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 June 30, 2010
 
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
(State or other jurisdiction of
incorporation or organization)
  74-0484030
(I.R.S. employer
identification number)
     
One Moody Plaza    
Galveston, Texas
(Address of principal executive offices)
  77550-7999
(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 þ NO o
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 July 30, 2010, 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  
         
    34  
         
    62  
         
    62  
         
       
         
    63  
         
    63  
         
    63  
         
    63  
         
    63  
         
    63  
         
    64  
         
    64  
         
    64  
         
 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 OPERATIONS
(Unaudited and in thousands, except for per share data)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  
PREMIUMS AND OTHER REVENUE
                               
Premiums
                               
Life
  $ 68,873     $ 65,228     $ 138,318     $ 135,318  
Annuity
    40,608       53,641       80,960       90,857  
Accident and health
    67,841       69,651       136,265       149,573  
Property and casualty
    287,497       276,427       573,969       568,916  
Other policy revenues
    46,728       44,768       91,724       88,448  
Net investment income
    211,817       214,664       430,028       407,860  
Realized investments gains (losses)
    19,749       (2,674 )     37,491       (8,061 )
Other-than-temporary impairments
    (1,505 )     (6,074 )     (2,750 )     (74,148 )
Other income
    8,961       12,159       16,850       21,024  
 
                       
Total revenues
    750,569       727,790       1,502,855       1,379,787  
 
                       
 
                               
BENEFITS, LOSSES AND EXPENSES
                               
Policy Benefits
                               
Life
    74,468       72,317       147,006       146,266  
Annuity
    50,442       63,151       98,137       106,808  
Accident and health
    45,351       57,699       98,190       121,766  
Property and casualty
    257,993       243,771       493,177       491,845  
Interest credited to policy account balances
    79,545       95,714       173,926       177,302  
Commissions for acquiring and servicing policies
    115,900       114,675       222,777       227,590  
Other operating costs and expenses
    114,454       120,378       229,440       231,540  
Increase in deferred policy acquisition costs
    (18,126 )     (27,396 )     (33,009 )     (34,029 )
 
                       
Total benefits, losses and expenses
    720,027       740,309       1,429,644       1,469,088  
 
                       
 
                               
Income (loss) from continuing operations before federal income tax, and equity in earnings (losses) of unconsolidated affiliates
    30,542       (12,519 )     73,211       (89,301 )
Provision (benefit) for federal income taxes
                               
Current
    9,903       (10,330 )     19,466       (25,105 )
Deferred
    (5,642 )     (446 )     (5,112 )     (16,694 )
 
                       
Total provision (benefit) for federal income taxes
    4,261       (10,776 )     14,354       (41,799 )
 
                               
Equity in earnings (losses) of unconsolidated affiliates, net of tax
    62       (3,180 )     69       (5,117 )
 
                       
 
                               
Net income (loss)
    26,343       (4,923 )     58,926       (52,619 )
 
                       
Less: Net loss attributable to noncontrolling interest
    (279 )     (568 )     (2,474 )     (569 )
 
                       
Net income (loss) attributable to American National Insurance Company and Subsidiaries
  $ 26,622     $ (4,355 )   $ 61,400     $ (52,050 )
 
                       
 
                               
Amounts available to American National Insurance Company common stockholders
                               
Earnings (loss) per share:
                               
Basic
  $ 1.00     $ (0.16 )   $ 2.31     $ (1.96 )
Diluted
  $ 1.00     $ (0.16 )   $ 2.30     $ (1.96 )
 
                               
Weighted average common shares outstanding
    26,558,832       26,498,832       26,558,832       26,498,832  
Weighted average common shares outstanding and dilutive potential common shares
    26,669,828       26,498,832       26,669,828       26,498,832  
 
                       
See accompanying notes to the consolidated financial statements.

 

3


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Unaudited and in thousands, except for share and per share data)
                 
    June 30,     December 31,  
    2010     2009  
ASSETS
               
Investments, other than investments in unconsolidated affiliates
               
Fixed Securities:
               
Bonds held-to-maturity
  $ 7,813,519     $ 7,461,711  
Bonds available-for-sale
    4,229,320       4,213,550  
Equity securities:
               
Preferred stocks
    36,890       35,717  
Common stocks
    809,913       934,754  
Mortgage loans on real estate, net of allowance
    2,387,657       2,229,659  
Policy loans
    370,139       364,354  
Investment real estate, net of accumulated depreciation of $229,873 and $209,115
    665,343       635,110  
Short-term investments
    776,114       636,823  
Other invested assets
    97,760       94,442  
 
           
Total investments
    17,186,655       16,606,120  
 
           
Cash
    115,155       161,483  
Investments in unconsolidated affiliates
    158,832       156,809  
Accrued investment income
    195,728       191,737  
Reinsurance ceded receivables
    379,779       371,654  
Prepaid reinsurance premiums
    49,921       53,545  
Premiums due and other receivables
    304,713       282,865  
Deferred policy acquisition costs
    1,324,510       1,330,981  
Property and equipment, net
    82,819       88,705  
Current federal income taxes
    35,920       29,474  
Deferred federal income taxes
    11,642       5,034  
Other assets
    149,991       152,722  
Separate account assets
    698,497       718,378  
 
           
Total assets
  $ 20,694,162     $ 20,149,507  
 
           
LIABILITIES
               
Policyholder funds
               
Future policy benefits:
               
Life
  $ 2,510,440     $ 2,485,886  
Annuity
    821,380       783,065  
Accident and health
    94,833       97,407  
Policy account balances
    9,998,536       9,567,860  
Policy and contract claims
    1,346,090       1,293,791  
Participating policyholder share
    167,507       162,794  
Other policyholder funds
    936,037       919,864  
 
           
Total policyholder liabilities
    15,874,823       15,310,667  
 
           
Liability for retirement benefits
    182,405       180,909  
Notes payable
    73,208       73,842  
Other liabilities
    379,585       393,302  
Separate account liabilities
    698,497       718,378  
 
           
Total liabilities
    17,208,518       16,677,098  
 
           
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
    13,539       11,986  
Accumulated other comprehensive income
    113,647       117,649  
Retained earnings
    3,418,589       3,398,492  
Treasury stock, at cost
    (98,505 )     (98,505 )
 
           
Total American National stockholders’ equity
    3,478,102       3,460,454  
Noncontrolling interest
    7,542       11,955  
 
           
Total stockholders’ equity
    3,485,644       3,472,409  
 
           
Total liabilities and stockholders’ equity
  $ 20,694,162     $ 20,149,507  
 
           
See accompanying notes to the 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)
                 
    Six Months Ended June 30,  
    2010     2009  
 
Common Stock
               
Balance at beginning and end of the period
  $ 30,832     $ 30,832  
 
           
 
               
Additional Paid-In Capital
               
Balance at beginning of the year
    11,986       7,552  
Issuance of treasury shares as restricted stock
          (18 )
Amortization of restricted stock
    1,553       2,357  
 
           
Balance as of June 30,
  $ 13,539     $ 9,891  
 
           
 
               
Accumulated Other Comprehensive Income
               
Balance at beginning of the year
    117,649       (221,148 )
Change in unrealized gains (losses) on marketable securities, net
    (4,023 )     205,645  
Cumulative effect of change in accounting
          (49,890 )
Foreign exchange adjustments
    (68 )     (776 )
Minimum pension liability adjustment
    89       1,563  
 
           
Balance as of June 30,
  $ 113,647     $ (64,606 )
 
           
 
               
Retained Earnings
               
Balance at beginning of the year
    3,398,492       3,414,946  
Net income (loss) attributable to American National Insurance and Subsidiaries
    61,400       (52,050 )
Cash dividends to common stockholders ($1.54 and $1.54 per share)
    (41,303 )     (41,188 )
Cumulative effect of change in accounting
          49,890  
 
           
Balance as of June 30,
  $ 3,418,589     $ 3,371,598  
 
           
 
               
Treasury Stock
               
Balance at beginning of the year
    (98,505 )     (98,326 )
Net issuance of restricted stock
          18  
 
           
Balance as of June 30,
  $ (98,505 )   $ (98,308 )
 
           
 
               
Noncontrolling Interest
               
Balance at beginning of the year
    11,955       8,377  
Contributions
    285       491  
Distributions
    (892 )     (50 )
Loss attributable to noncontrolling interest
    (3,806 )     (875 )
 
           
Balance as of June 30,
  $ 7,542     $ 7,943  
 
           
 
               
Total Equity
               
Balance as of June 30,
  $ 3,485,644     $ 3,257,350  
 
           
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited and in thousands)
                                 
    Three Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009  
 
                               
Net income (loss) attributable to American National Insurance Company and Subsidiaries
  $ 26,622     $ (4,355 )   $ 61,400     $ (52,050 )
 
                       
 
                               
Other comprehensive income (loss), net of tax
                               
Change in unrealized gains (losses) on marketable securities, net
    (61,296 )     222,308       (4,023 )     205,645  
Foreign exchange adjustments
    (227 )     (666 )     (68 )     (776 )
Minimum pension liability adjustment
    89       (147 )     89       1,563  
 
                       
Total other comprehensive income (loss)
  $ (61,434 )   $ 221,495     $ (4,002 )   $ 206,432  
 
                       
 
                               
Total comprehensive income (loss) attributable to American National Insurance Company and Subsidiaries
  $ (34,812 )   $ 217,140     $ 57,398     $ 154,382  
 
                       
See accompanying notes to the consolidated financial statements.

 

5


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)
                 
    Six Months Ended June 30,  
    2010     2009  
 
               
OPERATING ACTIVITIES
               
Net income (loss) attributable to American National Insurance Company and Subsidiaries
  $ 61,400     $ (52,050 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Realized (gains) losses on investments
    (37,491 )     8,061  
Other-than-temporary impairments
    2,750       74,148  
Amortization of discounts and premiums on bonds
    8,414       7,979  
Net capitalized interest on policy loans and mortgage loans
    (14,972 )     (13,853 )
Depreciation
    23,849       17,293  
Interest credited to policy account balances
    173,926       177,302  
Charges to policy account balances
    (89,110 )     (85,177 )
Deferred federal income tax benefit
    (5,112 )     (16,694 )
Deferral of policy acquisition costs
    (248,038 )     (248,568 )
Amortization of deferred policy acquisition costs
    215,029       214,539  
Equity in (earnings) losses of unconsolidated affiliates
    (106 )     7,872  
Changes in:
               
Policyholder funds liabilities
    133,480       (20,986 )
Reinsurance ceded receivables
    (8,125 )     66,342  
Premiums due and other receivables
    (21,848 )     8,914  
Accrued investment income
    (3,991 )     (3,703 )
Current federal income taxes
    (6,446 )     44,240  
Liability for retirement benefits
    1,496       4,403  
Prepaid reinsurance premiums
    3,624       4,094  
Other, net
    (13,901 )     3,812  
 
           
Net cash provided by operating activities
    174,828       197,968  
 
           
INVESTING ACTIVITIES
               
Proceeds from sales of:
               
Bonds — available for sale
    136,514       20,910  
Common stocks
    68,986       60,451  
Real estate
    16,381       1,204  
Other invested assets
    4,925        
Disposals of property and equipment
    1,083       493  
Distributions from unconsolidated affiliates
    3,100       3,088  
Proceeds from maturity of:
               
Bonds — available for sale
    187,951       146,260  
Bonds — held to maturity
    182,030       441,781  
Principal payments received on:
               
Mortgage loans
    46,157       63,860  
Policy loans
    24,247       26,508  
Purchases of investments:
               
Bonds — available for sale
    (220,232 )     (67,110 )
Bonds — held to maturity
    (535,103 )     (1,081,138 )
Common stocks
    (13,357 )     (19,847 )
Real estate
    (30,139 )     (32,656 )
Mortgage loans
    (220,566 )     (208,828 )
Policy loans
    (18,219 )     (17,539 )
Other invested assets
    (26,503 )     (6,270 )
Additions to property and equipment
    (4,019 )     (9,260 )
Contributions to unconsolidated affiliates
    (11,820 )     (8,370 )
Net increase in short-term investments
    (139,291 )     (161,162 )
Other, net
    21,183       8,132  
 
           
Net cash used in investing activities
    (526,692 )     (839,493 )
 
           
FINANCING ACTIVITIES
               
Policyholders’ deposits to policy account balances
    865,753       1,347,735  
Policyholders’ withdrawals from policy account balances
    (518,280 )     (697,051 )
Decrease in notes payable
    (634 )     (1,429 )
Dividends to stockholders
    (41,303 )     (41,188 )
 
           
Net cash provided by financing activities
    305,536       608,067  
 
           
NET DECREASE IN CASH
    (46,328 )     (33,458 )
Cash:
               
Beginning of the year
    161,483       66,096  
 
           
Balance as of June 30,
  $ 115,155     $ 32,638  
 
           
See accompanying notes to the consolidated financial statements.

 

6


Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 insurance, health insurance, annuities, and property and casualty insurance. In addition, through a non-insurance subsidiary, American National invests in stocks and 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 exclusive agents, independent agents, third-party marketing organizations, career agents, and direct sales to the public.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES
The 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. Investments in unconsolidated affiliates are shown at cost plus equity in undistributed earnings since the dates of acquisition. In addition to GAAP accounting literature, specific SEC regulation is also applied to the financial statements issued by insurance companies.
The interim consolidated financial statements and notes herein are unaudited. These interim financial statements reflect all adjustments which are, in the opinion of management, considered necessary for the fair presentation of the financial position, statements of operations, cash flows and changes in equity and comprehensive income (loss) for the interim periods. These interim financial statements and notes should be read in conjunction with the annual financial statements and notes thereto included in the Company’s Annual Report on Form 10-K as of and for the year ended December 31, 2009. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
Certain reclassifications have been made to prior period amounts to conform to the current period presentation. During the first quarter of 2010, American National consolidated two real estate joint ventures that were previously accounted for under the equity method of accounting. This change was due to an increase in American National’s investment in the entities, which resulted in a controlling financial interest in the entities and therefore meeting the criteria for consolidation. The consolidation of these two joint ventures did not have a material effect on the interim consolidated financial statements as of June 30, 2010.
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 ceded receivables;
 
    Pension and postretirement benefit plan liabilities;
 
    Litigation contingencies; and
 
    Federal income taxes.
As of June 30, 2010, American National’s significant accounting policies and practices remain materially unchanged from those disclosed in Note 2 of Notes to Consolidated Financial Statements incorporated within the Company’s 2009 Annual Report on Form 10-K.

 

7


Table of Contents

3. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-15, “How Investments Held through Separate Accounts Affect an Insurer’s Consolidation Analysis of Those Investments” (“ASU 2010-15”), which amends Accounting Standards Codification (“ASC”) Subtopic 944-80 — Financial Services — Insurance. ASU 2010-15 clarifies that an insurance entity should not consider any separate account interests held for the benefit of policyholders in an investment to be the insurer’s interests and should not combine those interests with its general account interest in the same investment when assessing the investment for consolidation, unless the separate account interests are held for the benefit of a related party policyholder. This ASU also clarifies that for the purpose of evaluating whether the retention of specialized accounting for investments in consolidation is appropriate, a separate account arrangement should be considered a subsidiary. The amendments do not require an insurer to consolidate an investment in which a separate account holds a controlling financial interest if the investment is not or would not be consolidated in the stand-alone financial statements of the separate account. ASU 2010-15 is effective for annual periods and interim periods within those annual periods, commencing after December 15, 2010. Early adoption is permitted and guidance is to be applied retrospectively to all prior periods upon adoption. Accordingly, this guidance will be adopted on January 1, 2011, and it is not expected to have a material effect on American National’s consolidated financial statements.
In April 2010, the FASB issued ASU No. 2010-18, Effect of a Loan Modification When The Loan Is Part of a Pool That Is Accounted for as a Single Asset” (“ASU 2010-18”), which amends FASB ASC Subtopic 310-30 — Receivables-Loans and Debt Securities Acquired with Deteriorated Credit Quality. The amendments require that modifications of loans that are accounted for within a pool under that Subtopic do not result in the removal of the loans from the pool even if the modifications of the loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. The amendments in this ASU are effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early adoption is permitted. American National is currently assessing the impact, if any, the adoption of ASU 2010-18 may have on its consolidated financial statements.

