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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2017

or

 

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

Commission File No. 001- 34280

 

 

 

LOGO

American National Insurance Company

(Exact name of registrant as specified in its charter)

 

 

 

Texas   74-0484030

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Moody Plaza

Galveston, Texas 77550-7999

(Address of principal executive offices) (Zip Code)

(409) 763-4661

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

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

As of May 01, 2017, there were 26,926,305 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

  PART I – FINANCIAL INFORMATION   

ITEM 1.

  FINANCIAL STATEMENTS (Unaudited):   
  Consolidated Statements of Financial Position as of March 31, 2017 and December 31, 2016      3  
  Consolidated Statements of Operations for the three months ended March 31, 2017 and 2016      4  
  Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016      5  
  Consolidated Statements of Changes in Equity for the three months ended March 31, 2017 and 2016      5  
  Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016      6  
  Notes to the Unaudited Consolidated Financial Statements      7  

ITEM 2.

  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS      35  

ITEM 3.

  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK      53  

ITEM 4.

  CONTROLS AND PROCEDURES      53  
  PART II – OTHER INFORMATION   

ITEM 1.

  LEGAL PROCEEDINGS      55  

ITEM 1A.

  RISK FACTORS      55  

ITEM 2.

  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS      55  

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      55  

ITEM 4.

  MINE SAFETY DISCLOSURES      55  

ITEM 5.

  OTHER INFORMATION      55  

ITEM 6.

  EXHIBIT INDEX      56  

 

2


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY    

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION    

(Unaudited and in thousands, except share data)    

 

     March 31,
2017
    December 31,
2016
 

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost (Fair value $7,329,302 and $7,496,692)

   $ 7,063,930     $ 7,251,385  

Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $5,730,335 and $5,668,984)

     5,900,702       5,803,276  

Equity securities, at fair value (Cost $747,779 and $732,433)

     1,616,318       1,541,676  

Mortgage loans on real estate, net of allowance

     4,463,197       4,348,046  

Policy loans

     383,911       384,376  

Investment real estate, net of accumulated depreciation of $265,937 and $259,578

     586,316       593,417  

Short-term investments

     411,949       192,226  

Other invested assets

     115,474       113,550  
  

 

 

   

 

 

 

Total investments

     20,541,797       20,227,952  
  

 

 

   

 

 

 

Cash and cash equivalents

     296,233       289,338  

Investments in unconsolidated affiliates

     505,970       490,476  

Accrued investment income

     180,305       180,323  

Reinsurance recoverables

     372,545       401,709  

Prepaid reinsurance premiums

     62,787       63,026  

Premiums due and other receivables

     313,187       296,930  

Deferred policy acquisition costs

     1,298,486       1,294,443  

Property and equipment, net

     118,241       116,028  

Current tax receivable

     64,683       61,423  

Other assets

     146,543       169,962  

Separate account assets

     949,786       941,612  
  

 

 

   

 

 

 

Total assets

   $ 24,850,563     $ 24,533,222  
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,955,637     $ 2,939,308  

Annuity

     1,287,122       1,277,220  

Accident and health

     59,289       60,308  

Policyholders’ account balances

     11,171,953       11,068,775  

Policy and contract claims

     1,298,471       1,303,925  

Unearned premium reserve

     845,464       823,938  

Other policyholder funds

     321,443       318,620  

Liability for retirement benefits

     149,130       152,496  

Notes payable

     139,674       136,080  

Deferred tax liabilities, net

     413,359       367,487  

Other liabilities    

     521,325       481,958  

Separate account liabilities

     949,786       941,612  
  

 

 

   

 

 

 

Total liabilities

     20,112,653       19,871,727  
  

 

 

   

 

 

 

EQUITY

    

American National stockholders’ equity:

    

Common stock, $1.00 par value, - Authorized 50,000,000, Issued 30,832,449 and 30,832,449 Outstanding 26,927,115 and 26,914,516 shares

     30,832       30,832  

Additional paid-in capital

     17,992       16,406  

Accumulated other comprehensive income

     513,457       455,899  

Retained earnings

     4,268,578       4,250,818  

Treasury stock, at cost

     (101,595     (101,777
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,729,264       4,652,178  

Noncontrolling interest

     8,646       9,317  
  

 

 

   

 

 

 

Total equity

     4,737,910       4,661,495  
  

 

 

   

 

 

 

Total liabilities and equity

   $ 24,850,563     $ 24,533,222  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.    

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY    

CONSOLIDATED STATEMENTS OF OPERATIONS    

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

 

     Three months ended March 31,  
     2017     2016  

PREMIUMS AND OTHER REVENUE

    

Premiums

    

Life

   $ 77,474     $ 75,117  

Annuity

     29,809       70,208  

Accident and health

     37,039       42,313  

Property and casualty

     327,450       303,361  

Other policy revenues

     63,452       64,347  

Net investment income

     228,503       196,054  

Net realized investment gains

     14,008       9,062  

Other-than-temporary impairments

     (6,783     (3,476

Other income

     8,845       7,984  
  

 

 

   

 

 

 

Total premiums and other revenues

     779,797       764,970  
  

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

    

Policyholder benefits

    

Life

     99,108       100,771  

Annuity

     43,662       81,247  

Claims incurred

    

Accident and health

     24,528       32,292  

Property and casualty

     227,530       211,958  

Interest credited to policyholders’ account balances

     96,008       76,527  

Commissions for acquiring and servicing policies

     125,491       112,884  

Other operating expenses

     130,194       130,376  

Change in deferred policy acquisition costs

     (9,487     (4,593
  

 

 

   

 

 

 

Total benefits, losses and expenses

     737,034       741,462  
  

 

 

   

 

 

 

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

     42,763       23,508  
  

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

    

Current

     (1,204     (4,714

Deferred

     14,276       644  
  

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

     13,072       (4,070

Equity in earnings of unconsolidated affiliates

     9,500       937  
  

 

 

   

 

 

 

Net income

     39,191       28,515  

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

     (649     (801
  

 

 

   

 

 

 

Net income attributable to American National

   $ 39,840     $ 29,316  
  

 

 

   

 

 

 

Amounts available to American National common stockholders

    

Earnings per share

    

Basic

   $ 1.48     $ 1.09  

Diluted

     1.48       1.09  

Cash dividends to common stockholders

     0.82       0.80  

Weighted average common shares outstanding

     26,899,648       26,909,511  

Weighted average common shares outstanding and dilutive potential common shares

     26,972,128       26,965,967  

See accompanying notes to the consolidated financial statements.    

