash provided by (used in):
               
Operating activities
  $ 354,932     $ 243,898  
Investing activities
    (1,083,110 )     (811,426 )
Financing activities
    755,449       464,486  
 
           
Net increase (decrease) in cash
  $ 27,271     $ (103,042 )
 
           
The slight increase in operating cash flows primarily relates to a decrease in our realized losses on investments in the nine months ended September 30, 2009 compared to the same period in 2008.
Cash flows used in investing activities increased primarily due to increased investments in fixed income securities and short-term investments offset by the decrease in mortgage loans in the nine months ended September 30, 2009 compared to the same period in 2008.
Increased deposits on annuity products contributed to the increase in cash provided by financing activities for the nine months ended September 30, 2009 from the same period in 2008. Annuity sales are recorded as part of the cash flows from financing activities in accordance with U.S. GAAP rules.
Capital Resources
Our capital resources at September 30, 2009 and December 31, 2008 consisted of stockholders’ equity summarized as follows:
                         
    As of September 30,     As of December 31,     Increase/  
    2009     2008     (Decrease)  
    (in thousands)  
Equity, excluding accumulated other comprehensive income (loss), net of tax (“AOCI”)
  $ 3,327,801     $ 3,355,004     $ (27,203 )
AOCI, net of tax
    108,830       (221,148 )     329,978  
 
                 
Total stockholders’ equity
  $ 3,436,631     $ 3,133,856     $ 302,775  
 
                 
We have notes payable on our consolidated statement of financial position that are not part of our capital resources. These notes payable represent amounts borrowed by real estate joint ventures that we are required to consolidate into our results in accordance with accounting rules. The lenders for the notes payable have no recourse to us in the event of default by the joint ventures. Therefore, the only amount of liability we have for these notes payable is limited to our investment in the joint ventures, which totaled $18.7 million at September 30, 2009.
Total stockholders’ equity in the nine month period ended September 30, 2009 increased $302.8 million as a result of unrealized gains on marketable equity securities, offset by the net loss of $19.4 million and $61.8 million in dividends paid to stockholders.

 

54


Table of Contents

Statutory Surplus and Risk-based Capital
Statutory surplus represents the capital of our insurance companies reported in accordance with accounting practices prescribed or permitted by the applicable state insurance departments. As of September 30, 2009, the levels of our insurance subsidiaries’ surplus and risk-based capital exceeded the minimum risk-based capital requirements of the National Association of Insurance Commissioners. As of September 30, 2009, on a stand-alone basis the surplus of American National Insurance Company, the parent company, increased from the level recorded at December 31, 2008.
Contractual Obligations
Our future cash payments associated with loss and LAE reserves, life, annuity and disability obligations, contractual obligations pursuant to operating leases for office space and equipment, and notes payable have not materially changed since December 31, 2008. We expect to have the capacity to repay and/or refinance these obligations as they come due.
Off Balance Sheet Arrangements
We have off-balance sheet arrangements relating to third-party marketing operation bank loans which are discussed under “Commitments and Contingencies” in the footnotes to the consolidated financial statements above. In 2010, the third-party marketing operation plans to renegotiate the bank loans. If these renegotiations are unsuccessful, we would have to pay the bank loans during the second quarter of 2010 using the cash value of the underlying insurance contracts. However, since the cash value of the life insurance policies always equals or exceeds the balance of the loans, management does not foresee any loss on the guarantees.
Investments
General
We manage our investment portfolio to optimize the rate of return that is commensurate with sound and prudent underwriting practices and maintaining a well diversified portfolio. Our investment operations are governed by various regulatory authorities, including state insurance departments. Investment activity, including the setting of investment policies and defining acceptable risk levels, is subject to review and approval of our Finance Committee, a committee made up of two members of the Board of Directors and senior investment professionals. For additional information on the composition and responsibilities of the Finance Committee, see our amended Form 10 Registration Statement filed with the SEC on July 1, 2009.
Our insurance and annuity products are primarily supported by fixed-income securities and commercial mortgage loans. We purchase fixed income security investments and designate them as either held-to-maturity or available-for-sale as necessary to match our estimated future cash flow needs. We make use of statistical measures such as duration and the modeling of future cash flows using stochastic interest rate scenarios to balance our investment portfolio to match the pricing objectives of our underlying insurance products. As part of our asset/liability management program, we monitor the composition of our fixed income securities between held-to-maturity and available-for-sale securities and adjust the concentrations of various investments within the portfolio as investments mature or with the purchase of new investments.
We invest directly in quality commercial mortgage loans with yields that compare favorably with other fixed income securities. Investments in residential mortgage loans have not historically been part of our investment portfolio, and we do not anticipate investing in them in the future.
Our historically strong capitalization enabled us to invest in equity securities and investment real estate where there were opportunities for more significant returns. We make investments in real estate and equity securities based on a risk/reward analysis.

 

55


Table of Contents

Composition of Invested Assets
The following summarizes the carrying values of our investment portfolio by asset class as of September 30, 2009 and December 31, 2008 (other than investments in unconsolidated affiliates):
                                 
    As of:  
    September 30, 2009     December 31, 2008  
    Amount     Percent     Amount