 

8


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 (in thousands):
                                 
    As of June 30, 2010  
            Gross Unrealized     Gross Unrealized     Estimated Fair  
    Amortized Cost     Gains     Losses     Value  
Debt securities
                               
Bonds held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 23,393     $ 332     $     $ 23,725  
States of the U.S. and political subdivisions of the states
    292,698       12,356       (119 )     304,935  
Foreign governments
    29,008       4,853             33,861  
Corporate debt securities
    6,666,604       496,489       (24,604 )     7,138,489  
Residential mortgage-backed securities
    714,408       38,084       (11,655 )     740,837  
Commercial mortgage-backed securities
    33,667             (22,727 )     10,940  
Collateralized debt securities
    9,226       65       (1,063 )     8,228  
Other debt securities
    44,515       4,015             48,530  
 
                       
Total bonds held-to-maturity
  $ 7,813,519     $ 556,194     $ (60,168 )   $ 8,309,545  
 
                       
 
                               
Bonds available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    3,426       754             4,180  
States of the U.S. and political subdivisions of the states
    616,049       26,875       (429 )     642,495  
Foreign governments
    5,000       2,187             7,187  
Corporate debt securities
    3,060,782       193,073       (43,188 )     3,210,667  
Residential mortgage-backed securities
    321,207       10,030       (3,073 )     328,164  
Collateralized debt securities
    20,492       1,839       (617 )     21,714  
Other debt securities
    14,219       694             14,913  
 
                       
Total bonds available-for-sale
  $ 4,041,175     $ 235,452     $ (47,307 )   $ 4,229,320  
 
                       
 
                               
Total debt securities
  $ 11,854,694     $ 791,646     $ (107,475 )   $ 12,538,865  
 
                       
 
                               
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    130,668       40,067       (4,712 )     166,023  
Energy and utilities
    83,498       23,256       (5,184 )     101,570  
Finance
    108,838       34,723       (5,313 )     138,248  
Healthcare
    82,832       22,125       (4,733 )     100,224  
Industrials
    58,799       27,784       (974 )     85,609  
Information technology
    100,414       36,853       (3,796 )     133,471  
Materials
    17,898       6,654       (1,579 )     22,973  
Mutual funds
    23,121       3,063       (14 )     26,170  
Telecommunication services
    31,691       5,117       (1,183 )     35,625  
 
                       
Total common stock
  $ 637,759     $ 199,642     $ (27,488 )   $ 809,913  
 
                       
Preferred stock
    33,359       6,303       (2,772 )     36,890  
 
                       
Total marketable equity securities
  $ 671,118     $ 205,945     $ (30,260 )   $ 846,803  
 
                       
 
                               
Total investments in securities
  $ 12,525,812     $ 997,591     $ (137,735 )   $ 13,385,668  
 
                       

 

9


Table of Contents

                                 
    As of December 31, 2009  
            Gross Unrealized     Gross Unrealized     Estimated Fair  
    Amortized Cost     Gains     Losses     Value  
Debt securities
                               
Bonds held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 21,222     $ 183     $ (58 )   $ 21,347  
States of the U.S. and political subdivisions of the states
    240,403       8,619       (1,144 )     247,878  
Foreign governments
    28,997       3,606             32,603  
Corporate debt securities
    6,390,377       327,535       (73,856 )     6,644,056  
Residential mortgage-backed securities
    693,178       24,650       (21,856 )     695,972  
Commercial mortgage-backed securities
    33,128             (23,941 )     9,187  
Collateralized debt securities
    9,627       85       (1,036 )     8,676  
Other debt securities
    44,779       2,009       (31 )     46,757  
 
                       
Total bonds held-to-maturity
  $ 7,461,711     $ 366,687     $ (121,922 )   $ 7,706,476  
 
                       
 
                               
Bonds available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    3,438       448             3,886  
States of the U.S. and political subdivisions of the states
    540,210       18,869       (1,044 )     558,035  
Foreign governments
    5,000       1,188             6,188  
Corporate debt securities
    3,196,202       126,742       (69,932 )     3,253,012  
Residential mortgage-backed securities
    353,729       8,507       (6,671 )     355,565  
Collateralized debt securities
    23,064       983       (1,553 )     22,494  
Other debt securities
    14,401       225       (256 )     14,370  
 
                       
Total bonds available-for-sale
  $ 4,136,044     $ 156,962     $ (79,456 )   $ 4,213,550  
 
                       
 
                               
Total debt securities
  $ 11,597,755     $ 523,649     $ (201,378 )   $ 11,920,026  
 
                       
 
                               
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    129,363       47,093       (2,336 )     174,120  
Energy and utilities
    83,284       42,939       (1,453 )     124,770  
Finance
    118,622       40,296       (2,174 )     156,744  
Healthcare
    81,454       29,767       (1,100 )     110,121  
Industrials
    58,900       28,887       (357 )     87,430  
Information technology
    102,171       48,413       (422 )     150,162  
Materials
    17,875       7,317       (22 )     25,170  
Mutual funds
    59,853       6,426       (77 )     66,202  
Telecommunication services
    32,272       8,118       (355 )     40,035  
 
                       
Total common stock
  $ 683,794     $ 259,256     $ (8,296 )   $ 934,754  
 
                       
Preferred stock
    35,359       5,269       (4,911 )     35,717  
 
                       
Total marketable equity securities
  $ 719,153     $ 264,525     $ (13,207 )   $ 970,471  
 
                       
 
                               
Total investments in securities
  $ 12,316,908     $ 788,174     $ (214,585 )   $ 12,890,497  
 
                       

 

10


Table of Contents

Debt securities
The amortized costs and estimated fair values, by contractual maturity, of debt securities at June 30, 2010, are shown below (in thousands). Actual 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  
 
                               
Due in one year or less
  $ 318,043     $ 323,953     $ 253,412     $ 259,968  
Due after one year through five years
    3,789,297       4,046,478       1,889,057       1,968,379  
Due after five years through ten years
    2,954,659       3,159,687       1,307,532       1,389,958  
Due after ten years
    745,671       775,127       586,174       606,664  
 
                       
 
  $ 7,807,670     $ 8,305,245     $ 4,036,175     $ 4,224,969  
 
                               
Without single maturity date
    5,849       4,300       5,000       4,351  
 
                       
 
                               
Total
  $ 7,813,519     $ 8,309,545     $ 4,041,175     $ 4,229,320  
 
                       
Available-for-sale securities are sold throughout the year for various reasons. Proceeds from the disposals of these securities, with the realized gains and losses, are shown below (in thousands):
                 
    Six Months Ended  
    June 30,  
    2010     2009  
 
               
Proceeds from sales of available-for-sale securities
  $ 205,500     $ 81,361  
Gross realized gains
    22,875       4,539  
Gross realized losses
    (1,147 )     (11,022 )
There were no securities transferred from held-to-maturity to available-for-sale during the six months ended June 30, 2010.
For the six months ended June 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.
All gains and losses were determined using specific identification of the securities sold.

 

11


Table of Contents

Derivative Instruments
American National purchases derivative contracts (equity indexed options) 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 tables detail the estimated fair value amounts and the gain or loss on derivatives related to equity indexed annuities (in thousands):
                         
            Estimated Fair Value  
Derivatives Not Designated as   Location of Asset (Liability) Reported     June 30,     December 31,  
Hedging Instruments   in the Statements of Financial Position     2010     2009  
 
                       
Equity indexed options
  Other invested assets   $ 41,344     $ 32,801  
Equity indexed annuity embedded derivative
  Future policy benefits - Annuity   $ (23,341 )   $ (22,487 )
                                         
            Amount of Gain (Loss) Recognized in Income on Derivatives  
Derivatives Not Designated as   Location of Gain (Loss) Recognized     For the Three Months Ended June 30,     For the Six Months Ended June 30,  
Hedging Instruments   in the Statements of Operations     2010     2009     2010     2009  
 
                                       
Equity indexed options
  Net investment income   $ (10,252 )   $ 1,757     $ (11,889 )   $ (2,101 )
Equity indexed annuity embedded derivative
  Policy benefits - Annuity   $ 12,628     $ (3,000 )   $ 12,911     $ (738 )
Unrealized gains (losses) on securities
Unrealized gains (losses) on marketable equity securities and bonds available-for-sale, presented in the stockholders’ equity section of the consolidated statements of financial position, are net of deferred tax expense of $100,000 and $1,608,000 as of June 30, 2010 and 2009, respectively.
The change in the net unrealized gains (losses) on investments for the six months ended June 30, 2010 and 2009 are summarized as follows (in thousands):
                 
    2010     2009  
Bonds available-for-sale
  $ 110,639     $ 249,499  
Preferred stocks
    3,173       8,663  
Common stocks
    (78,806 )     91,834  
Amortization of deferred policy acquisition costs
    (39,480 )     (103,757 )
 
           
 
    (4,474 )     246,239  
Provision (benefit) for federal income taxes
    (1,509 )     85,004  
 
           
 
  $ (2,965 )   $ 161,235  
 
               
Change in unrealized gains (losses) of investments attributable to participating policyholders’ interest
    (1,058 )     (5,480 )
Cumulative effect of change in accounting
          49,890  
 
           
Total
  $ (4,023 )   $ 205,645  
 
           

 

12


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 June 30, 2010 and December 31, 2009, are summarized as follows (in thousands):
                                                 
                    As of June 30, 2010        
    Less than 12 months     12 Months or more     Total  
    Unrealized     Fair     Unrealized     Fair     Unrealized     Fair  
    Losses     Value     Losses     Value     Losses     Value  
Debt securities
                                               
Bonds held-to-maturity:
                                               
States of the U.S. and political subdivisions of the states
  $ 65     $ 7,362     $ 54     $ 3,194     $ 119     $ 10,556  
Corporate debt securities
    5,907       226,300       18,697       258,571       24,604       484,871  
Residential mortgage-backed securities
    302       28,834       11,353       128,710       11,655       157,544  
Commercial mortgage-backed securities
                22,727       10,940       22,727       10,940  
Collateralized debt securities
                1,063       5,005       1,063       5,005  
 
                                   
Total bonds held-to-maturity
  $ 6,274     $ 262,496     $ 53,894     $ 406,420     $ 60,168     $ 668,916  
 
                                   
 
                                               
Bonds available-for-sale:
                                               
States of the U.S. and political subdivisions of the states
    317       32,573       112       10,183       429       42,756  
Corporate debt securities
    8,657       157,106       34,531       244,541       43,188       401,647  
Residential mortgage-backed securities
    386       50,107       2,687       56,566       3,073       106,673  
Collateralized debt securities
                617       4,786       617       4,786  
 
                                   
Total bonds available-for-sale
  $ 9,360     $ 239,786     $ 37,947     $ 316,076     $ 47,307     $ 555,862  
 
                                   
 
                                               
Total debt securities
  $ 15,634     $ 502,282     $ 91,841     $ 722,496     $ 107,475     $ 1,224,778  
 
                                   
 
                                               
Marketable equity securities
                                               
Common stock:
                                               
Consumer goods
    3,077       33,651       1,635       13,497       4,712       47,148  
Energy and utilities
    4,831       19,990       353       2,789       5,184       22,779  
Finance
    5,193       30,035       120       544       5,313       30,579  
Healthcare
    3,620       20,784       1,113       5,456       4,733       26,240  
Industrials
    897       8,825       77       483       974       9,308  
Information technology
    3,737       30,530       59       363       3,796       30,893  
Materials
    1,579       2,991                   1,579       2,991  
Mutual funds
    14       699                   14       699  
Telecommunications services
    987       8,858       196       863       1,183       9,721  
 
                                   
Total common stock
  $ 23,935     $ 156,363     $ 3,553     $ 23,995     $ 27,488     $ 180,358  
 
                                   
Preferred stock
    362       1,612       2,410       10,090       2,772       11,702  
 
                                   
Total marketable equity securities
  $ 24,297     $ 157,975     $ 5,963     $ 34,085     $ 30,260     $ 192,060  
 
                                   
 
                                               
Total investments in securities
  $ 39,931     $ 660,257     $ 97,804     $ 756,581     $ 137,735     $ 1,416,838  
 
                                   

 

13


Table of Contents

                                                 
                    As of December 31, 2009        
    Less than 12 months     12 Months or more     Total  
    Unrealized     Fair     Unrealized     Fair     Unrealized     Fair  
    Losses     Value     Losses     Value     Losses     Value  
Debt securities
                                               
Bonds held-to-maturity:
                                               
U.S. Treasury and other U.S. government corporations and agencies
  $ 58     $ 6,387     $     $     $ 58     $ 6,387  
States of the U.S. and political subdivisions of the states
    666       24,819       478       5,849       1,144       30,668  
Corporate debt securities
    12,602       543,459       61,254       700,718       73,856       1,244,177  
Residential mortgage-backed securities
    445       23,750       21,411       182,315       21,856       206,065  
Commercial mortgage-backed securities
                23,941       9,187       23,941       9,187  
Collateralized debt securities
    53       2,844       983       2,310       1,036       5,154  
Other debt securities
    31       3,428                   31       3,428  
 
                                   
Total bonds held-to-maturity
  $ 13,855     $ 604,687     $ 108,067     $ 900,379     $ 121,922     $ 1,505,066  
 
                                   
 
                                               
Bonds available-for-sale:
                                               
States of the U.S. and political subdivisions of the states
    520       58,622       524       18,941       1,044       77,563  
Corporate debt securities
    13,340       318,569       56,592       506,881       69,932       825,450  
Residential mortgage-backed securities
    2,273       49,066       4,398       36,649       6,671       85,715  
Collateralized debt securities
    269       1,313       1,284       9,077       1,553       10,390  
Other debt securities
    256       9,947                   256       9,947  
 
                                   
Total bonds available-for-sale
  $ 16,658     $ 437,517     $ 62,798     $ 571,548     $ 79,456     $ 1,009,065  
 
                                   
 
                                               
Total debt securities
  $ 30,513     $ 1,042,204     $ 170,865     $ 1,471,927     $ 201,378     $ 2,514,131  
 
                                   
 
                                               
Marketable equity securities
                                               
Common stock:
                                               
Consumer goods
    837       5,838       1,499       14,900       2,336       20,738  
Energy and utilities
    296       7,949       1,157       7,006       1,453       14,955  
Finance
    1,712       29,515       462       3,881       2,174       33,396  
Healthcare
    464       6,124       636       5,316       1,100       11,440  
Industrials
    163       2,567       194       1,678       357       4,245  
Information technology
    358       2,583       64       533       422       3,116  
Materials
    19       453       3       45       22       498  
Mutual funds
    77       4,372                   77       4,372  
Telecommunications services
    232       3,188       123       2,542       355       5,730  
 
                                   
Total common stock
  $ 4,158     $ 62,589     $ 4,138     $ 35,901     $ 8,296     $ 98,490  
 
                                   
Preferred stock
    21       4,169       4,890       15,210       4,911       19,379  
 
                                   
Total marketable equity securities
  $ 4,179     $ 66,758     $ 9,028     $ 51,111     $ 13,207     $ 117,869  
 
                                   
 
                                               
Total investments in securities
  $ 34,692     $ 1,108,962     $ 179,893     $ 1,523,038     $ 214,585     $ 2,632,000  
 
                                   
For all investment securities, including those securities in an unrealized loss position for 12 months or more, American National performs a quarterly analysis to determine if an other-than-temporary impairment loss should be recorded for any securities. As of June 30, 2010, the securities with unrealized losses did not meet management’s criteria for other-than-temporary impairment. Even though the duration of the unrealized losses on some of the debt securities exceeds one year, American National has no intent to sell, and it is not more likely than not that American National will be required to sell these securities prior to recovery. Recovery is expected in the near term for equity securities.