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY    

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME     

(Unaudited and in thousands)    

 

     Three months ended March 31,  
     2017     2016  

Net income

   $ 39,191     $ 28,515  
  

 

 

   

 

 

 

Other comprehensive income, net of tax

    

Change in net unrealized gains on securities

     55,912       51,973  

Foreign currency transaction and translation adjustments

     112       (12

Defined benefit pension plan adjustment

     1,534       1,879  
  

 

 

   

 

 

 

Other comprehensive income, net of tax

     57,558       53,840  
  

 

 

   

 

 

 

Total comprehensive income

     96,749       82,355  

Less: Comprehensive loss attributable to noncontrolling interest

     (649     (801
  

 

 

   

 

 

 

Total comprehensive income attributable to American National

   $ 97,398     $ 83,156  
  

 

 

   

 

 

 
AMERICAN NATIONAL INSURANCE COMPANY     
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY     
(Unaudited and in thousands)     
     Three months ended March 31,  
     2017     2016  

Common Stock

    

Balance at beginning and end of the period

   $ 30,832     $ 30,832  
  

 

 

   

 

 

 

Additional Paid-In Capital

    

Balance as of January 1,

     16,406       13,689  

Reissuance of treasury shares

     1,379       1,841  

Amortization of restricted stock

     207       210  
  

 

 

   

 

 

 

Balance at end of the period

     17,992       15,740  
  

 

 

   

 

 

 

Accumulated Other Comprehensive Income

    

Balance as of January 1,

     455,899       352,620  

Other comprehensive income

     57,558       53,840  
  

 

 

   

 

 

 

Balance at end of the period

     513,457       406,460  
  

 

 

   

 

 

 

Retained Earnings

    

Balance as of January 1,

     4,250,818       4,157,184  

Net income attributable to American National

     39,840       29,316  

Cash dividends to common stockholders

     (22,080     (21,531
  

 

 

   

 

 

 

Balance at end of the period

     4,268,578       4,164,969  
  

 

 

   

 

 

 

Treasury Stock

    

Balance as of January 1,

     (101,777     (102,043

Reissuance of treasury shares

     182       262  
  

 

 

   

 

 

 

Balance at end of the period

     (101,595     (101,781
  

 

 

   

 

 

 

Noncontrolling Interest

    

Balance as of January 1,

     9,317       10,189  

Contributions

     224       —    

Distributions

     (246     —    

Net loss attributable to noncontrolling interest

     (649     (801
  

 

 

   

 

 

 

Balance at end of the period

     8,646       9,388  
  

 

 

   

 

 

 

Total Equity

   $ 4,737,910     $ 4,525,608  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.     

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Three months ended March 31,  
     2017     2016  
           (As Revised)  

OPERATING ACTIVITIES

    

Net income

   $ 39,191     $ 28,515  

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

    

Net realized investment gains

     (14,008     (9,062

Other-than-temporary impairments

     6,783       3,476  

Amortization (accretion) of premiums, discounts and loan origination fees

     (2,661     161  

Net capitalized interest on policy loans and mortgage loans

     (8,368     (6,820

Depreciation

     14,981       12,752  

Interest credited to policyholders’ account balances

     96,008       76,527  

Charges to policyholders’ account balances

     (63,452     (64,347

Deferred federal income tax expense

     14,276       644  

Equity in earnings of unconsolidated affiliates

     (9,500     (937

Distributions from equity method investments

     410       317  

Changes in

    

Policyholder liabilities

     39,136       54,761  

Deferred policy acquisition costs

     (9,487     (4,593

Reinsurance recoverables

     29,163       27,348  

Premiums due and other receivables

     (16,257     (5,108

Prepaid reinsurance premiums

     239       12,082  

Accrued investment income

     18       6,865  

Current tax receivable/payable

     (3,260     (12,777

Liability for retirement benefits

     (3,366     (5,621

Other, net

     233       16,628  
  

 

 

   

 

 

 

Net cash provided by operating activities

     110,079       130,811  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     203,445       116,940  

Available-for-sale securities

     118,007       120,761  

Investment real estate

     3,911       —    

Mortgage loans

     104,007       125,983  

Policy loans

     12,885       13,610  

Other invested assets

     14,404       4,592  

Disposals of property and equipment

     1,408       8,349  

Distributions from unconsolidated affiliates

     2,639       4,972  

Payment for the purchase/origination of

    

Held-to-maturity securities

     (28,356     (80,091

Available-for-sale securities

     (138,132     (325,867

Investment real estate

     (7,829     (9,710

Mortgage loans

     (212,561     (332,093

Policy loans

     (6,201     (5,868

Other invested assets

     (7,577     (5,294

Additions to property and equipment

     (10,588     (13,442

Contributions to unconsolidated affiliates

     (14,748     (40,351

Change in short-term investments

     (219,723     148,306  

Change in collateral held for derivatives

     14,062       (1,696

Other, net

     15,649       (3,564
  

 

 

   

 

 

 

Net cash used in investing activities

     (155,298     (274,463
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     393,369       435,506  

Policyholders’ account withdrawals

     (322,746     (324,504

Change in notes payable

     3,593       7,539  

Dividends to stockholders

     (22,080     (21,531

Payments to noncontrolling interest

     (22     —    
  

 

 

   

 

 

 

Net cash provided by financing activities

     52,114       97,010  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     6,895       (46,642

Beginning of the period

     289,338       310,930  
  

 

 

   

 

 

 

End of the period

   $ 296,233     $ 264,288  
  

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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Table of Contents

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Operations

American National Insurance Company and its consolidated subsidiaries (collectively “American National” or “the Company”) offer a broad spectrum of insurance products, including individual and group life insurance, annuities, health insurance, and property and casualty insurance. Business is conducted in all 50 states, the District of Columbia and Puerto Rico.