 

14


Table of Contents

Net investment income and realized investments gains (losses)
Net investment income and realized investments gains (losses), before federal income taxes, for the three and six months ended June 30, 2010 and 2009 are summarized as follows (in thousands):
                                                                 
    Net Investment Income     Realized Investments Gains/(Losses)     Net Investment Income     Realized Investments Gains/(Losses)  
    Three Months Ended June 30,     Three Months Ended June 30,     Six Months Ended June 30,     Six Months Ended June 30,  
    2010     2009     2010     2009     2010     2009     2010     2009  
 
Bonds
  $ 163,211     $ 156,284     $ 6,853     $ (2,433 )   $ 325,299     $ 307,730     $ 16,552     $ (3,403 )
Preferred stocks
    756       1,128       (880 )           1,387       2,066       (880 )     (1,620 )
Common stocks
    5,361       6,708       7,682       (2 )     10,886       12,701       13,829       (818 )
Mortgage loans
    41,949       34,333                   81,842       66,309              
Real estate
    33,718       36,706       (123 )           61,599       62,065       2,002        
Options
    (11,326 )     1,636                   (10,997 )     (1,975 )            
Other invested assets
    10,162       8,974       (23 )     (49 )     19,820       16,959       (54 )     287  
 
                                               
 
    243,831       245,769       13,509       (2,484 )     489,836       465,855       31,449       (5,554 )
Investment expenses
    (32,014 )     (31,105 )                 (59,808 )     (57,995 )            
Decrease (Increase) in valuation allowances
                6,240       (190 )                 6,042       (2,507 )
 
                                               
Total
  $ 211,817     $ 214,664     $ 19,749     $ (2,674 )   $ 430,028     $ 407,860     $ 37,491     $ (8,061 )
 
                                               
Other-than-temporary impairments
The following table summarizes other-than-temporary impairments for the three and six months ended June 30, 2010 and 2009 (in thousands):
                                 
    Three months ended June 30,     Six months ended June 30,  
    2010     2009     2010     2009  
 
                               
Bonds
  $     $     $     $ (5,898 )
Stocks
    (1,505 )     (6,074 )     (2,750 )     (67,750 )
Real estate
                      (500 )
 
                       
Total
  $ (1,505 )   $ (6,074 )   $ (2,750 )   $ (74,148 )
 
                       

 

15


Table of Contents

5. CREDIT RISK MANAGEMENT
American National employs a strategy to invest funds at the highest return possible commensurate with sound and prudent underwriting practices to ensure a well-diversified investment portfolio.
Bonds
Management believes American National’s bond portfolio is diversified and of investment grade. The bond portfolio distributed by quality rating at June 30, 2010 and December 31, 2009 is summarized as follows:
                 
    As of:  
    June 30, 2010     December 31, 2009  
 
               
AAA
    11 %     12 %
AA+
    2       2  
AA
    3       2  
AA-
    4       5  
A+
    7       8  
A
    15       14  
A-
    15       14  
BBB+
    12       13  
BBB
    15       16  
BBB-
    8       8  
BB+ and below
    8       6  
 
           
Total
    100 %     100 %
 
           
Common stock
American National’s common stock portfolio by market sector distribution at June 30, 2010 and December 31, 2009 is summarized as follows:
                 
    As of  
    June 30, 2010     December 31, 2009  
 
               
Consumer goods
    21 %     19 %
Financials
    17       17  
Information technology
    16       16  
Energy and utilities
    13       13  
Healthcare
    12       12  
Industrials
    11       9  
Communications
    4       4  
Mutual funds
    3       7  
Materials
    3       3  
 
           
Total
    100 %     100 %
 
           

 

16


Table of Contents

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 June 30, 2010 and December 31, 2009 are summarized as follows:
                                 
    Mortgage Loans     Investment Real Estate  
    June 30,     December 31,     June 30,     December 31,  
    2010     2009     2010     2009  
 
Office buildings
    31 %     31 %     12 %     15 %
Industrial
    29       28       39       37  
Shopping centers
    19       19       18       19  
Hotels and motels
    14       15       2       2  
Other
    4       4       18       16  
Commercial
    3       3       11       11  
 
                       
Total
    100 %     100 %     100 %     100 %
 
                       
American National has a diversified portfolio of mortgage loans and real estate properties. Mortgage loans and investment real estate by geographic distribution at June 30, 2010 and December 31, 2009 are as follows:
                                 
    Mortgage Loans     Investment Real Estate  
    June 30,     December 31,     June 30,     December 31,  
    2010     2009     2010     2009  
 
                               
West South Central
    22 %     22 %     58 %     58 %
East North Central
    21       20       7       8  
South Atlantic
    21       20       12       13  
Pacific
    9       10       2       2  
Middle Atlantic
    7       8       9       10  
East South Central
    6       6       7       7  
Mountain
    6       6       4       1  
New England
    4       4              
West North Central
    4       4       1       1  
 
                       
Total
    100 %     100 %     100 %     100 %
 
                       

 

17


Table of Contents

6. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of financial instruments at June 30, 2010 and December 31, 2009 are as follows (in thousands):
                                 
    June 30, 2010     December 31, 2009  
    Carrying     Estimated     Carrying     Estimated  
    Amount     Fair Value     Amount     Fair Value  
Financial assets:
                               
Fixed maturities
                               
Held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 23,393     $ 23,725     $ 21,222     $ 21,347  
States of the U.S. and political subdivisions of the states
    292,698       304,935       240,403       247,878  
Foreign governments
    29,008       33,861       28,997       32,603  
Corporate debt securities
    6,666,604       7,138,489       6,390,377       6,644,056  
Residential mortgage-backed securities
    714,408       740,837       693,178       695,972  
Commercial mortgage-backed securities
    33,667       10,940       33,128       9,187  
Collateralized debt securities
    9,226       8,228       9,627       8,676  
Other debt securities
    44,515       48,530       44,779       46,757  
 
                       
Total fixed maturities, held-to-maturity
  $ 7,813,519     $ 8,309,545     $ 7,461,711     $ 7,706,476  
 
                       
Available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    4,180       4,180       3,886       3,886  
States of the U.S. and political subdivisions of the states
    642,495       642,495       558,035       558,035  
Foreign governments
    7,187       7,187       6,188       6,188  
Corporate debt securities
    3,210,667       3,210,667       3,253,012       3,253,012  
Residential mortgage-backed securities
    328,164       328,164       355,565       355,565  
Collateralized debt securities
    21,714       21,714       22,494       22,494  
Other debt securities
    14,913       14,913       14,370       14,370  
 
                       
Total fixed maturities, available-for-sale
  $ 4,229,320     $ 4,229,320     $ 4,213,550     $ 4,213,550  
 
                       
Total fixed maturities
  $ 12,042,839     $ 12,538,865     $ 11,675,261     $ 11,920,026  
 
                       
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    166,023       166,023       174,120       174,120  
Energy and utilities
    101,570       101,570       124,770       124,770  
Finance
    138,248       138,248       156,744       156,744  
Healthcare
    100,224       100,224       110,121       110,121  
Industrials
    85,609       85,609       87,430       87,430  
Information technology
    133,471       133,471       150,162       150,162  
Materials
    22,973       22,973       25,170       25,170  
Mutual funds
    26,170       26,170       66,202       66,202  
Telecommunication services
    35,625       35,625       40,035       40,035  
Preferred stock
    36,890       36,890       35,717       35,717  
 
                       
Total marketable equity securities
  $ 846,803     $ 846,803     $ 970,471     $ 970,471  
 
                       
Options
    41,344       41,344       32,801       32,801  
Mortgage loans on real estate, net of allowance
    2,387,657       2,462,868       2,229,659       2,267,157  
Policy loans
    370,139       370,139       364,354       364,354  
Short-term investments
    776,114       776,114       636,823       636,823  
 
                       
Total financial assets
  $ 16,464,896     $ 17,036,133     $ 15,909,369     $ 16,191,632  
 
                       
Financial liabilities:
                               
Investment contracts
    8,108,923       8,108,923       7,828,243       7,828,243  
Liability for embedded derivatives of equity indexed annuities
    23,341       23,341       22,487       22,487  
Notes payable
    73,208       73,208       73,842       73,842  
 
                       
Total financial liabilities
  $ 8,205,472     $ 8,205,472     $ 7,924,572     $ 7,924,572  
 
                       

 

18


Table of Contents

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

 

19


Table of Contents

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.
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.

 

20


Table of Contents

The following tables provide quantitative disclosures regarding fair value hierarchy measurements of our financial assets and liabilities at June 30, 2010 and December 31, 2009 (in thousands):
                                 
            Fair Value Measurement at June 30, 2010 Using:  
            Quoted Prices in                
            Active Markets             Significant  
    Estimated Fair     for Identical     Significant Other     Unobservable  
    Value at     Assets     Observable Inputs     Inputs  
    June 30, 2010     (Level 1)     (Level 2)     (Level 3)  
Financial assets:
                               
Fixed maturities
                               
Held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 23,725     $     $ 23,725     $  
States of the U.S. and political subdivisions of the states
    304,935             304,680       255  
Foreign governments
    33,861             33,861        
Corporate debt securities
    7,138,489             7,104,707       33,782  
Residential mortgage-backed securities
    740,837             738,006       2,831  
Commercial mortgage-backed securities
    10,940             10,940        
Collateralized debt securities
    8,228             380       7,848  
Other debt securities
    48,530             48,530        
 
                       
Total fixed maturities,
held-to-maturity
  $ 8,309,545     $     $ 8,264,829     $ 44,716  
 
                       
Available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    4,180             4,180        
States of the U.S. and political subdivisions of the states
    642,495             639,970       2,525  
Foreign governments
    7,187             7,187        
Corporate debt securities
    3,210,667             3,176,286       34,381  
Residential mortgage-backed securities
    328,164             328,147       17  
Collateralized debt securities
    21,714             21,453       261  
Other debt securities
    14,913             14,913        
 
                       
Total fixed maturities, available-for-sale
  $ 4,229,320     $     $ 4,192,136     $ 37,184  
 
                       
Total fixed maturities
  $ 12,538,865     $     $ 12,456,965     $ 81,900  
 
                       
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    166,023       166,023              
Energy and utilities
    101,570       101,570              
Finance
    138,248       138,248              
Healthcare
    100,224       100,224              
Industrials
    85,609       85,609              
Information technology
    133,471       133,471              
Materials
    22,973       22,973              
Mutual funds
    26,170       26,170              
Telecommunication services
    35,625       35,625              
Preferred stock
    36,890       36,890              
 
                       
Total marketable equity securities
  $ 846,803     $ 846,803     $     $  
 
                       
Options
    41,344                   41,344  
Mortgage loans on real estate
    2,462,868             2,462,868        
Short-term investments
    776,114             776,114        
 
                       
 
                               
Total financial assets
  $ 16,665,994     $ 846,803     $ 15,695,947     $ 123,244  
 
                       
Financial liabilities:
                               
Liability for embedded derivatives of equity indexed annuities
    23,341                   23,341  
 
                       
Total financial liabilities
  $ 23,341     $     $     $ 23,341  
 
                       

 

21


Table of Contents

                                 
            Fair Value Measurement at December 31, 2009 Using:  
            Quoted Prices in     Significant        
            Active Markets     Other     Significant  
            for Identical     Observable     Unobservable  
    Estimated Fair Value at     Assets     Inputs     Inputs  
    December 31, 2009     (Level 1)     (Level 2)     (Level 3)  
Financial assets:
                               
Fixed maturities
                               
Held-to-maturity:
                               
U.S. treasury and other U.S. government corporations and agencies
  $ 21,347     $     $ 21,347     $  
States of the U.S. and political subdivisions of the states
    247,878             247,878        
Foreign governments
    32,603             32,603        
Corporate debt securities
    6,644,056             6,635,387       8,669  
Residential mortgage-backed securities
    695,972             692,702       3,270  
Commercial mortgage-backed securities
    9,187             9,187        
Collateralized debt securities
    8,676             624       8,052  
Other debt securities
    46,757             46,757        
 
                       
Total fixed maturities, held-to-maturity
  $ 7,706,476     $     $ 7,686,485     $ 19,991  
 
                       
Available-for-sale:
                               
U.S. treasury and other U.S. government corporations and agencies
    3,886             3,886        
States of the U.S. and political subdivisions of the states
    558,035             558,035        
Foreign governments
    6,188             6,188        
Corporate debt securities
    3,253,012             3,238,004       15,008  
Residential mortgage-backed securities
    355,565             355,548       17  
Collateralized debt securities
    22,494             21,138       1,356  
Other debt securities
    14,370             14,370        
 
                       
Total fixed maturities, available-for-sale
  $ 4,213,550     $     $ 4,197,169     $ 16,381  
 
                       
Total fixed maturities
  $ 11,920,026     $     $ 11,883,654     $ 36,372  
 
                       
Marketable equity securities
                               
Common stock:
                               
Consumer goods
    174,120       174,120              
Energy and utilities
    124,770       124,770              
Finance
    156,744       156,744              
Healthcare
    110,121       110,121              
Industrials
    87,430       87,430              
Information technology
    150,162       150,162              
Materials
    25,170       25,170              
Mutual funds
    66,202       66,202              
Telecommunication services
    40,035       40,035              
Preferred stock
    35,717       35,123             594  
 
                       
Total marketable equity securities
  $ 970,471     $ 969,877     $     $ 594  
 
                       
Options
    32,801                   32,801  
Mortgage loans on real estate
    2,267,157             2,267,157        
Short-term investments
    636,823             636,823        
 
                       
Total financial assets
  $ 15,827,278     $ 969,877     $ 14,787,634     $ 69,767  
 
                       
Financial liabilities:
                               
Liability for embedded derivatives of equity indexed annuities
    22,487                   22,487  
 
                       
Total financial liabilities
  $ 22,487     $     $     $ 22,487  
 
                       

 

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, is as follows (in thousands):
                         
    Fixed     Other        
    Maturities     Investments     Total  
Beginning balance — December 31, 2009
  $ 36,966     $ 10,314     $ 47,280  
Total realized and unrealized investment gains (losses)
                       
Included in other comprehensive income
    1,178       (10,453 )     (9,275 )
Net loss for derivatives included in net investment income
    (17 )     (853 )     (870 )
Purchases, sales, and settlements/maturities
                       
Purchases
    50,141       23,465       73,606  
Sales
    (1,054 )     (4,470 )     (5,524 )
Settlements/maturities
                 
Gross transfers into Level 3
    5,913             5,913  
Gross transfers out of Level 3
    (11,227 )           (11,227 )
 
                 
Ending balance — June 30, 2010
  $ 81,900     $ 18,003     $ 99,903  
 
                 
The transfers into Level 3 were the result of new securities purchased, or existing securities no longer being priced by the third-party pricing service. In accordance with American National’s pricing methodology, these securities are being valued using similar techniques as the pricing service; however, the 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 securities now being priced by a third-party service, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2.
There were no significant transfers between Levels 1 and 2.
7. DEFERRED POLICY ACQUISITION COSTS
Deferred policy acquisition costs and premiums for the six months ended June 30, 2010 are summarized as follows (in thousands):
                                 
    Life     Accident     Property        
    & Annuity     & Health     & Casualty     Total  
 
Balance at December 31, 2009
  $ 1,114,491     $ 69,853     $ 146,637     $ 1,330,981  
 
                       
Additions
    101,552       9,320       137,166       248,038  
Amortization
    (68,468 )     (12,213 )     (134,348 )     (215,029 )
Effect of change in unrealized losses on available-for-sale securities
    (39,480 )                 (39,480 )
 
                       
Net changes
    (6,396 )     (2,893 )     2,818       (6,471 )
 
                       
Balance at June 30, 2010
  $ 1,108,095     $ 66,960     $ 149,455     $ 1,324,510  
 
                       
 
                               
Premiums for the six months ended June 30:
                               
2010
  $ 219,278     $ 136,265     $ 573,969     $ 929,512  
 
                       
2009
  $ 226,175     $ 149,573     $ 568,916     $ 944,664  
 
                       
Commissions comprise the majority of the additions to deferred policy acquisition costs for each year.
Acquisitions relate to the purchase of various insurance portfolios under assumption reinsurance agreements. All amounts for the present value of future profits resulting from the acquisition of life insurance portfolios have been accounted for in accordance with ASC 944-20-S99-2, “Accounting for Intangible Assets Arising from Insurance Contracts Acquired in a Business Combination,” and are immaterial in all periods presented.

 

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 is summarized as shown below (in thousands):
                 
    2010     2009  
 
Balance at January 1
  $ 1,224,211     $ 1,310,272  
Less reinsurance recoverables
    279,987       377,692  
 
           
Net beginning balance
    944,224       932,580  
 
           
Incurred related to:
               
Current
    615,581       599,573  
Prior years
    (40,624 )     (6,165 )
 
           
Total incurred
    574,957       593,408  
 
           
Paid related to:
               
Current
    314,649       293,295  
Prior years
    218,051       270,953  
 
           
Total paid
    532,700       564,248  
 
           
Net balance at June 30
    986,481       961,740  
Plus reinsurance recoverables
    264,613       283,519  
 
           
Balance at June 30
  $ 1,251,094     $ 1,245,259  
 
           
The balances at June 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 year-ends 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 $41,000,000 in the first six months of 2010 and $6,000,000 for the same period in 2009.
9. NOTES PAYABLE
At June 30, 2010, and December 31, 2009 American National’s real estate holding companies were partners in affiliates that had notes payable to third-party lenders totaling $73,208,000 and $73,842,000, respectively. These notes have interest rates ranging from 5.95% to 8.07% and maturities from 2010 to 2020. Each of these notes 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 $33,388,000 and $33,265,000 at June 30, 2010 and December 31, 2009, 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 six months ended June 30, 2010 and 2009 is as follows (in thousands, except percentages):
                                                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
    Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  
Income tax (benefit) on pre-tax income
  $ 10,689       35.0 %   $ (4,382 )     35.0 %   $ 25,624       35.0 %   $ (31,255 )     35.0 %
Tax-exempt investment income
    (2,277 )     (7.4 )     (2,381 )     19.0       (4,587 )     (6.3 )     (4,704 )     5.2  
Dividend exclusion
    (1,360 )     (4.5 )     (1,692 )     13.5       (2,853 )     (3.9 )     (6,422 )     7.2  
Miscellaneous tax credits, net
    (1,843 )     (6.0 )     (1,635 )     13.1       (3,577 )     (4.9 )     (3,186 )     3.6  
Other items, net
    (948 )     (3.1 )     (686 )     5.5       (253 )     (0.3 )     3,768       (4.2 )
 
                                               
 
  $ 4,261       14.0 %   $ (10,776 )     86.1 %   $ 14,354       19.6 %   $ (41,799 )     46.8 %
 
                                               

 

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 June 30, 2010 and December 31, 2009 are as follows (in thousands):
                 
    June 30     December 31,  
    2010     2009  
DEFERRED TAX ASSETS:
               
Marketable securities, principally due to impairment losses
  $ 105,519     $ 109,650  
Investment in real estate and other invested assets, principally due to investment valuation allowances
    13,961       18,315  
Policyholder funds, principally due to policy reserve discount
    214,757       211,547  
Policyholder funds, principally due to unearned premium reserve
    33,783       31,312  
Non-qualified pension
    29,272       29,109  
Participating policyholders’ surplus
    29,784       28,505  
Pension
    35,422       35,228  
Commissions and other expenses
    15,860       16,209  
Tax carryforwards
    21,813       8,666  
Other assets
    12,619       5,952  
 
           
Gross deferred tax assets
  $ 512,790     $ 494,493  
Valuation allowance
          (400 )
 
           
Net deferred tax assets
    512,790       494,093  
 
           
 
               
DEFERRED TAX LIABILITIES:
               
Marketable securities, principally due to net unrealized gains
    (127,168 )     (114,861 )
Investment in bonds, principally due to accrual of discount on bonds
    (15,204 )     (13,426 )
Deferred policy acquisition costs, due to difference between GAAP and tax amortization methods
    (353,439 )     (356,014 )
Property, plant and equipment, principally due to difference between GAAP and tax depreciation methods
    (5,337 )     (4,758 )
 
           
Gross deferred tax liabilities
    (501,148 )     (489,059 )
 
           
Total net deferred tax asset
  $ 11,642     $ 5,034  
 
           
Management believes that a sufficient level of taxable income will be achieved to utilize the net deferred tax assets of the companies in the consolidated federal tax return. However, if not utilized within the statutory timeframe, American National has approximately $244,000 in deferred tax assets resulting from capital loss carryforwards that will expire at the end of tax year 2015 and approximately $21,569,000 in deferred tax assets resulting from ordinary loss carryforwards that will expire at the end of tax year 2030.
In accordance with ASC 740-10, “Accounting for Uncertainty in Income Taxes”, American National maintained a reserve for unrecognized tax benefits in 2008. The reserve was removed during 2009 because the tax was fully settled. The change in the reserve is as follows (in thousands):
                 
    June 30,     December 31,  
    2010     2009  
UNRECOGNIZED TAX POSITIONS:
               
Balance at beginning of year
          1,054  
Tax positions related to prior years
           
Current year tax positions
           
Settlements during the year
          (1,054 )
Lapse in statute of limitations
           
 
           
Balance at end of period
           
 
           

 

25


Table of Contents

American National recognizes interest expense and penalties related to uncertain tax positions. Interest expense and penalties are included in the “Other operating costs and expenses” line in the consolidated statements of operations. However, no interest expense was incurred as of June 30, 2010 or December 31, 2009. Also, no provision for penalties was established for uncertain tax positions.
Management does not believe that there are any unrecognized tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.
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 (in thousands):
                         
    Before Federal     Federal Income     Net of Federal  
    Income Tax     Tax Expense     Income Tax  
June 30, 2010
                       
Unrealized gains
  $ 35,006     $ 23,567     $ 11,439  
Reclassification adjustment for net gain/(loss) realized in net income/(loss)
    23,788       8,326       15,462  
 
                 
Net unrealized gain/(loss) component of comprehensive income (loss)
  $ 11,218     $ 15,241     $ (4,023 )
 
                 
 
                       
June 30, 2009
                       
Unrealized gains
  $ 349,995     $ 92,685     $ 257,310  
Reclassification adjustment for net gain/(loss) realized in net income/(loss)
    (79,484 )     (27,819 )     (51,665 )
 
                 
Net unrealized gain/(loss) component of comprehensive income (loss)
  $ 270,511     $ 64,866     $ 205,645  
 
                 
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:
                         
    June 30,     December 31,     June 30,  
    2010     2009     2009  
Common stock
                       
Shares issued
    30,832,449       30,832,449       30,832,449  
Treasury shares
    4,012,283       4,012,283       4,012,283  
Restricted shares
    261,334       261,334       321,334  
 
                 
Unrestricted outstanding shares
    26,558,832       26,558,832       26,498,832  
 
                 
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, Restricted Stock Units, Performance Rewards, 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.

 

26


Table of Contents

The plan provides for the award of Restricted Stock. 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 $1,340,000 for the six months ended June 30, 2010 and $1,516,000 for the six months ended June 30, 2009.
The plan provides for the award of Stock Appreciation Rights (SAR). The SAR’s 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 $30,000 and $1,613,000 at June 30, 2010 and December 31, 2009, respectively. Compensation expense (income) was recorded totaling $(1,583,000) and $7,000 for the six months ended June 30, 2010 and 2009, respectively.
The plan provides for the award of Restricted Stock Units (“RSU”). Beginning March 31, 2010, RSUs are awarded as a result of achieving the objectives of a performance based incentive compensation plan. The RSUs vest after two years when they will be converted to American National’s common stock on a one for one basis. These awards result in compensation expense to American National over the vesting period. Compensation expense or (income) was recorded totaling $260,000 for the six months ended June 30, 2010.
SAR and Restricted Stock (RS) information for June 30, 2010 and December 31, 2009 are as follows:
                                                 
            SAR Weighted-             RS Weighted-             RSU Weighted-  
            Average Price             Average Price             Average Price per  
    SAR Shares     per Share     RS Shares     per Share     RS Units     Share  
 
                                               
Outstanding at December 31, 2009
    161,449     $ 108.53       261,334     $           $  
 
                                   
Granted
    1,835       110.83                   10,230       109.29  
Exercised
    (8,833 )     95.64                   (811 )     109.29  
Forfeited
    (4,649 )     115.79                          
 
                                   
Outstanding at June 30, 2010
    149,802     $ 109.16       261,334     $ 102.98       9,419     $ 109.29  
 
                                   
The weighted-average contractual remaining life for the 149,802 SAR shares outstanding as of June 30, 2010, is 4.9 years. The weighted-average exercise price for these shares is $109.16 per share. Of the shares outstanding, 93,964 are exercisable at a weighted-average exercise price of $106.32 per share.
The weighted-average contractual remaining life for the 261,334 Restricted Stock shares outstanding as of June 30, 2010, is 6.3 years. The weighted-average exercise price for these shares is $102.98 per share. None of the shares outstanding was exercisable.
The weighted-average contractual remaining life for the 9,419 Restricted Stock Units authorized as of June 30, 2010, is 1.7 years. The weighted-average exercise price for these units is $109.29 per share. None of the authorized units are exercisable.

 

27


Table of Contents

Earnings per share
Basic earnings per share was calculated using a weighted average number of shares outstanding of 26,558,832 at June 30, 2010 and 26,498,832 at June 30, 2009. The Restricted Stock resulted in diluted earnings per share as follows for the periods indicated.
                                 
    Three Months Ended     Six Months Ended  
    June 30,     June 30,  
    2010     2009     2010     2009  
 
                               
Weighted average shares outstanding
    26,558,832       26,498,832       26,558,832       26,498,832  
Incremental shares from restricted stock
    110,996             110,996        
 
                       
Total shares for diluted calculations
    26,669,828       26,498,832       26,669,828       26,498,832  
Net income (loss) attributable to American National Insurance Company and Subsidiaries
    26,622,000       (4,355,000 )     61,400,000       (52,050,000 )
 
                               
Diluted earnings per share
  $ 1.00     $ (0.16 )   $ 2.30     $ (1.96 )
 
                       
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 the greater of statutory net gain from operations on an annual, non-cumulative basis, or 10% of statutory surplus. 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 June 30, 2010 and December 31, 2009, American National’s statutory capital and surplus was $1,869,175,000 and $1,892,467,000, respectively.
Generally, the same restrictions on amounts that can transfer in the form of dividends, loans, or advances to the parent company apply to American National’s insurance subsidiaries. Dividends received by American National from its non-insurance subsidiaries amounted to $4,000,000 and $0 for the six months ended 2010 and 2009, respectively.
At June 30, 2010, approximately $1,357,445,000 of American National’s consolidated stockholders’ equity represents net assets of its insurance subsidiaries, compared to $1,406,599,000 at December 31, 2009. 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, County Mutual has a management agreement with American National, which effectively gives complete control of County Mutual to American National. As a result, County Mutual is included in the consolidated financial statements of American National. The interest that the policyholders of County Mutual have in the financial position of County Mutual is reflected as noncontrolling interest totaling $6,750,000 at June 30, 2010 and December 31, 2009.
American National’s wholly-owned 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 interests. Noncontrolling interests were a net liability of $792,000 and $5,205,000 at June 30, 2010 and December 31, 2009, respectively.
The accompanying consolidated financial statements are presented in our reporting currency, the U.S. dollar. All material intercompany transactions with consolidated entities have been eliminated.

 

28


Table of Contents

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 and variable life insurance on a national basis primarily through employee 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 financial institutions, multiple line agents and employee 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 independent agents and Managing General Underwriters.
    The Property and Casualty segment writes auto, homeowners, agribusiness and credit related property insurance. These products are primarily sold through multiple line agents and 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.
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 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.
    Realized gains or losses on investments are allocated to Corporate and Other.
    Equity in earnings of unconsolidated affiliates are 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.