Note 2 – Summary of Significant Accounting Policies and Practices

The consolidated financial statements and notes thereto have been prepared in conformity with U.S. generally accepted accounting principles (“GAAP”) and are reported in U.S. currency. American National consolidates entities that are wholly-owned and those in which American National owns less than 100% but controls, as well as variable interest entities in which American National is the primary beneficiary. Intercompany balances and transactions with consolidated entities have been eliminated. Investments in unconsolidated affiliates are accounted for using the equity method of accounting. Certain amounts in prior years have been reclassified to conform to current year presentation.

The interim consolidated financial statements and notes herein are unaudited and reflect all adjustments which management considers necessary for the fair presentation of the interim consolidated statements of financial position, operations, comprehensive income, changes in stockholders’ equity, and cash flows.

The interim consolidated financial statements and notes should be read in conjunction with the annual consolidated financial statements and notes thereto included in American National’s Annual Report on Form 10-K as of and for the year ended December 31, 2016. The consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.

The preparation of the consolidated financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported consolidated financial statement balances. Actual results could differ from those estimates.

 

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Note 2 – Summary of Significant Accounting Policies and Practices – (Continued)

 

Revision to Previously Reported Amounts

Correction of an Immaterial Error. During the fourth quarter of 2016, the Company revised previously reported amounts to include cash held in a bank custody account representing collateral provided to us by third parties for equity-option derivative transactions. For details, see Note 7, Derivative Instruments, of the Notes to the Consolidated Financial Statements. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the error from qualitative and quantitative perspectives, and concluded the error was immaterial to the current and prior periods. The correction of the immaterial error revised the consolidated statements of financial position and statements of cash flows as disclosed in our 2016 Annual Report on Form 10-K filed with the SEC on March 10, 2017. There was no revision to the consolidated statements of operations, comprehensive income or changes in equity.

The Company has revised prior period amounts in the Consolidated Statements of Cash Flows included herein to reflect the immaterial correction of an error.

Financial statement amounts previously reported were revised as shown below (in thousands):

 

     As Reported      As Revised      Effect of Change  

Three months ended March 31, 2016

        

Statement of Cash Flow

        

Change in collateral held for derivatives

     —          (1,696      (1,696

Other investing activities, net

     90        (3,564      (3,654

Net cash used in investing activities

     (269,113      (274,463      (5,350

Net decrease in cash and cash equivalents

     (41,292      (46,642      (5,350

Cash at beginning of period

     190,237        310,930        120,693  

Cash at end of period

     148,945        264,288        115,343  

 

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Note 3 – Recently Issued Accounting Pronouncements

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

In May 2014, the FASB issued guidance that will supersede most existing revenue recognition requirements in GAAP. Insurance contracts generally are excluded from the scope of the guidance. For those contracts which are impacted, the transaction price is attributed to the underlying performance obligations in the contract and revenue is recognized as the entity satisfies the performance obligations and transfers control of a good or service to the customer. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company intends to adopt the standard effective January 1, 2018. Since the majority of our revenue sources are insurance related and accordingly, not in scope of the standard, we do not expect the adoption of the standard to be material to the Company’s results of operations or financial position.

In January 2016, the FASB issued guidance that will change certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance requires that equity investments in unconsolidated entities be measured at fair value and that changes in fair value are recognized through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance also simplifies the impairment assessment of equity investments and eliminates the disclosure requirements for methods and significant assumptions used to estimate fair value of financial instruments that are measured at amortized cost on the statement of financial position. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017. The Company is currently evaluating the impact of adoption to the Company’s results of operations and financial position.

In February 2016, the FASB issued guidance that will require significant changes to the statement of financial position of lessees. With certain limited exceptions, lessees will need to recognize virtually all of their leases on the statement of financial position, by recording a right-of-use asset and a lease liability. Lessor accounting is less affected by the standard, but has been updated to align with certain changes in the lessee model and the new revenue recognition standard. The standard is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. We are currently quantifying the expected gross up of our balance sheet for a right of use asset and a lease liability as required. Since the majority of our lease activity is as a lessor, we do not expect the adoption of the standard to be material to the Company’s results of operations or financial position.

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

In March 2017, the FASB issued guidance on the presentation of net periodic pension and postretirement benefit costs. The guidance requires the service cost component to be reported in the same line item as other compensation costs. All other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside of income from operations. The standard is effective for annual periods, including interim periods within those annual periods beginning after December 15, 2017. The Company plans to adopt the standard effective January 1, 2018. Considering the Company’s defined benefit pension plans are frozen, this guidance is not expected to have a material impact to the Company’s results of operations or financial position.

 

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Note 4 – Investment in Securities

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

 

     March 31, 2017  
     Cost or
Amortized Cost
     Gross Unrealized
Gains
     Gross Unrealized
(Losses)
    Fair Value  

Fixed maturity securities, bonds held-to-maturity

          

U.S. states and political subdivisions

   $ 280,313      $ 17,040      $ (31   $ 297,322  

Foreign governments

     4,046        654        —         4,700  

Corporate debt securities

     6,556,897        259,433        (24,005     6,792,325  

Residential mortgage-backed securities

     219,452        13,245        (1,095     231,602  

Collateralized debt securities

     929        50        —         979  

Other debt securities

     2,293        81        —         2,374  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     7,063,930        290,503        (25,131     7,329,302  
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     25,012        573        (28     25,557  

U.S. states and political subdivisions

     923,873        23,846        (4,533     943,186  

Foreign governments

     5,000        1,545        —         6,545  

Corporate debt securities

     4,753,437        165,866        (21,255     4,898,048  

Residential mortgage-backed securities

     17,556        3,656        (360     20,852  

Collateralized debt securities

     3,515        732        (2     4,245  

Other debt securities

     1,942        327        —         2,269  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     5,730,335        196,545        (26,178     5,900,702  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     728,445        871,476        (7,294     1,592,627  

Preferred stock

     19,334        4,357        —         23,691  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     747,779        875,833        (7,294     1,616,318  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,542,044      $ 1,362,881      $ (58,603   $ 14,846,322  
  

 

 

    

 

 

    

 

 

   

 

 

 
     December 31, 2016  
     Cost or
Amortized Cost
     Gross Unrealized
Gains
     Gross Unrealized
(Losses)
    Fair Value  

Fixed maturity securities, bonds held-to-maturity

          

U.S. states and political subdivisions

   $ 301,994      $ 17,190      $ (102   $ 319,082  

Foreign governments

     4,057        659        —         4,716  

Corporate debt securities

     6,711,508        253,191        (38,721     6,925,978  

Residential mortgage-backed securities

     229,758        14,112        (1,185     242,685  

Collateralized debt securities

     1,290        64        —         1,354  

Other debt securities

     2,778        99        —         2,877  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     7,251,385        285,315        (40,008     7,496,692  
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     25,062        594        (16     25,640  

U.S. states and political subdivisions

     945,431        21,170        (6,378     960,223  

Foreign governments

     5,000        1,567        —         6,567  

Corporate debt securities

     4,666,096        145,716        (31,049     4,780,763  

Residential mortgage-backed securities

     18,588        2,267        (342     20,513  

Collateralized debt securities

     5,574        821        (3     6,392  

Other debt securities

     3,233        —          (55     3,178  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     5,668,984        172,135        (37,843     5,803,276  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     713,099        810,611        (5,195     1,518,515  

Preferred stock

     19,334        3,889        (62     23,161  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     732,433        814,500        (5,257     1,541,676  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,652,802      $ 1,271,950      $ (83,108   $ 14,841,644  
  

 

 

    

 

 

    

 

 

   

 

 

 

 

10


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2017  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 498,640      $ 508,925      $ 260,406      $ 262,820  

Due after one year through five years

     3,461,225        3,647,898        1,444,496        1,521,792  

Due after five years through ten years

     2,934,087        2,995,118        3,451,498        3,539,874  

Due after ten years

     164,127        172,237        568,935        571,225  

Without single maturity date

     5,851        5,124        5,000        4,991  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,063,930      $ 7,329,302      $ 5,730,335      $ 5,900,702  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

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

 

     Three months ended March 31,  
     2017      2016  

Proceeds from sales of available-for-sale securities

   $ 27,723      $ 15,705  

Gross realized gains

     10,826        5,067  

Gross realized losses

     6        124  

Gains and losses are determined using specific identification of the securities sold. During the three months ended March 31, 2017, bonds with a carrying value of $15,000,000 transferred from held-to-maturity to available-for-sale after a significant deterioration in the issuers’ credit worthiness became evident. A realized loss of $6,000,000 was recorded in 2017 on the bond that was transferred, due to an other-than-temporary impairment. During the three months ended March 31, 2016 there were no bonds transferred from held-to-maturity to available-for-sale.

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

 

     Three months ended March 31,  
     2017      2016  

Bonds available-for-sale

   $ 36,075      $ 119,802  

Equity securities

     59,296        (2,308
  

 

 

    

 

 

 

Change in net unrealized gains on securities during the year

     95,371        117,494  

Adjustments for

     

Deferred policy acquisition costs

     (5,444      (31,463

Participating policyholders’ interest

     (4,971      (6,012

Deferred federal income tax expense

     (29,044      (28,046
  

 

 

    

 

 

 

Change in net unrealized gains on securities, net of tax

   $ 55,912      $ 51,973  
  

 

 

    

 

 

 

 

11


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

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

Fixed maturity securities, bonds held-to-maturity

              

U.S. states and political subdivisions

   $ (31   $ 1,185      $ —       $ —        $ (31   $ 1,185  

Corporate debt securities

     (10,535     757,780        (13,470     141,272        (24,005     899,052  

Residential mortgage-backed securities

     (483     22,420        (612     9,044        (1,095     31,464  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (11,049     781,385        (14,082     150,316        (25,131     931,701  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (28     21,462        —         —          (28     21,462  

U.S. states and political subdivisions

     (4,531     181,906        (2     121        (4,533     182,027  

Corporate debt securities

     (12,327     770,718        (8,928     102,882        (21,255     873,600  

Residential mortgage-backed securities

     (218     12,404        (142     3,183        (360     15,587  

Collateralized debt securities

     —         161        (2     133        (2     294  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (17,104     986,651        (9,074     106,319        (26,178     1,092,970  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (7,294     51,557        —         —          (7,294     51,557  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (7,294     51,557        —         —          (7,294     51,557  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (35,447   $ 1,819,593      $ (23,156   $ 256,635      $ (58,603   $ 2,076,228  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     December 31, 2016  
     Less than 12 months      12 Months or more      Total  
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
     Unrealized
(Losses)
    Fair
Value
 

Fixed maturity securities, bonds held-to-maturity

              

U.S. states and political subdivisions

   $ (102   $ 18,886      $ —       $ —        $ (102   $ 18,886  

Corporate debt securities

     (18,110     971,361        (20,611     186,262        (38,721     1,157,623  

Residential mortgage-backed securities

     (558     22,806        (627     10,248        (1,185     33,054  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (18,770     1,013,053        (21,238     196,510        (40,008     1,209,563  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (16     10,640        —         —          (16     10,640  