 

29


Table of Contents

The following tables summarize American National’s key financial measures used by the chief operating decision makers, including operating results as of and for the six months ended June 30, 2010 and 2009 (in thousands):
Three Months Ended June 30, 2010
                                                 
                            Property &     Corporate        
    Life     Annuity     Health     Casualty     & Other     TOTAL  
Premiums and Other Revenues:
                                               
Premiums
  $ 68,873     $ 40,608     $ 67,841     $ 287,497     $     $ 464,819  
Other policy revenues
    42,690       4,038                         46,728  
Net investment income
    55,467       112,560       3,799       17,183       22,808       211,817  
Other income
    953       (1,523 )     2,954       1,857       4,720       8,961  
 
                                     
Total operating revenues
    167,983       155,683       74,594       306,537       27,528       732,325  
 
                                   
Realized gains/(losses) on investments
                            18,244       18,244  
 
                                   
Total revenues
    167,983       155,683       74,594       306,537       45,772       750,569  
 
                                   
 
                                               
Benefits, Losses and Expenses:
                                               
Policy benefits
    74,468       50,442       45,351       257,993             428,254  
Interest credited to policy account balances
    13,302       66,222             21             79,545  
Commissions for acquiring and servicing policies
    23,954       26,456       9,362       56,126       2       115,900  
Other operating costs and expenses
    42,983       16,196       12,973       32,604       9,698       114,454  
Decrease (increase) in deferred policy acquisition costs
    (1,534 )     (14,683 )     981       (2,890 )           (18,126 )
 
                                   
Total benefits, losses and expenses
    153,173       144,633       68,667       343,854       9,700       720,027  
 
                                   
 
                                               
Income (loss) from continuing operations before federal income taxes, and equity in losses of unconsolidated affiliates
  $ 14,810     $ 11,050     $ 5,927     $ (37,317 )   $ 36,072     $ 30,542  
 
                                   
Three Months Ended June 30, 2009
                                                 
                            Property &     Corporate        
    Life     Annuity     Health     Casualty     & Other     TOTAL  
Premiums and Other Revenues:
                                               
Premiums
  $ 65,228     $ 53,641     $ 69,651     $ 276,427     $     $ 464,947  
Other policy revenues
    40,657       4,111                         44,768  
Net investment income
    55,497       112,812       4,024       16,952       25,379       214,664  
Other income
    51       3,195       2,100       2,422       4,391       12,159  
 
                                     
Total operating revenues
    161,433       173,759       75,775       295,801       29,770       736,538  
 
                                   
Realized gains/(losses) on investments
                            (8,748 )     (8,748 )
 
                                   
Total revenues
    161,433       173,759       75,775       295,801       21,022       727,790  
 
                                   
 
                                               
Benefits, Losses and Expenses:
                                               
Policy benefits
    72,317       63,151       57,699       243,771             436,938  
Interest credited to policy account balances
    16,202       79,512                         95,714  
Commissions for acquiring and servicing policies
    21,888       29,739       9,929       53,119             114,675  
Other operating costs and expenses
    43,627       15,506       15,864       31,719       13,662       120,378  
Decrease (increase) in deferred policy acquisition costs
    428       (19,419 )     1,377       (9,782 )           (27,396 )
 
                                   
Total benefits, losses and expenses
    154,462       168,489       84,869       318,827       13,662       740,309  
 
                                   
 
                                               
Income (loss) from continuing operations before federal income taxes, and equity in losses of unconsolidated affiliates
  $ 6,971     $ 5,270     $ (9,094 )   $ (23,026 )   $ 7,360     $ (12,519 )
 
                                   

 

30


Table of Contents

Six Months Ended June 30, 2010
                                                 
                            Property &     Corporate        
    Life     Annuity     Health     Casualty     & Other     TOTAL  
Premiums and Other Revenues:
                                               
Premiums
  $ 138,318     $ 80,960     $ 136,265     $ 573,969     $     $ 929,512  
Other policy revenues
    83,776       7,948                         91,724  
Net investment income
    111,441       231,212       7,683       34,702       44,990       430,028  
Other income
    1,790       (2,922 )     5,290       3,895       8,797       16,850  
 
                                   
Total operating revenues
    335,325       317,198       149,238       612,566       53,787       1,468,114  
 
                                   
Realized gains/(losses) on investments
                            34,741       34,741  
 
                                   
Total revenues
    335,325       317,198       149,238       612,566       88,528       1,502,855  
 
                                   
 
                                               
Benefits, Losses and Expenses:
                                               
Policy benefits
    147,006       98,137       98,190       493,177             836,510  
Interest credited to policy account balances
    27,994       145,892             40             173,926  
Commissions for acquiring and servicing policies
    43,662       51,149       19,115       108,848       3       222,777  
Other operating costs and expenses
    86,375       30,801       25,112       63,270       23,882       229,440  
Decrease (increase) in deferred policy acquisition costs
    (4,144 )     (28,940 )     2,893       (2,818 )           (33,009 )
 
                                   
Total benefits, losses and expenses
    300,893       297,039       145,310       662,517       23,885       1,429,644  
 
                                   
 
                                               
Income (loss) from continuing operations before federal income taxes, and equity in losses of unconsolidated affiliates
  $ 34,432     $ 20,159     $ 3,928     $ (49,951 )   $ 64,643     $ 73,211  
 
                                   
Six Months Ended June 30, 2009
                                                 
                            Property &     Corporate        
    Life     Annuity     Health     Casualty     & Other     TOTAL  
Premiums and Other Revenues:
                                               
Premiums
  $ 135,318     $ 90,857     $ 149,573     $ 568,916     $     $ 944,664  
Other policy revenues
    80,851       7,597                         88,448  
Net investment income
    110,786       212,644       8,049       33,770       42,611       407,860  
Other income
    920       2,463       5,028       4,452       8,161       21,024  
 
                                   
Total operating revenues
    327,875       313,561       162,650       607,138       50,772       1,461,996  
 
                                   
Realized gains/(losses) on investments
                            (82,209 )     (82,209 )
 
                                   
Total revenues
    327,875       313,561       162,650       607,138       (31,437 )     1,379,787  
 
                                   
 
                                               
Benefits, Losses and Expenses:
                                               
Policy benefits
    146,266       106,808       121,766       491,845             866,685  
Interest credited to policy account balances
    30,208       147,094                         177,302  
Commissions for acquiring and servicing policies
    43,690       55,983       22,812       105,105             227,590  
Other operating costs and expenses
    90,712       29,283       31,567       59,483       20,495       231,540  
Decrease (increase) in deferred policy acquisition costs
    329       (31,467 )     3,839       (6,730 )           (34,029 )
 
                                   
Total benefits, losses and expenses
    311,205       307,701       179,984       649,703       20,495       1,469,088  
 
                                   
 
                                               
Income (loss) from continuing operations before federal income taxes, and equity in losses of unconsolidated affiliates
  $ 16,670     $ 5,860     $ (17,334 )   $ (42,565 )   $ (51,932 )   $ (89,301 )
 
                                   

 

31


Table of Contents

14. COMMITMENTS AND CONTINGENCIES
Commitments
In the ordinary course of operations, American National also had commitments outstanding at June 30, 2010, to purchase, expand or improve real estate, to fund mortgage loans, and to purchase other invested assets aggregating $189,359,000, of which $167,320,000 is expected to be funded in 2010. The remaining balance of $22,039,000 is scheduled to be funded in 2011 and beyond. As of June 30, 2010, 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 June 30, 2010, was approximately $206,513,000, while the total cash values of the related life insurance policies was approximately $207,621,000.
Litigation
As previously reported, American National was a defendant in a lawsuit related to the alleged inducement of another company’s insurance agents to become agents of American National (Farm Bureau Life Insurance Company and Farm Bureau Mutual Insurance Company v. American National Insurance Company et al., U.S. District Court for the District of Utah, filed July 23, 2003). Plaintiffs initially alleged that American National improperly induced agents to leave Plaintiffs and join American National, asserting claims against American National for inducing one of Plaintiffs’ managers to breach duties allegedly owed to Plaintiffs as well as claims against American National for misappropriation of trade secrets, tortious interference with contractual relationships, business disparagement, libel, defamation, civil conspiracy, unjust enrichment and unfair competition. By the time of trial, some claims had been dismissed; however, Plaintiffs’ surviving claims continued to allege that their damages from the wrongful conduct exceeded $3.9 million, and Plaintiffs also sought punitive damages. The jury reached a verdict adverse to American National, and the court reduced the amount of such verdict as to American National to approximately $7.1 million. An appeal has been taken to the Tenth Circuit. American National has accrued an appropriate amount for resolution of this case, including attorneys’ fees, and believes that any additional amounts necessary will not be material to the financial statements.
As previously reported, American National is a defendant in a putative class action lawsuit wherein the Plaintiff proposes to certify a class of persons who purchased certain American National proprietary deferred annuity products (Rand v. American National Insurance Company, U.S. District Court for the Northern District of California, filed February 12, 2009). Plaintiff alleges that American National violated the California Insurance, Business & Professions, Welfare & Institutions, and Civil Codes through its fixed and equity indexed deferred annuity sales and marketing practices by not sufficiently providing proper disclosure notices on the nature of surrender fees, commissions and bonus features and not considering the suitability of the product. Certain claims raised by Plaintiff relate to sales of annuities to the elderly. Plaintiff seeks statutory penalties, restitution, interest, penalties, attorneys’ fees, punitive damages and injunctive relief in an unspecified amount. Discovery in this case is ongoing. Both American National and Plaintiff have moved for summary judgment on statutory compliance issues. Summary judgment motions will be heard in late summer or early fall of 2010. If necessary, class certification issues may be briefed and argument heard by the Court by the end of 2010. American National believes that it has meritorious defenses; however, no prediction can be made as to the probability or remoteness of any recovery against American National.
American National and certain subsidiaries are also defendants in various other lawsuits concerning alleged failure to honor certain loan commitments, alleged breach of certain agency and real estate contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and other litigation arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. After reviewing these matters with legal counsel, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position or results of operations. However, these lawsuits are in various stages of development, and future facts and circumstances could result in management’s changing its conclusions.
In addition, it should be noted that the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continue to create the potential for an unpredictable judgment in any given lawsuit. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than management can anticipate, the resulting liability could have a material impact on the consolidated financial results.

 

32


Table of Contents

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 June 30, 2010 and December 31, 2009, is shown below (in thousands):
                                     
        Dollar Amount of        
        Transactions     Amount due from/(to) as of  
        Six Months Ended June 30,     June 30,     December 31,  
Related Party   Financial Statement Line Impacted   2010     2009     2010     2009  
 
Gal-Tex Hotel Corporation
  Mortgage loans on real estate     454       422       11,421       11,875  
Gal-Tex Hotel Corporation
  Net investment income     424       455       69       72  
Gal-Tex Hotel Corporation
  Other operating costs and expenses     131       152       25       20  
Gal-Tex Hotel Corporation
  Accident and health premiums     48       29       48        
Moody Insurance Group, Inc.
  Commissions for acquiring and servicing policies     1,392       1,391       405       388  
Moody Insurance Group, Inc.
  Other operating costs and expenses     70       123              
National Western Life Ins. Co.
  Accident and health premiums     76       95              
National Western Life Ins. Co.
  Other operating costs and expenses     738       640              
Moody Foundation
  Accident and health premiums     152       133              
Greer, Herz and Adams, LLP
  Other operating costs and expenses     5,849       4,787       473       370  
Information Regarding Related Parties and Transactions
Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): The Moody Foundation and the Libbie Shearn Moody Trust own 34% and 50.2%, respectively, of Gal-Tex Hotel Corporation (“Gal-Tex”). The Moody Foundation and the Libbie Shearn Moody Trust also own approximately 22.9% and 37.1%, respectively, of American National Insurance Company (“we” or “us”). As of June 30, 2010, we held a first mortgage loan issued to Gal-Tex secured by hotel property in San Antonio, Texas. This loan was originated in 1999, had a balance of $11,421,000 as of June 30, 2010, has a current interest rate of 7.250%, and has a final maturity date of April 1, 2019. This loan is current as to principal and interest payments. Such loan impacts the “Mortgage loans on real estate” and “Investment income” lines of our financial statements.
Management Contracts with Gal-Tex: We have entered into management contracts with Gal-Tex for the management of a hotel and adjacent fitness center owned by us. Such contracts are terminable by us upon thirty days’ prior written notice. Payments by us to Gal-Tex pursuant to these management contracts impact the “Other operating costs and expenses” line of the financial statements.
Transactions with Moody Insurance Group, Inc.: Robert L. Moody, Jr. (“RLM Jr.”) is the son of our Chairman and Chief Executive Officer, brother of two of our directors, and he is one of our advisory directors. RLM Jr., mainly through his wholly-owned insurance agency, Moody Insurance Group, Inc. (“MIG”), has entered into a number of agency agreements with us and some of our subsidiaries in connection with the marketing of insurance products.
MIG and we are also parties to a Consulting and Special Marketing Agreement concerning development and marketing of new products. In addition to consulting fees paid under such agreement, compensation also includes dividends on shares of our Restricted Stock granted to MIG as a consultant. Such compensation impacts the “Other operating costs and expenses” line of our financial statements.
Health Insurance Contracts with Certain Affiliates: Our Merit Plan is insured by National Western Life Insurance Company (“National Western”). Robert L. Moody, Sr., our Chairman of the Board and Chief Executive Officer, is also the Chairman of the Board, Chief Executive Officer, and controlling stockholder of National Western. Our Merit Plan is an insured medical plan that supplements our core medical insurance plan by providing coverage for co-pays, deductibles, and other out-of-pocket expenses that are not covered by the core medical insurance plan, limited to medical expenses that could be deducted by the recipient for federal income tax purposes. Payments made by us to National Western in connection with the Merit Plan impact the “Other costs and expenses” line of our financial statements.
In addition, we insure substantially similar plans offered by National Western, Gal-Tex, and The Moody Foundation to certain of their officers. We also insure The Moody Foundation’s basic health insurance plan. Amounts paid to us by such entities are reflected in the “Accident and health premiums” line of our financial statements.
Transactions with Greer, Herz & Adams, L.L.P.: Irwin M. Herz, Jr. is an advisory director of ours and a Partner with Greer, Herz Adams, L.L.P. which serves as our General Counsel. Legal fees and reimbursements of expenses in connection with such firm’s services as our General Counsel and for all of our subsidiaries are reflected in the “Other operating costs and expenses” line of the financial statements.

 

33


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 financial condition and results of operations for the three and six month periods ended June 30, 2010 and 2009, 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.
INDEX
         
    35  
 
       
    35  
 
       
    35  
 
       
    36  
 
       
    36  
 
       
    37  
 
       
    38  
 
       
    42  
 
       
    47  
 
       
    50  
 
       
    55  
 
       
    55  
 
       
    56  
 
       
    56  
 
       
    56  
 
       
    57  
 
       

 

34


Table of Contents

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 factors, 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, 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 and 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;
    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.
We describe these risks and uncertainties in greater detail in Item IA, Risk Factors, in our 2009 Annual Report on Form 10-K filed with the SEC on March 12, 2010. 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 insurance. We also offer pension services and limited health insurance. 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 June 30, 2010 were $20.7 billion and $3.5 billion, respectively, and at December 31, 2009 were $20.1 billion and $3.5 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 2009 Annual Report on Form 10-K filed with the SEC on March 12, 2010.

 

35


Table of Contents

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 2009 Annual Report on Form 10-K filed with the SEC on March 12, 2010. There were no material changes in accounting policies from December 31, 2009.
Recently Issued Accounting Pronouncements
Refer to Item 1, Note 3 of Notes to the Consolidated Financial Statements for a discussion on “Recently Issued Accounting Pronouncements.”

 

36


Table of Contents

Consolidated Results of Operations
The following is a discussion of our consolidated results of operations for the three and six months ended June 30, 2010 and 2009. 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 (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Premiums and other revenues:
                                                               
Premiums
  $ 464,819     $ 464,947     $ (128 )     (0.0 )   $ 929,512     $ 944,664     $ (15,152 )     (1.6 )
Other policy revenues
    46,728       44,768       1,960       4.4       91,724       88,448       3,276       3.7  
Net investment income
    211,817       214,664       (2,847 )     (1.3 )     430,028       407,860       22,168       5.4  
Realized investments gains (losses), net
    18,244       (8,748 )     26,992       (308.6 )     34,741       (82,209 )     116,950       142.3  
Other income
    8,961       12,159       (3,198 )     (26.3 )     16,850       21,024       (4,174 )     (19.9 )
 
                                                   
Total revenues
    750,569       727,790       22,779       3.1       1,502,855       1,379,787       123,068       8.9  
 
                                                   
 
                                                               
Benefits, losses and expenses:
                                                               
Policy benefits
    428,254       436,938       (8,684 )     (2.0 )     836,510       866,685       (30,175 )     (3.5 )
Interest credited to policy account balances
    79,545       95,714       (16,169 )     (16.9 )     173,926       177,302       (3,376 )     (1.9 )
Commissions
    115,900       114,675       1,225       1.1       222,777       227,590       (4,813 )     (2.1 )
Other operating costs and expenses
    114,454       120,378       (5,924 )     (4.9 )     229,440       231,540       (2,100 )     (0.9 )
Change in deferred policy acquisition costs (1)
    (18,126 )     (27,396 )     9,270       (33.8 )     (33,009 )     (34,029 )     1,020       (3.0 )
 
                                                   
Total benefits and expenses
    720,027       740,309       (20,282 )     (2.7 )     1,429,644       1,469,088       (39,444 )     (2.7 )
 
                                                   
 
                                                               
Income (loss) before other items and federal income taxes
  $ 30,542     $ (12,519 )   $ 43,061       (344.0 )   $ 73,211     $ (89,301 )   $ 162,512       (182.0 )
 
                                                   
     
(1)   A negative amount of net change indicates more expense was deferred than amortized and represents a reduction to expenses in the periods indicated.
Consolidated revenues increased during the three and six months ended June 30, 2010 compared to the same periods in 2009. The three month increase was primarily due to an increase in realized investment gains as greater opportunities existed for favorable sales of investments, particularly in our stock and bond portfolios. The six month increase was primarily due to increases in net investment income and realized investment gains as a result of improving financial market conditions, partially offset by a slight decrease in premiums. Increases in our Life and Property and Casualty premiums largely offset the consolidated impact of decreases in Annuity and Health premiums.
Consolidated benefits and expenses decreased during the three and six months ended June 30, 2010 compared to the same periods in 2009. These decreases are primarily due to a decrease in policy benefits in our Annuity and Health segments.

 

37


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, variable universal life and indexed 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 (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Revenues:
                                                               
Premiums
  $ 68,873     $ 65,228     $ 3,645       5.6     $ 138,318     $ 135,318     $ 3,000       2.2  
Other policy revenues
    42,690       40,657       2,033       5.0       83,776       80,851       2,925       3.6  
Net investment income
    55,467       55,497       (30 )     (0.1 )     111,441       110,786       655       0.6  
Other income
    953       51       902       1,768.6       1,790       920       870       94.6  
 
                                                   
Total revenues
    167,983       161,433       6,550       4.1       335,325       327,875       7,450       2.3  
 
                                                   
 
                                                               
Benefits, losses and expenses:
                                                               
Policy benefits
    74,468       72,317       2,151       3.0       147,006       146,266       740       0.5  
Interest credited to policy account balances
    13,302       16,202       (2,900 )     (17.9 )     27,994       30,208       (2,214 )     (7.3 )
Commissions
    23,954       21,888       2,066       9.4       43,662       43,690       (28 )     (0.1 )
Other operating costs and expenses
    42,983       43,627       (644 )     (1.5 )     86,375       90,712       (4,337 )     (4.8 )
Change in deferred policy acquisition costs
    (1,534 )     428       (1,962 )     (458.4 )     (4,144 )     329       (4,473 )     (1,359.6 )
 
                                               
Total benefits, losses and expenses
    153,173       154,462       (1,289 )     (0.8 )     300,893       311,205       (10,312 )     (3.3 )
 
                                                   
 
                                                               
Income before other items and federal income taxes
  $ 14,810     $ 6,971     $ 7,839       112.5     $ 34,432     $ 16,670     $ 17,762       106.6  
 
                                                   
For the three and six months ended June 30, 2010, earnings more than doubled when compared to the same periods in 2009. Both periods of 2010 experienced growth in the following:
    other policy revenues due to higher policy service fees;
    reductions in interest credited to policy account balances, which resulted from lowering rates on certain life products;
    lower other operating costs and expenses primarily due to decreases in Sarbanes-Oxley and SEC registration related consulting fees; and
    decreases in the change in DAC that resulted from fewer terminations of life policies.
During the second quarter of 2009, we settled a class action lawsuit related to certain credit life and disability sales. The Life segment fully reserved for this settlement and did not incur any related impact to its income from operations during the three or six months ended June 30, 2009. However, during the three and six months ended June 30, 2009, several categories of the consolidated statement of operations were impacted by the recording of the settlement, including premiums, other income, commissions, and other operating costs and expenses. 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.
Premiums
Revenues from traditional life insurance products include scheduled premium payments from policyholders on whole life and term life products. These premiums are in exchange for financial protection for the policyholder from a specific insurable event, such as death or disability. The change in total premiums is impacted by new sales during the period and the persistency of in-force policies.

 

38


Table of Contents

Premiums slightly increased for both the three and six months periods ended June 30, 2010 compared to 2009. Excluding the effect of the previously noted settlement payments, earned premiums decreased $0.9 million and $1.5 million for the three and six month periods ended June 30, 2010, respectively, as compared to the like periods of 2009. We consider these decreases insignificant as they represent approximately 1.0% of the premium earned in the comparable periods of 2009.
Other Policy Revenues
Other policy revenues include mortality charges, earned policy service fees, and surrender charges on interest sensitive life insurance policies. These charges increased for the three and six months ended June 30, 2010 compared to 2009 primarily due to higher policy service fees. The increase in fees reflects a growing block of interest sensitive life business in the Independent Marketing channel, a trend that we expect to continue as that channel emphasizes growth in life business to complement its large annuity block.
Net Investment Income
Net investment income remained relatively flat for the three and six months ended June 30, 2010 compared to 2009. The absence of significant fluctuation was due to the offsetting effect of slight increases in the reserves available to invest and a decrease caused by the drop in yield rates earned.
Interest sensitive life products are adjustable with respect to crediting rates in changing interest rate environments. On the other hand, non-interest sensitive life products, such as whole life and term life policies, cannot be adjusted to reflect a change in earned investment rates. In a low interest rate environment, the effect of this lower yield earned directly impacts earnings due to not having any offset with lower crediting rates. The current environment is one of low interest rates, resulting in lower earnings on our non-interest sensitive products.
Policy Benefits
Policy benefits include death claims, surrenders and other benefits paid to traditional whole life and term life policyholders (net of reserves released on terminated policies), reserve increases on existing life policies (reflecting the portion of revenues actuarially determined to be set aside to provide for benefit guarantees in future periods), claim benefits in excess of account balances returned to interest sensitive life policyholders, and interest credited on account balances.
Policy benefits modestly increased for the three and six months ended June 30, 2010 compared to 2009. The result is consistent with relatively stable premiums and net investment income.
Commissions
Commissions increased for the three months ended June 30, 2010 and slightly decreased for the six months ended June 30, 2010, compared to the same periods in 2009. Excluding the effect of the previously noted settlement payments, commissions increased $1.2 million and decreased $0.9 million for the three and six month periods ended June 30, 2010, respectively, as compared to the same periods in 2009. The minor fluctuations in commissions for both periods were mainly attributable to changes in the volume of sales of different products.
Other Operating Costs and Expenses
Other operating costs and expenses decreased for the three and six months ended June 30, 2010 compared to 2009. Excluding the effect of the previously noted settlement payments, other operating costs and expenses decreased $5.1 million and $8.8 million for the three and six month periods ended June 30, 2010, respectively, as compared to the like periods of 2009. The decreases for both periods were primarily due to a reduction in consulting fees which were attributed to Sarbanes-Oxley and SEC registration related consulting fees as well as lower back-office expenses.

 

39


Table of Contents

Change in Deferred Policy Acquisition Costs
The following table presents the components of the change in DAC for the three and six months ended June 30, 2010 and 2009 (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
 
Acquisition cost capitalized
  $ 20,050     $ 16,802     $ 3,248       19.3     $ 38,148     $ 35,122     $ 3,026       8.6  
Amortization of DAC
    (18,516 )     (17,230 )     (1,286 )     (7.5 )     (34,004 )     (35,451 )     1,447       4.1  
 
                                                   
Change in deferred policy acquisition costs (1)
  $ 1,534     $ (428 )   $ 1,962       458.4     $ 4,144     $ (329 )   $ 4,473       1,359.6  
 
                                                   
     
(1)   A positive amount of net change indicates more expense was deferred than amortized and represents a reduction to expenses in the periods indicated.
We regularly review the underlying DAC assumptions, including future mortality, expenses, lapses, premium persistency, investment yields and interest spreads. Relatively minor adjustments to these assumptions can significantly impact changes in DAC. We monitor the amortization of DAC as a percentage of gross profits before DAC amortization. A deterioration of this ratio could indicate an emergence of adverse experience affecting the future profitability of a particular block of business and, in turn, affect the recoverability of DAC from such future profits.
The previously noted settlement payments caused increases of $4.2 million to both acquisition costs capitalized and DAC amortization for the three and six months ended June 30, 2009. The settlement-related increase to acquisition costs capitalized was fully offset by the settlement related increase to DAC amortization and therefore, no net impact was recognized in the statement of operations. Excluding the effect of the settlement payments, DAC amortization decreased $2.9 million and $5.6 million for the three and six months ended June 30, 2010 compared to 2009, respectively, as a result of lower lapse rates.
An increase in the lapse rate would cause acceleration in DAC amortization; therefore, the lapse rate is an important measure of the Life segment’s performance. The average annualized lapse/surrender rates in the Life segment were 9.4% and 9.7% for the three months and 9.7% and 10.4% for the six months ended June 30, 2010 and 2009, respectively. These combined rates reflect both first year and renewal business. First year lapse rates are typically much higher on traditional life business than in later years. In general, stable or lower lapse rates are important toward maintaining profitability of the Life segment, as higher lapse rates will reduce the average life expectancy of the in-force block of business and could result in acceleration in the amortization of DAC.
Although difficult to quantify, there is generally some correlation between recessionary economic conditions and high termination rates on life insurance policies. Therefore, we believe the lower termination rates for 2010 are due in part to the improvement in the general economic conditions from a year ago.

 

40


Table of Contents

Policy in-force information
The following tables summarize changes in the Life segment’s in-force amounts and policy counts (dollar amounts in thousands):
                                 
    As of June 30,     Change Over Prior Year  
    2010     2009     amount     percentage  
Life insurance in-force:
                               
Traditional life
  $ 45,656,727     $ 46,126,438     $ (469,711 )     (1.0 )
Interest sensitive life
    24,042,637       23,237,976       804,661       3.5  
 
                         
Total life insurance in-force
  $ 69,699,364     $ 69,364,414     $ 334,950       0.5  
 
                         
                                 
    As of June 30,     Change Over Prior Year  
    2010     2009     amount     percentage  
Number of policies:
                               
Traditional life
    2,311,928       2,385,140       (73,212 )     (3.1 )
Interest sensitive life
    175,560       173,660       1,900       1.1  
 
                         
Total number of policies
    2,487,488       2,558,800       (71,312 )     (2.8 )
 
                         
There was a slight percentage increase in total life insurance in-force as of June 30, 2010 when compared to 2009. The aggregate of the face amount on new policies issued is partially offset by the aggregate of the face amount of older policies terminated by death, lapse, or surrender, which has resulted in an insignificant net increase in the total life insurance in-force.
The decreasing trend in our policy count is primarily attributable to new business activity being comprised of fewer, but larger face-value policies.

 

41


Table of Contents

Annuity
We develop, sell and support 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 multiple line and employee agents. Segment financial results for the periods indicated were as follows (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Revenues:
                                                               
Premiums
  $ 40,608     $ 53,641     $ (13,033 )     (24.3 )   $ 80,960     $ 90,857     $ (9,897 )     (10.9 )
Other policy revenues
    4,038       4,111       (73 )     (1.8 )     7,948       7,597       351       4.6  
Net investment income
    112,560       112,812       (252 )     (0.2 )     231,212       212,644       18,568       8.7  
Other income
    (1,523 )     3,195       (4,718 )     (147.7 )     (2,922 )     2,463       (5,385 )     (218.6 )
 
                                                   
Total revenues
    155,683       173,759       (18,076 )     (10.4 )     317,198       313,561       3,637       1.2  
 
                                                   
 
                                                               
Benefits, losses and expenses:
                                                               
Policy benefits
    50,442       63,151       (12,709 )     (20.1 )     98,137       106,808       (8,671 )     (8.1 )
Interest credited to policy account balances
    66,222       79,512       (13,290 )     (16.7 )     145,892       147,094       (1,202 )     (0.8 )
Commissions
    26,456       29,739       (3,283 )     (11.0 )     51,149       55,983       (4,834 )     (8.6 )
Other operating costs and expenses
    16,196       15,506       690       4.4       30,801       29,283       1,518       5.2  
Change in deferred policy acquisition costs
    (14,683 )     (19,419 )     4,736       24.4       (28,940 )     (31,467 )     2,527       8.0  
 
                                                   
Total benefits, losses and expenses
    144,633       168,489       (23,856 )     (14.2 )     297,039       307,701       (10,662 )     (3.5 )
 
                                                   
 
                                                               
Income before other items and federal income taxes
  $ 11,050     $ 5,270     $ 5,780       109.7     $ 20,159     $ 5,860     $ 14,299       244.0  
 
                                                   
Earnings substantially increased for the three and six months ended June 30, 2010 compared to 2009. The increase in both periods is the net result of a substantial increase in the amount of interest spreads (investment income less interest credited to policy account balances and reserves) offset by a relatively modest increase in expenses. Interest spreads increased largely as a result of growth in the block of business.
Premiums
Annuity premium and deposit amounts received during the three and six months ended June 30, 2010 and 2009 are shown in the table below (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
 
                                                               
Fixed deferred annuity
  $ 256,117     $ 577,669     $ (321,552 )     (55.7 )   $ 446,392     $ 1,141,906     $ (695,514 )     (60.9 )
Equity indexed deferred annuity
    124,791       39,807       84,984       213.5       248,955       63,204       185,751       293.9  
Single premium immediate annuity
    41,801       55,460       (13,659 )     (24.6 )     82,775       93,490       (10,715 )     (11.5 )
Variable deferred annuity
    22,677       19,265       3,412       17.7       48,304       41,231       7,073       17.2  
 
                                                   
Total
    445,386       692,201       (246,815 )     (35.7 )     826,426       1,339,831       (513,405 )     (38.3 )
 
                                                   
Less: policy deposits
    (404,778 )     (638,560 )     233,782       36.6       (745,466 )     (1,248,974 )     503,508       40.3  
 
                                                   
Total earned premiums
  $ 40,608     $ 53,641     $ (13,033 )     (24.3 )   $ 80,960     $ 90,857     $ (9,897 )     (10.9 )
 
                                                   
Amounts received on single premium immediate annuities (“SPIA’s”) are classified as premiums and are taken immediately into income. Amounts received from fixed deferred annuity policyholders and equity indexed annuity policyholders are classified as deposits and are not immediately taken into income. Fees assessed against variable deferred annuity policyholder funds are reported as income.
Fixed deferred annuity receipts decreased for the three and six months ended June 30, 2010 compared to 2009. The decrease in sales of our fixed annuity products was a result of the comparison to abnormally high sales in the first quarter of 2009 due to a “flight to safety” related to the credit crisis of late 2008. We planned for the decrease which met our expectations.