U.S. states and political subdivisions

     (6,376     282,141        (2     122        (6,378     282,263  

Corporate debt securities

     (19,828     917,215        (11,221     126,584        (31,049     1,043,799  

Residential mortgage-backed securities

     (204     12,420        (138     3,982        (342     16,402  

Collateralized debt securities

     —         1        (3     146        (3     147  

Other Debt Securities

     (55     3,178        —         —          (55     3,178  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (26,479     1,225,595        (11,364     130,834        (37,843     1,356,429  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (5,195     53,068        —         —          (5,195     53,068  

Preferred stock

     (62     4,324        —         —          (62     4,324  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (5,257     57,392        —         —          (5,257     57,392  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (50,506   $ 2,296,040      $ (32,602   $ 327,344      $ (83,108   $ 2,623,384  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

As of March 31, 2017, the securities with unrealized losses including those exceeding one year were not deemed to be other-than-temporarily impaired. American National has the ability and intent to hold those securities until a market price recovery or maturity. It is not more-likely-than-not that American National will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time. It is possible an issuer’s financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.

 

12


Table of Contents

Note 4 – Investment in Securities – (Continued)

 

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

 

     March 31, 2017     December 31, 2016  
     Amortized      Estimated      % of Fair     Amortized      Estimated      % of Fair  
     Cost      Fair Value      Value     Cost      Fair Value      Value  

AAA

   $ 665,323      $ 690,687        5.2   $ 667,561      $ 691,296        5.2

AA

     1,359,941        1,410,360        10.7       1,393,137        1,440,667        10.8  

A

     4,429,266        4,595,314        34.7       4,538,471        4,696,909        35.3  

BBB

     5,733,653        5,936,130        44.9       5,758,560        5,931,112        44.6  

BB and below

     606,082        597,513        4.5       562,640        539,984        4.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 12,794,265      $ 13,230,004        100.0   $ 12,920,369      $ 13,299,968        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Equity securities by market sector distribution are shown below:

 

     March 31, 2017     December 31, 2016  

Consumer goods

     20.7     20.4

Energy and utilities

     10.1       11.1  

Finance

     21.5       22.1  

Healthcare

     12.9       12.7  

Industrials

     8.9       9.0  

Information technology

     18.3       17.1  

Other

     7.6       7.6  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

Note 5 – Mortgage Loans

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

 

     March 31, 2017     December 31, 2016  

East North Central

     16.0     16.2

East South Central

     4.1       3.7  

Mountain

     10.6       10.6  

Pacific

     18.8       17.6  

South Atlantic

     14.5       15.1  

West South Central

     29.4       31.0  

Other

     6.6       5.8  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

For the three months ended March 31, 2017, American National did not foreclose on any loans, and two loans with a total recorded investment of $4,225,000, were in the process of foreclosure. For the year ended December 31, 2016, American National did not foreclose on any loans, and one loan with a recorded investment of $1,940,000, was in the process of foreclosure. American National sold no loans during the three months ended March 31, 2017 and no loans during the year ended December 31, 2016.

 

13


Table of Contents

Note 5 – Mortgage Loans – (Continued)

 

The age analysis of past due loans is shown below (in thousands):

 

     30-59 Days
Past Due
     60-89 Days
Past Due
     More Than
90 Days
     Total      Current      Total  
March 31, 2017                   Amount     Percent  

Industrial

   $ 16,671      $ —        $ —        $ 16,671      $ 765,356      $ 782,027       17.5  

Office

     —          —          6,059        6,059        1,566,237        1,572,296       35.1  

Retail

     —          —          —          —          687,173        687,173       15.3  

Other

     49,000        —          —          49,000        1,386,817        1,435,817       32.1  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 65,671      $ —        $ 6,059      $ 71,730      $ 4,405,583      $ 4,477,313       100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (14,116  
                 

 

 

   

Total, net of allowance

                  $ 4,463,197    
                 

 

 

   

December 31, 2016

                   

Industrial

   $ —        $ 2,300      $ —        $ 2,300      $ 744,472      $ 746,772       17.1  

Office

     —          —          6,059        6,059        1,541,880        1,547,939       35.5  

Retail

     —          —          —          —          736,121        736,121       16.9  

Other

     20,179        9,280        —          29,459        1,300,245        1,329,704       30.5  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 20,179      $ 11,580      $ 6,059      $ 37,818      $ 4,322,718      $ 4,360,536       100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (12,490  
                 

 

 

   

Total, net of allowance

                  $ 4,348,046    
                 

 

 

   

Total mortgage loans are net of unamortized discounts of $177,000 and $233,000 and unamortized origination fees of $32,133,000 and $33,019,000 at March 31, 2017 and December 31, 2016, respectively. No unearned income is included in these amounts.

Allowance for Credit Losses

A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms of the loan agreement. Mortgage loans with temporary difficulties are not considered impaired when the borrower has the financial capacity to fund revenue shortfalls from the properties for the foreseeable future. Individual valuation allowances are established for impaired loans to reduce the carrying value to the fair value of the collateral. Loans not evaluated individually for collectability are segregated by property-type and location, and allowance factors are applied. These factors are developed based on our historical loss experience adjusted for the expected trend in the rate of foreclosure losses. Allowance factors are higher for loans of certain property types and in certain regions based on loss experience or a blended historical loss factor.