 

42


Table of Contents

Equity indexed deferred annuity premiums increased for the three and six months ended June 30, 2010 compared to 2009. The increases were primarily the result of certain annuitants accepting some exposure to volatility in the pursuit of potentially higher returns. Equity indexed deferred annuities allow policyholders to participate in equity returns while also having certain downside protection resulting from the guaranteed minimum returns defined in the product.
SPIA premiums decreased for the three and six months ended June 30, 2010 compared to 2009. The competitiveness of rates in the SPIA line can change very quickly and premium income can reflect changes in our position relative to the financial marketplace. In the first quarter of 2010, sales outpaced the prior year, but in the second quarter of 2010, sales were down $13.6 million from the prior year, bringing year-to-date sales $10.7 million under the prior year. We believe that the current low interest rate environment has led some prospective annuity buyers to defer their purchase of a payout annuity and temporarily invest in cash, in the hope that rates will be higher at a later date, affording a higher annuity payment per premium dollar.
Policy deposits decreased for the three and six months ended June 30, 2010 compared to 2009. The decreases were mainly the result of decreases in the fixed deferred annuity premiums noted above.
Other Policy Revenues
Other policy revenues include surrender charges, variable annuity management and expense fees, other expense charges, and charges for riders on deferred annuities. Other policy revenues were relatively static for the three months ended June 30, 2010 compared to 2009. For the six months ended June 30, 2010 compared to 2009, other policy revenues increased primarily as a result of an increase in variable annuity mortality and expense charges due to higher policyholder account balances.
Net Investment Income
Net investment income, a key component of the profitability of the Annuity segment, showed a slight decrease for the three months ended June 30, 2010 compared to 2009. This decrease is the net result of a $12.0 million decrease in the gain/loss on equity options held to hedge equity indexed deferred annuities, almost entirely offset by increased fixed investment income due to a 12.0% larger asset base as a result of a corresponding 12.4% growth in reserves.
Net investment income increased for the six months ended June 30, 2010 compared to 2009, similarly due to the net result of decreased equity option returns and increased fixed investment income. Fixed investment income increased $28.3 million, largely due to a 12.0% larger asset base, whereas equity option returns decreased $9.8 million.
Equity options are purchased and held as a means to hedge equity indexed annuity benefits. Realized and unrealized gains or losses on the equity options portfolio are recognized in earnings as net investment income. Equity indexed annuities include a fixed host annuity contract and an embedded equity derivative. The gain or loss on the embedded derivative is recognized in earnings as interest credited to policy account balances.
The following table details the gain or loss on derivatives related to equity indexed deferred annuities (in thousands):
                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     2009     2010     2009     2009  
 
Derivative gain/(loss) included in net investment income
  $ (10,252 )   $ 1,757     $ (12,009 )   $ (11,889 )   $ (2,101 )   $ (9,788 )
 
                                   
 
                                               
Embedded derivative gain/(loss) included in interest credited
  $ 12,628     $ (3,000 )   $ 15,628     $ 12,911     $ (738 )   $ 13,649  
 
                                   
The derivative gain/(loss) included in net investment income is offset by the embedded derivative gain/(loss) included in interest credited. See the discussion in the Interest Credited to Policy Account Balances section for further details.

 

43


Table of Contents

Interest Spread and Account Values
We evaluate the performance of our Annuity segment primarily based on interest spreads. Interest spread is the difference between investment income on assets supporting the product lines and benefits credited to policyholders, including interest credited to deferred annuities. In determining interest spread, deferred sales inducements, such as first-year interest bonuses, are excluded from the interest credited measurement. The variable annuity spread is equal to the mortality and expense charge assessed against policyholder funds.
The table below shows the interest spreads for our annuity products (in thousands, except percentages):
                 
    Six Months Ended June 30,  
    2010     2009  
Fixed deferred annuity
               
Interest spread (excluding first year sales inducements):
               
Dollar amount
  $ 71,098     $ 56,492  
Annualized rate
    1.70 %     1.55 %
 
               
Variable deferred annuity
               
Mortality and expense charge:
               
Dollar amount
  $ 2,409     $ 1,871  
Annualized rate
    1.23 %     1.16 %
 
               
Total annuity:
               
Gross interest margins:
               
Dollar amount
  $ 73,507     $ 58,363  
Annualized rate
    1.68 %     1.53 %
The profits on fixed deferred annuity contracts are driven by interest spreads and, to a lesser extent, other policy fees. When determining crediting rates for fixed deferred annuities, management considers current investment yields in setting new money crediting rates and looks at average portfolio yields when setting renewal rates. In setting rates, management takes into account target spreads established by pricing models while also factoring in price levels needed to maintain a competitive position. Target interest spreads vary by product depending on attributes such as interest bonus, interest guarantee term, and length of surrender charge period.
Interest spread income can vary from period to period due to factors such as yields on short-term (cash) investments, the portion of the portfolio invested in cash, commercial mortgage loan prepayments, bond make-whole premiums, product mix, and competition in the annuity market.
The amount of interest spread on fixed deferred annuities increased from 2009 levels. The increase was primarily due to a 12.0% growth in the block of business which resulted in higher average policyholder account balances.
A portion of the variable deferred annuity policies in the table above include guaranteed minimum death benefits. The total account value related to variable deferred annuity policies with guaranteed minimum death benefit features was $61.3 million and $59.9 million as of June 30, 2010 and 2009, respectively.
We are subject to equity market volatility related to these guaranteed minimum death benefits. We use reinsurance to mitigate the mortality exposure associated with such benefits. Our maximum guaranteed minimum death benefit exposure, before reinsurance, which represents the total exposure in the event that all annuitants die, was $7.8 million and $13.8 million for the six months ended June 30, 2010 and June 30, 2009, respectively. The decrease in the guaranteed minimum death benefit amount at risk in the six months ended June 30, 2010 compared to 2009 was due to the partial recovery in the equity market from the 2008 financial market downturn.

 

44


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 and outflows, fees, interest credited and market value changes for the six months ended June 30, 2010 and 2009 (in thousands):
                 
    Six Months Ended June 30,  
    2010     2009  
 
               
Fixed deferred annuity:
               
Account value, beginning of period
  $ 8,151,366     $ 6,918,365  
Net inflows
    262,074       586,704  
Fees
    (5,483 )     (5,711 )
Interest credited
    148,062       145,558  
 
           
Account value, end of period
  $ 8,556,019     $ 7,644,916  
 
           
 
               
Variable deferred annuity:
               
Account value, beginning of period
  $ 400,624     $ 309,011  
Net inflows/(outflows)
    (1,018 )     7,904  
Fees
    (2,409 )     (1,870 )
Change in market value and other
    (11,639 )     21,675  
 
           
Account value, end of period
  $ 385,558     $ 336,720  
 
           
 
               
Single premium immediate annuity:
               
Reserve, beginning of period
  $ 820,295     $ 701,141  
Net inflows
    17,094       24,419  
Interest and mortality
    20,936       15,142  
 
           
Reserve, end of period
  $ 858,325     $ 740,702  
 
           
Fixed Deferred Annuity: Account values associated with fixed deferred annuities increased $404.7 million during the first six months of 2010. Account values increased $726.6 million during the same period of 2009. The reduced growth in 2010 resulted from lower sales due to the low interest environment.
Variable Deferred Annuity: Variable deferred annuity account values decreased $15.1 million during the first six months of 2010 versus an increase of $27.7 million during the first six months of 2009. The decrease in 2010 was due to financial market depreciation, whereas the increase in 2009 was largely due to financial market appreciation.
SPIA: SPIA reserves increased $38.0 million during the first six months of 2010 and increased $39.6 million during the first six months of 2009. The decrease in growth was primarily due to a $7.3 million decrease in net inflows partially offset by a $5.8 million increase in interest and mortality fees.
Policy Benefits
Benefits consist of annuity payments and reserve increases on SPIA contracts. Benefits decreased for the three and six months ended June 30, 2010 compared to 2009. The decreases for both periods were mainly attributed to a reduced amount of new-issue reserve additions due to decreased sales of SPIA contracts.
Interest Credited to Policy Account Balances
The decrease in interest credited for the three months ended June 30, 2010 compared to 2009 was the net result of a $15.6 million decrease in embedded derivative gain/(loss) offset by increased fixed interest credited resulting from 12.0% growth in the size of the block, as measured by in-force policy account balances. Similarly, the decrease in interest credited for the six month comparative period was the net result of a $13.6 million decrease in embedded derivative gain/(loss) offset by increased fixed interest credited, also resulting from the 12.0% growth in in-force policy account balances.

 

45


Table of Contents

Commissions
Commissions decreased for the three and six months ended June 30, 2010 compared to 2009. The decrease was primarily due to an overall decrease in sales, slightly offset by an increase in the ratio of commissions to premiums due to a change in our product mix, with higher commission items making up a larger portion of our sales while lower commission products were selling less.
Other Operating Costs and Expenses
Other operating costs and expenses remained relatively flat for the three months ended June 30, 2010 compared to 2009. For the six months ended June 30, 2010 compared to 2009, other operating costs and expenses increased which was primarily the result of a $1.4 million one-time buyout of trailing consultant fees linked to certain equity indexed annuity products.
Change in Deferred Policy Acquisition Costs
DAC on deferred annuities is amortized in proportion to gross profits. The change in DAC balance consists of new DAC additions from acquisition costs capitalized in the current period, less amortization (write-downs) of outstanding DAC balances from prior periods. The following table presents the components of change in DAC for the three and six months ended June 30, 2010 and 2009 (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
 
                                                               
Acquisition cost capitalized
  $ 32,251     $ 34,440     $ (2,189 )     (6.4 )   $ 63,405     $ 64,842     $ (1,437 )     (2.2 )
Amortization of DAC
    (17,568 )     (15,021 )     (2,547 )     (17.0 )     (34,465 )     (33,375 )     (1,090 )     (3.3 )
 
                                                   
Change in deferred policy acquisition costs(1)
  $ 14,683     $ 19,419     $ (4,736 )     (24.4 )   $ 28,940     $ 31,467     $ (2,527 )     (8.0 )
 
                                                   
     
(1)   A positive amount of net change indicates more expense was deferred than amortized and represents a reduction to expenses in the periods indicated.
A performance measure of the Annuity segment is amortization of DAC as a percentage of gross profits. The amortization of DAC as a percentage of gross profits for the three months ended June 30, 2010 and 2009 was 49.8% and 57.5%, respectively. The reduction in the ratio was primarily due to improved persistency.
The amortization of DAC as a percentage of gross profits for the six months ended June 30, 2010 and 2009 was 52.1% and 66.4%, respectively. The reduction in the ratio was due to improved persistency.
We believe low interest rates on competing guaranteed interest products, such as certificates of deposit and money market funds, was a contributing factor to our improved persistency in both periods.
The change in DAC decreased in the three and six months ended June 30, 2010 compared to 2009. The decreases in both periods were due in part to decreased acquisition costs capitalized due to reduced commissions and increased amortization of DAC which correlates with the growth in gross profits.

 

46


Table of Contents

Health
The Health segment has been primarily focused on supplemental and limited benefit coverage products including Medicare Supplement insurance for the aged population as well as hospital surgical and cancer policies for the general population. Our other health products include major medical insurance, credit accident and health policies, employer-based stop loss, and dental coverage. We distribute our health insurance products through our network of independent agents and managing general underwriters (“MGU’s”).
Segment results for the periods indicated were as follows (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Revenues:
                                                               
Premiums
  $ 67,841     $ 69,651     $ (1,810 )     (2.6 )   $ 136,265     $ 149,573     $ (13,308 )     (8.9 )
Net investment income
    3,799       4,024       (225 )     (5.6 )     7,683       8,049       (366 )     (4.5 )
Other income
    2,954       2,100       854       40.7       5,290       5,028       262       5.2  
 
                                                   
Total premiums and other revenues
    74,594       75,775       (1,181 )     (1.6 )     149,238       162,650       (13,412 )     (8.2 )
 
                                                   
 
                                                               
Benefits and expenses:
                                                               
Policy benefits
    45,351       57,699       (12,348 )     (21.4 )     98,190       121,766       (23,576 )     (19.4 )
Commissions
    9,362       9,929       (567 )     (5.7 )     19,115       22,812       (3,697 )     (16.2 )
Other operating costs and expenses
    12,973       15,864       (2,891 )     (18.2 )     25,112       31,567       (6,455 )     (20.4 )
Change in deferred policy acquisition costs
    981       1,377       (396 )     (28.8 )     2,893       3,839       (946 )     (24.6 )
 
                                                   
Total benefits and expenses
    68,667       84,869       (16,202 )     (19.1 )     145,310       179,984       (34,674 )     (19.3 )
 
                                                   
 
                                                               
Income (loss) before other items and federal income taxes
  $ 5,927     $ (9,094 )   $ 15,021       165.2     $ 3,928     $ (17,334 )   $ 21,262       122.7  
 
                                                   
Earnings for the Health lines of business improved for the three and six month periods ended June 30, 2010 compared to 2009. Earnings for both periods of 2010 were largely improved by reductions in policy benefits relative to higher claim payments in 2009. Lower operating costs and expenses also contributed to the improvement in earnings with a decrease in payroll costs resulting from personnel reductions, a one-time marketing fee for the write-off of agent balances in the second quarter of 2009 and a decrease in technology costs. A decrease in premiums resulting from a reduction of in-force policies partially offset the improvement in earnings for the six months ended June 30, 2010.
During the second quarter of 2009, we settled a class action lawsuit on our credit accident and health product which resulted in issuing $12.4 million in 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 income (loss) from operations during the three or six months ended June 30, 2009. However, during the three and six months ended June 30, 2009, several categories of the consolidated statements of income were impacted by the recording of the settlement including premiums, other income, commissions, and other operating costs and expenses. For additional information on this settlement, refer to the discussion of the Perkins litigation in our Commitments and Contingencies footnote within Notes to the Consolidated Financial Statements in our amended Form 10 Registration Statement, filed with the SEC on July 1, 2009.
Health Care Reform
During March 2010, the Patient Protection and Affordable Care Act, and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (collectively, “the Act”), were signed into law. The Act mandates broad changes in the delivery of health care benefits that impact our current business model, including its relationship with current and future customers, producers and health care providers, products, services, processes and technology. We have been evaluating potential business opportunities resulting from the Act that will enable us to leverage our strengths and capabilities. The Act includes provisions for mandatory payment of assessment fees, coverage of benefits and a minimum medical loss ratio, eliminates lifetime and annual benefit limits and creates health insurance exchanges. These provisions are expected to take effect over the next several years from 2010 to 2018.

 

47


Table of Contents

Management is currently unable to estimate the ultimate impact of the Act on our results of operations, financial condition and liquidity due to the uncertainties of interpretation, implementation and timing of the many provisions of the Act.
Additionally, as a result of the Act, management decided to discontinue the sale of individual medical expense insurance plans effective June 30, 2010. Such insurance plans include our major medical and hospital surgical product lines.
Premiums
The Health segment’s earned premiums decreased for the three and six months ended June 30, 2010 compared to 2009. Excluding the effect of the previously noted settlement payments, earned premium decreased $6.1 million during the three months ended June 30, 2010 compared to 2009, which was mainly attributable to a decrease in the sales of our group plan product. Earned premiums, net of the settlement payments, decreased $17.6 million for the six months ended June 30, 2010 compared to 2009, which was primarily driven by the winding down of our major medical product, the booking of a large volume of ceded premium payments in the MGU line in 2009 that did not occur in 2010 and the loss of two major MGU’s.
In addition, premium earned on our Medicare Supplement product remain relatively flat for the six months ended June 30, 2010 compared to 2009, while the number of Medicare Supplement policies dropped by 4,900 during the same period. The flat premiums and decreasing number of policies was mainly a result of rate increases and a shift from a lower premium product to a higher premium product.
Our MGU line’s in-force policies had a net decrease of 45,800 for the six months ended June 30, 2010 compared to 2009. The net decrease was mainly attributed to the loss of two major MGU’s.
Premiums for the periods indicated are as follows (in thousands, except percentages):
                                                                 
    Three Months Ended
June 30, 2010
    Three Months Ended
June 30, 2009
    Six Months Ended
June 30, 2010
    Six Months Ended
June 30, 2009
 
    Premiums     Premiums     Premiums     Premiums  
    dollars     percentage     dollars     percentage     dollars     percentage     dollars     percentage  
Medicare Supplement
  $ 29,731       43.8 %   $ 29,963       43.0 %   $ 60,122       44.0 %   $ 60,178       40.2 %
Managing general underwriter
    3,573       5.3       2,493       3.6       5,747       4.2       13,742       9.1  
Group
    7,203       10.6       9,895       14.2       14,302       10.5       16,989       11.4  
Major medical
    5,812       8.6       7,750       11.1       12,067       9.0       15,950       10.7  
Hospital surgical
    11,775       17.3       12,880       18.5       24,394       17.9       25,063       16.8  
Long-term care
    415       0.6       541       0.8       822       0.6       1,070       0.7  
Supplemental insurance
    1,952       2.9       2,061       3.0       3,940       2.9       4,206       2.8  
Credit accident and health
    5,421       8.0       1,887       2.7       10,843       8.0       7,949       5.3  
All other
    1,959       2.9       2,181       3.1       4,028       2.9       4,426       3.0  
 
                                               
Total
  $ 67,841       100.0 %   $ 69,651       100.0 %   $ 136,265       100.0 %   $ 149,573       100.0 %
 
                                               
Our in-force policies as of the dates indicated are as follows:
                                 
    As of June 30, 2010     As of June 30, 2009  
    Certificates/Policies     Certificates/Policies  
    number     percentage     number     percentage  
 
Medicare Supplement
    54,198       8.9 %     59,094       8.5 %
Managing general underwriter
    71,377       11.7       117,203       16.9  
Group
    13,504       2.2       19,049       2.8  
Major medical
    2,789       0.5       3,943       0.6  
Hospital surgical
    11,903       1.9       16,084       2.3  
Long-term care
    1,829       0.3       1,962       0.3  
Supplemental insurance
    93,922       15.4       98,717       14.3  
Credit accident and health
    298,897       49.0       308,723       44.5  
All other
    61,717       10.1       67,911       9.8  
 
                       
Total
    610,136       100.0 %     692,686       100.0 %
 
                       

 

48


Table of Contents

Net Investment Income
Net investment income remained relatively consistent for the three and six months ended June 30, 2010 and 2009.
Policy Benefits
The benefit ratio, measured as the ratio of claims and other benefits to premiums, decreased to 66.8% and 72.1% for the three and six months ended June 30, 2010, respectively, from 82.8% and 81.4% for the three and six months June 30, 2009, respectively. Unexpected high claim payments on medical expense products in 2009, with a subsequent return to lower levels during the first half of 2010 contributed to the decrease in the benefit ratio. In addition, premium rate increases implemented during late 2009 and early 2010 also improved the benefit ratio.
Commissions
Commissions decreased for the three and six months ended June 30, 2010 compared to 2009. Excluding the effect of the previously noted settlement payments, commissions decreased $1.5 million during the three months ended June 30, 2010 compared to 2009, which was mainly attributable to a decrease in sales. Commissions, net of the settlement payments, decreased $4.6 million for the six months ended June 30, 2010 compared to 2009, which was primarily due to booking a large ceded commission in the MGU line in 2009 that did not occur in 2010, with the remainder of the decrease due to lower sales.
Other Operating Costs and Expenses
For the three and six months ended June 30, 2010, other operating costs and expenses decreased when compared to the same periods in 2009. Excluding the effect of the previously noted settlement payments, other operating costs and expenses decreased $7.2 million during the three months ended June 30, 2010 compared to 2009, which was mainly attributable to lower payroll costs resulting from a reduction of personnel in the fourth quarter of 2009, a one-time marketing fee for the write-off of agent balances in the second quarter of 2009 and lower technology costs. Other operating costs and expenses, net of the settlement payments, decreased $10.8 million for the six months ended June 30, 2010 compared to 2009 which was primarily attributed to lower payroll costs and a one-time marketing fee as well as lower technology costs and bank charges.
Change in Deferred Policy Acquisition Costs
Health premiums are recognized as revenue when due, but certain expenses associated with the acquisition of new business, such as commissions, are incurred before premiums can be earned. In order to recognize profits over the life of the policy, the expenses are deferred as DAC and amortized over the life of the policy. Generally, we expect the change in DAC expense to continue to follow changes in the in-force block by policy duration.
The following table presents the components of change in DAC for the three and six months ended June 30, 2010 and 2009 (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Acquisition cost capitalized
  $ 4,978     $ 3,624     $ 1,354       37.4     $ 9,320     $ 8,101     $ 1,219       15.0  
Amortization of DAC
    (5,959 )     (5,001 )     (958 )     (19.2 )     (12,213 )     (11,940 )     (273 )     (2.3 )
 
                                                   
Total change in DAC (1)
  $ (981 )   $ (1,377 )   $ 396       28.8     $ (2,893 )   $ (3,839 )   $ 946       24.6  
 
                                                   
     
(1)   A negative amount of net change indicates more expense was amortized than deferred and represents an increase to expenses in the periods indicated.
As of June 30, 2010, the Health related DAC balances were $67.0 million compared to $71.0 million as of June 30, 2009. The decrease in DAC reflects a reversal of acquisition costs previously capitalized and the related amortization expense.
The change in DAC decreased for both the three and six months ended June 30, 2010 compared to 2009 due to a reduction of the number of in-force policies.

 

49


Table of Contents

Property and Casualty
Property and Casualty business is written through our multiple line agents and Credit Insurance Division agents. Evaluation of our property and casualty insurance operations is 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 results for the periods indicated were as follows (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Revenues:
                                                               
Net premiums written
  $ 304,663     $ 306,656     $ (1,993 )     (0.6 )   $ 602,144     $ 603,476     $ (1,332 )     (0.2 )
 
                                               
Net premiums earned
  $ 287,497     $ 276,427     $ 11,070       4.0     $ 573,969     $ 568,916     $ 5,053       0.9  
Net investment income
    17,183       16,952       231       1.4       34,702       33,770       932       2.8  
Other income
    1,857       2,422       (565 )     (23.3 )     3,895       4,452       (557 )     (12.5 )
 
                                                   
Total premiums and other revenues
    306,537       295,801       10,736       3.6       612,566       607,138       5,428       0.9  
 
                                                   
 
                                                               
Benefits and expenses:
                                                               
Policy benefits
    258,014       243,771       14,243       5.8       493,217       491,845       1,372       0.3  
Commissions
    56,126       53,119       3,007       5.7       108,848       105,105       3,743       3.6  
Other operating costs and expenses
    32,604       31,719       885       2.8       63,270       59,483       3,787       6.4  
Change in deferred policy acquisition costs
    (2,890 )     (9,782 )     6,892       (70.5 )     (2,818 )     (6,730 )     3,912       (58.1 )
 
                                                   
Total benefits and expenses
    343,854       318,827       25,027       7.8       662,517       649,703       12,814       2.0  
 
                                                   
 
                                                               
Income (loss) before other items and federal income taxes
  $ (37,317 )   $ (23,026 )   $ (14,291 )     62.1     $ (49,951 )   $ (42,565 )   $ (7,386 )     17.4  
 
                                                   
 
                                                               
Loss ratio
    89.7 %     88.2 %     1.5 %             85.9 %     86.5 %     (0.6) %        
Underwriting expense ratio
    29.9       27.2       2.7               29.5       27.7       1.8          
 
                                                   
Combined ratio
    119.6       115.4       4.2               115.4       114.2       1.2          
 
                                                   
 
                                                               
Effect of net catastrophe losses on combined ratio
    20.3 %     12.5 %     7.8 %             16.9 %     11.6 %     5.3 %        
 
                                                   
The Property and Casualty segment net loss deteriorated in the three and six months ended June 30, 2010 compared to the same periods in 2009. The deterioration is primarily due to a $23.9 million and $31.0 million increase, respectively, in net catastrophe losses from those we experienced in the same periods in 2009. These increases were partially offset by an increase in net premiums earned and a decrease in non-catastrophe policy benefits.
Net Premiums Written and Earned
Net premiums written were relatively flat in the three and six months ended June 30, 2010 compared to 2009 due primarily to decreases in our other commercial and credit related property insurance products lines partially offset by increases in our personal lines.
Net premiums earned increased in the three and six months ended June 30, 2010 compared to 2009 primarily as a result of increases in our personal lines partially offset by decreases in our credit related property insurance products, commercial auto and workers’ compensation insurance products. These are discussed in further detail in the “Products” section.

 

50


Table of Contents

Net Investment Income
Net investment income increased slightly for the three and six months ended June 30, 2010 as compared to the same periods in 2009, primarily as a result of improved financial market conditions in the first half of 2010 compared to 2009.
Policy Benefits
Policy benefits include loss and loss adjustment expenses incurred on property and casualty policies.
Policy benefits increased significantly during the three months ended June 30, 2010 compared to the same period in 2009 as a result of catastrophe experience during the second quarter of 2010. Policy benefits remained relatively flat in the six months ended June 30, 2010 compared to 2009 as a result of an increase in catastrophe experience partially offset by the decrease in non-catastrophe policy benefits.
The loss ratio for the three and six months ended June 30, 2010 increased and decreased slightly, respectively, as compared to the same periods in 2009 due to the change in catastrophe experience noted above.
For the three and six months ended June 30, 2010, gross catastrophe losses increased to $78.3 million and $119.6 million, respectively, compared to $33.6 million and $65.6 million for the same periods in 2009. Net catastrophe losses increased to $58.5 million and $97.0 million, respectively, from $34.6 million and $66.0 million, as a result of seven and thirteen catastrophes being experienced in the first and second quarter of 2010, compared to six and eleven during the same periods in 2009. We typically experience the worst catastrophes during the second quarter, resulting from spring storm activity throughout our geographic coverage area.
For the three and six months ended June 30, 2010, net favorable prior year loss and LAE development was $17.5 million and $44.1 million, respectively, compared to $5.1 million and $10.0 million for the same periods in 2009. This favorable development was driven by our personal auto and commercial liability lines, as we would expect to see a greater chance of adverse development in these longer-tail lines. Thus, these reserve amounts are typically larger than our short-tail business, and we experience a greater amount of savings if the adverse development is less than the levels we expect.
Commissions and Change in Deferred Policy Acquisition Costs
Commissions increased slightly during the three and six months ended June 30, 2010 compared to the same periods in 2009. This was the result of a shift in the product mix of our credit related property insurance products, which have a higher commission rate than the other property and casualty products we offer.
The change in deferred policy acquisition costs for the three and six months ended June 30, 2010 decreased compared to the same periods in 2009. 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.
Other Operating Costs and Expenses
Other operating costs and expenses remained flat for the three months ended June 30, 2010 compared to the same period in 2009. The increase during the six months ended June 30, 2010 compared to the same period in 2009 was due to a reduction in a litigation expense accrual during the first quarter of 2009, as we expected that the expenses related to certain litigation to be less adverse than originally estimated. Without this reduction in the prior period, other operating costs and expenses were relatively flat.
Products
Our Property and Casualty segment consists of three product lines: (i) Personal Lines products, which we market primarily to individuals, representing 60.4% of net premiums written, (ii) Commercial Lines products, which focus primarily on businesses engaged in agricultural and other targeted markets, representing 29.5% of net premiums written, and (iii) Credit related property insurance products which are marketed to financial institutions and retailers and represent 10.1% of net premiums written.

 

51


Table of Contents

Segment results by product line for the periods indicated were as follows (in thousands, except percentages):
Product Discussion — Personal Products
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Net premiums written
                                                               
Auto
  $ 116,603     $ 112,233     $ 4,370       3.9     $ 235,829     $ 228,949     $ 6,880       3.0  
Homeowner
    58,152       57,644       508       0.9       107,139       103,746       3,393       3.3  
Other Personal
    10,641       10,182       459       4.5       20,909       19,693       1,216       6.2  
 
                                                   
Total net premiums written
    185,396       180,059       5,337       3.0       363,877       352,388       11,489       3.3  
 
                                                   
Net premiums earned
                                                               
Auto
    116,930       108,086       8,844       8.2       230,497       221,940       8,557       3.9  
Homeowner
    51,834       45,867       5,967       13.0       105,677       97,818       7,859       8.0  
Other Personal
    9,873       9,165       708       7.7       19,320       17,724       1,596       9.0  
 
                                                   
Total net premiums earned
  $ 178,637     $ 163,118     $ 15,519       9.5     $ 355,494     $ 337,482     $ 18,012       5.3  
 
                                                   
Loss ratio
                                                               
Auto
    73.9 %     83.9 %     (10.0 )             75.3 %     83.9 %     (8.6 )        
 
                                                   
Homeowner
    162.7       146.3       16.4               122.4       131.0       (8.6 )        
Other Personal
    58.6       44.1       14.5               59.7       48.1       11.6          
 
                                                       
Personal line loss ratio
    98.8       99.2       (0.4 )             88.4       95.7       (7.3 )        
 
                                                       
Combined Ratio
                                                               
Auto
    96.3       102.1       (5.8 )             97.3       102.9       (5.6 )        
Homeowner
    188.8       168.0       20.8               147.9       153.7       (5.8 )        
Other Personal
    65.6       56.9       8.7               67.2       64.1       3.1          
 
                                                       
Personal line combined ratio
    121.4 %     118.1 %     3.3               110.7 %     115.6 %     (4.9 )        
 
                                                       
Personal Automobile: Net written and earned premiums are beginning to increase in our personal automobile line as a result of premium rate increases implemented during the second half of 2009 and an acquisition noted below. The increase in premium per policy is being slightly offset by a minimal decline in the number of policies.
On Feb. 8th, 2010, we purchased the collector car book of business from Sneed Insurance Agency, a well-known writer of classic automobiles for over 34-years. This business had been underwritten by American Modern Insurance Group. At the time of purchase the business consisted of 6,400 policyholders. We have transferred the servicing of this business to our company and are currently in the process of offering our CHROME® specialty collector car product along with our other products to the majority of these customers.
The loss ratio decreased due to the combination of the increase in premiums noted above, as well as a decrease in claims during 2010 than those we experienced in the same period in 2009. The combined ratio decreased as a result of the decrease in the loss ratio, partially offset by the increase discussed in the “Other Operating Costs and Expenses” noted above.
Homeowners: Net premiums written and earned have continued to increase in the three and six months ended June 30, 2010 compared to the same periods in 2009 due to rate increases across the entirety of this product line, as well as increases in policyholder-insured values as replacement and repair costs continue to increase. We are also seeing a minimal decline in the number of policies from our risk management initiatives and the impact of rate increases.
The loss ratio increased during the three months ended June 30, 2010 compared to the same period in 2009 due to a significant increase in catastrophes affecting this line, resulting in a total increase of $17.2 million in policy benefits. During the six month period, however, the loss ratio decreased as a result of a decrease in non-catastrophe policy benefits offset by the increase in catastrophe experience.
Other Personal: This product line is comprised primarily of watercraft, rental-owner and umbrella coverages for individuals seeking to protect their personal property not covered within our homeowner and auto policies. We continue to see promising growth in policy counts, premiums earned, and operating results as our agents continue to increase our business with our current customers.
Net premiums written and earned continued to increase in 2010 due to an increase in policy counts and an increase in the average premium per policy.

 

52


Table of Contents

Product Discussion — Commercial Products
Segment results by product for the periods indicated were as follows (in thousands, except percentages):
                                                                 
    Three Months Ended June 30,     Change Over Prior Year     Six Months Ended June 30,     Change Over Prior Year  
    2010     2009     amount     percentage     2010     2009     amount     percentage  
Net premiums written
                                                               
Agribusiness
  $ 28,576     $ 27,843     $ 733       2.6     $ 54,024     $ 52,219     $ 1,805       3.5  
Auto
    25,702       25,686       16       0.1       51,315       46,959       4,356       9.3  
Other Commercial
    37,769       39,793       (2,024 )     (5.1 )     72,200       76,749       (4,549 )     (5.9 )
 
                                                   
Total net premiums written
    92,047       93,322       (1,275 )     (1.4 )     177,539       175,927       1,612       0.9  
 
                                                   
Net premiums earned