The change in allowance for credit losses in mortgage loans is shown below (in thousands, except number of loans):

 

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

Beginning balance, 2017

     430     $ 4,358,596      $ 11,488        2      $ 1,940      $ 1,002        432      $ 4,360,536      $ 12,490  

Change in allowance

     —         —          302        —          —          1,324        —          —          1,626  

Change in recorded investment

     (1     100,376        —          1        2,285        —          —          102,661        —    
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at March 31, 2017

     429     $ 4,458,972      $ 11,790        3      $ 4,225      $ 2,326        432      $ 4,463,197      $ 14,116  
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

Note 5 – Mortgage Loans – (Continued)

 

Troubled Debt Restructurings

American National has granted concessions which are classified as troubled debt restructurings to certain mortgage loan borrowers. Concessions are generally one of, or a combination of, a delay in payment of principal or interest, a reduction of the contractual interest rate or an extension of the maturity date. American National considers the amount, timing and extent of concessions in determining any impairment or changes in the specific allowance for loan losses recorded in connection with a troubled debt restructuring. The carrying value after specific allowance, before and after modification in a troubled debt restructuring, may not change significantly, or may increase if the expected recovery is higher than the pre-modification recovery assessment.

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

 

     Three months ended March 31,  
     2017      2016  
     Number of
loans
     Recorded
investment pre-
modification
     Recorded
investment post
modification
     Number of
loans
     Recorded
investment pre-
modification
     Recorded
investment post
modification
 

Other

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There are $8,000,000 of commitments to lend additional funds to debtors whose loans have been modified in troubled debt restructuring, and there have been no defaults on modified loans during the periods presented.

Note 6 – Real Estate and Other Investments

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

 

     March 31, 2017     December 31, 2016  

Industrial

     9.1     9.2

Office

     38.3       37.8  

Retail

     37.0       37.2  

Other

     15.6       15.8  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     March 31, 2017     December 31, 2016  

East North Central

     8.8     8.8

East South Central

     3.4       3.4  

Mountain

     12.0       12.0  

Pacific

     6.6       6.1  

South Atlantic

     13.2       13.0  

West South Central

     52.0       52.2  

Other

     4.0       4.5  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

 

15


Table of Contents

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

 

American National regularly invests in real estate partnerships and joint ventures. American National frequently participates in the design of these entities with the sponsor, but in most cases, its involvement is limited to financing. Through analysis performed by American National, some of these partnerships and joint ventures have been determined to be variable interest entities (“VIEs”). In certain instances, in addition to an economic interest in the entity, American National holds the power to direct the most significant activities of the entity and is deemed the primary beneficiary or consolidator of the entity. The assets of the consolidated VIEs are restricted and must first be used to settle their liabilities. Creditors or beneficial interest holders of these VIEs have no recourse to the general credit of American National, as American National’s obligation is limited to the amount of its committed investment. American National has not provided financial or other support to the VIEs in the form of liquidity arrangements, guarantees, or other commitments to third parties that may affect the fair value or risk of its variable interest in the VIEs in 2017 or 2016.

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

 

     March 31, 2017      December 31, 2016  

Investment real estate

   $ 157,389      $ 173,816  

Short-term investments

     1,001        1  

Cash and cash equivalents

     4,182        6,099  

Other receivables

     6,504        6,456  

Other assets

     13,337        8,820  
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 182,413      $ 195,192  
  

 

 

    

 

 

 

Notes payable

   $ 139,674      $ 136,080  

Other liabilities

     8,395        10,037  
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 148,069      $ 146,117  
  

 

 

    

 

 

 

The notes payable in the consolidated statements of financial position pertain to the borrowings of the consolidated VIEs. The liability of American National relating to notes payable of the consolidated VIEs is limited to the amount of its direct or indirect investment in the respective ventures, which totaled $31,263,000 and $31,795,000 at March 31, 2017 and December 31, 2016, respectively. The total of notes payable, $139,674,000, is long-term and consists of four notes with the following interest rates: one note at 4.0%, one note at LIBOR, one note at 90-Day LIBOR plus LIBOR margin, and one note at Prime Rate. Two notes mature in 2018, one note matures in 2021, and one note matures in 2022.

For other VIEs in which American National is a partner, it is not the primary beneficiary, and these entities are not consolidated, as the major decisions that most significantly impact the economic activities of the VIE require unanimous consent of all partners. The carrying amount and maximum exposure to loss relating to unconsolidated VIEs follows (in thousands):

 

     March 31, 2017      December 31, 2016  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 336,400      $ 336,400      $ 323,933      $ 323,933  

Mortgage loans

     527,686        527,686        481,799        481,799  

Accrued investment income

     1,792        1,792        1,919        1,919  

As of March 31, 2017, one real estate investment with a carrying value of $16,229,000 was classified as held for sale.

 

16


Table of Contents

Note 7 – Derivative Instruments

American National purchases over-the-counter equity-indexed options as economic hedges against fluctuations in the equity markets to which equity-indexed products are exposed. These options are not designated as hedging instruments for accounting purposes under U.S. GAAP. Equity-indexed contracts include a fixed host universal-life insurance or annuity contract and an equity-indexed embedded derivative. The detail of derivative instruments is shown below (in thousands, except number of instruments):

 

          March 31, 2017      December 31, 2016  

Derivatives Not Designated

as Hedging Instruments

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

Equity-indexed options

   Other invested assets      440      $ 1,463,500      $ 174,258        442      $ 1,414,100      $ 156,479  

Equity-indexed embedded derivative

   Policyholders’
account balances
     64,891        1,365,000        346,634        62,481        1,289,800        314,330  

 

          Gains (Losses) Recognized in Income on Derivatives  

Derivatives Not Designated
as Hedging Instruments

  

Location in the Consolidated
Statements of Operations

   Three months ended March 31,  
      2017     2016  

Equity-indexed options

  

Net investment income

   $ 23,133     $ (3,639

Equity-indexed embedded
derivative

  

Interest credited to policyholders’ account balances

     (25,127     2,552  

 

17


Table of Contents

Note 7 – Derivative Instruments – (Continued)

 

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

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

 

            March 31, 2017  

Counterparty

   Moody/S&P
Rating
     Options
Fair Value
     Collateral
Held
     Collateral
Amounts used to
Offset Exposure
     Excess and
Restricted
Collateral
     Exposure Net
of Collateral
 

Barclays

     Baa2/BBB      $ 37,302      $ 37,103      $ 37,103      $ —        $ 199  

Citigroup

     Baa1/BBB+        2,337        —          —          —          2,337  

Goldman-Sachs

     A3/BBB+        1,535        1,400        1,400        —          135  

ING

     Baa1/A-        32,433        28,620        28,620        —          3,813  

JP Morgan

     A3/A-        174        —          —          —          174  

Morgan Stanley

     A3/BBB+        17,861        18,020        17,861        159        —    

NATIXIS*

     A2/A        27,721        27,460        —          27,460        27,721  

SunTrust

     Baa1/BBB+        23,313        23,190        23,122        68        191  

Wells Fargo

     A2/A        31,582        31,440        31,404        36        178  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Total      $ 174,258      $ 167,233      $ 139,510      $ 27,723      $ 34,748  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
            December 31, 2016  

Counterparty

   Moody/S&P
Rating
     Options
Fair Value
     Collateral
Held
     Collateral
Amounts used to
Offset Exposure
     Excess and
Restricted
Collateral
     Exposure Net
of Collateral
 

Barclays

     Baa2/BBB      $ 33,839      $ 35,063      $ 33,839      $ 1,224      $ —    

Citigroup

     Baa1/BBB+        2,249        —          —          —          2,249  

Goldman-Sachs

     A3/BBB+        1,452        1,400        1,400        —          52  

ING

     Baa1/A-        29,609        26,430        26,430        —          3,179  

JP Morgan

     A3/A-        163        —          —          —          163  

Morgan Stanley

     A3/BBB+        17,864        17,680        17,680        —          184  

NATIXIS*

     A2/A        24,804        26,620        —          26,620        24,804  

SunTrust

     Baa1/BBB+        19,559        19,960        19,559        401        —    

Wells Fargo

     A2/A        26,940        26,540        26,540        —          400  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Total      $ 156,479      $ 153,693      $ 125,448      $ 28,245      $ 31,031  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

* Collateral Restrictions

 

18


Table of Contents

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

Net investment income is shown below (in thousands):

 

     Three months ended
March 31,
 
     2017      2016  

Bonds

   $ 134,350      $ 140,193  

Equity securities

     8,732        9,279  

Mortgage loans

     57,704        48,002  

Real estate

     (1,195      (1,874

Options

     23,133        (3,639

Other invested assets

     5,779        4,093  
  

 

 

    

 

 

 

Total

   $ 228,503      $ 196,054  
  

 

 

    

 

 

 

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

 

     Three months ended
March 31,
 
     2017      2016  

Bonds

   $ 3,504      $ 2,739  

Equity securities

     11,360        4,865  

Mortgage loans

     (1,626      1,492  

Real estate

     788        —    

Other invested assets

     (18      (34
  

 

 

    

 

 

 

Total

   $ 14,008      $ 9,062  
  

 

 

    

 

 

 

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

 

     Three months ended
March 31,
 
     2017      2016  

Bonds

   $ (6,000    $ —    

Equity securities

     (783    $ (3,476
  

 

 

    

 

 

 

Total

   $ (6,783    $ (3,476
  

 

 

    

 

 

 

 

19


Table of Contents

Note 9 – Fair Value of Financial Instruments

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

 

     March 31, 2017      December 31, 2016  
     Carrying
Amount
     Fair Value      Carrying
Amount
     Fair Value  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

   $ 7,063,930      $ 7,329,302      $ 7,251,385      $ 7,496,692  

Fixed maturity securities, bonds available-for-sale

     5,900,702        5,900,702        5,803,276        5,803,276  

Equity securities

     1,616,318        1,616,318        1,541,676        1,541,676  

Equity-indexed options

     174,258        174,258        156,479        156,479  

Mortgage loans on real estate, net of allowance

     4,463,197        4,529,216        4,348,046        4,435,530  

Policy loans

     383,911        383,911        384,376        384,376  

Short-term investments

     411,949        411,949        192,226        192,226  

Separate account assets

     949,786        949,786        941,612        941,612  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,964,051      $ 21,295,442      $ 20,619,076      $ 20,951,867  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,800,231      $ 8,800,231      $ 8,785,412      $ 8,785,412  

Embedded derivative liability for equity-indexed contracts

     346,634        346,634        314,330        314,330  

Notes payable

     139,674        139,674        136,080        136,080  

Separate account liabilities

     949,786        949,786        941,612        941,612  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,236,325      $ 10,236,325      $ 10,177,434      $ 10,177,434  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

Level 1 Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 Quoted prices in markets that are not active or inputs that are observable directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 Unobservable inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect American National’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models and third-party evaluation, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

 

20


Table of Contents

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

 

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

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

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

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

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

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

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

Embedded Derivative—The embedded derivative liability for equity-indexed contracts is measured at fair value and is recalculated each reporting period using equity option pricing models. To validate the assumptions used to price the embedded derivative liability, American National measures and compares embedded derivative returns against the returns of equity options held to hedge the liability cash flows.

 

21


Table of Contents

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

 

The significant unobservable input used to calculate the fair value of the embedded derivatives is equity option implied volatility. An increase in implied volatility will result in an increase in the value of the equity-indexed embedded derivatives, all other things being equal. At March 31, 2017 and December 31, 2016, the one year implied volatility used to estimate embedded derivative value was 13.9% and 16.5%, respectively.

Other Financial Instruments—Other financial instruments classified as Level 3 measurements, as there is little or no market activity, are as follows:

Policy loans—The carrying value of policy loans is the outstanding balance plus any accrued interest. Due to the collateralized nature of policy loans such that they cannot be separated from the policy contracts and the unpredictable timing of repayments and the fact that settlement is at outstanding value, American National believes the carrying value of policy loans approximates fair value.

Investment contracts —The carrying value of investment contracts is equivalent to the accrued account balance. The accrued account balance consists of deposits, net of withdrawals, plus or minus interest credited, fees and charges assessed and other adjustments. American National believes that the carrying value of investment contracts approximates fair value because the majority of these contracts’ interest rates reset to current rates offered at anniversary.

Notes payable— Notes payable are carried at outstanding principal balance. The carrying value of the notes payable approximates fair value because the underlying interest rates approximate market rates at the balance sheet date.

 

22


Table of Contents

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

 

Quantitative Disclosures

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

 

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

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 297,322      $ —        $ 297,322      $ —    

Foreign governments

     4,700        —          4,700        —    

Corporate debt securities

     6,792,325        —          6,760,638        31,687  

Residential mortgage-backed securities

     231,602        —          230,719        883  

Collateralized debt securities

     979        —          —          979  

Other debt securities

     2,374        —          —          2,374  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,329,302        —          7,293,379        35,923  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     25,557        —          25,557        —    

U.S. states and political subdivisions

     943,186        —          940,721        2,465  

Foreign governments

     6,545        —          6,545        —    

Corporate debt securities

     4,898,048        —          4,887,184        10,864  

Residential mortgage-backed securities

     20,852        —          16,852        4,000  

Collateralized debt securities

     4,245        —          4,245        —    

Other debt securities

     2,269        —          2,269        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,900,702        —          5,883,373        17,329  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,592,627        1,592,610        17        —    

Preferred stock

     23,691        23,691        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,616,318        1,616,301        17        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     174,258        —          —          174,258  

Mortgage loans on real estate

     4,529,216        —          4,529,216        —    

Policy loans

     383,911        —          —          383,911  

Short-term investments

     411,949        —          411,949        —    

Separate account assets

     949,786        —          949,786        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 21,295,442      $ 1,616,301      $ 19,067,720      $ 611,421  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,800,231      $ —        $ —        $ 8,800,231  

Embedded derivative liability for equity-indexed contracts

     346,634        —          —          346,634  

Notes payable

     139,674        —          —          139,674  

Separate account liabilities

     949,786        —          949,786        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,236,325      $ —        $ 949,786      $ 9,286,539  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

23


Table of Contents

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

 

     Fair Value Measurement as of December 31, 2016  
     Total
Fair Value
     Level 1      Level 2      Level 3  

Financial assets

           

Fixed maturity securities, bonds held-to-maturity

           

U.S. states and political subdivisions

   $ 319,082      $ —        $ 319,082      $ —    

Foreign governments

     4,716        —          4,716        —    

Corporate debt securities

     6,925,978        —          6,875,015        50,963  

Residential mortgage-backed securities

     242,685        —          241,779        906  

Collateralized debt securities

     1,354        —          —          1,354  

Other debt securities

     2,877        —          —          2,877  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,496,692        —          7,440,592        56,100  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     25,640        —          25,640        —    

U.S. states and political subdivisions

     960,223        —          957,748        2,475  

Foreign governments

     6,567        —          6,567        —    

Corporate debt securities

     4,780,763        —          4,773,516        7,247  

Residential mortgage-backed securities

     20,513        —          17,909        2,604  

Collateralized debt securities

     6,392        —          4,454        1,938  

Other debt securities

     3,178        —          3,178        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,803,276        —          5,789,012        14,264  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,518,515        1,518,515        —          —    

Preferred stock

     23,161        23,161        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,541,676        1,541,676        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     156,479        —          —          156,479  

Mortgage loans on real estate

     4,435,530        —          4,435,530        —    

Policy loans

     384,376        —          —          384,376  

Short-term investments

     192,226        —          192,226        —    

Separate account assets

     941,612        —          941,612        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 20,951,867      $ 1,541,676      $ 18,798,972      $ 611,219  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,785,412      $ —        $ —        $ 8,785,412  

Embedded derivative liability for equity-indexed contracts

     314,330        —          —          314,330  

Notes payable

     136,080        —          —          136,080  

Separate account liabilities

     941,612        —          941,612        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,177,434      $ —        $ 941,612      $ 9,235,822  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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

 

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

 

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

Beginning balance, 2017

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

Total realized and unrealized investment losses included in other comprehensive income

     (4,467     —         —    

Net fair value change included in realized gains (losses)

     —         —         —    

Net gain for derivatives included in net investment income

     —         23,058       —    

Net change included in interest credited

     —         —         25,127  

Purchases, sales and settlements or maturities

      

Purchases

     —         7,552       —    

Sales

     (1,957     —         —    

Settlements or maturities

     (3,010     (12,831     —    

Premiums less benefits

     —         —         7,177  

Carry value transfers in

     15,000       —         —    

Gross transfers into Level 3

     382       —         —    

Gross transfers out of Level 3

     (2,883     —         —    
  

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2017

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

 

 

   

 

 

   

 

 

 

Beginning balance, 2016

   $ 20,130     $ 123,007     $ 242,412  

Total realized and unrealized investment gains included in other comprehensive income

     159       —         —    

Net fair value change included in realized gains (losses)

     —         —         —    

Net loss for derivatives included in net investment income

     —         (3,639     —    

Net change included in interest credited

     —         —         (2,552

Purchases, sales and settlements or maturities

      

Purchases

     —         5,293       —    

Sales

     —         —         —    

Settlements or maturities

     (13     (900     —    

Premiums less benefits

     —         —         18,407  

Gross transfers into Level 3

     1,413       —         —    

Gross transfers out of Level 3

     —         —         —    
  

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2016

   $ 21,689     $ 123,761     $ 258,267  
  

 

 

   

 

 

   

 

 

 

Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $17,028,000, and $5,401,000 relating to assets still held at March 31, 2017, and 2016, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies. The transfers into Level 3 during the three months ended March 31, 2017 and 2016 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period and unless information is obtained from the brokers that indicate observable inputs were used in their pricing, there are not enough observable inputs to enable American National to classify the securities priced by the brokers as anything other than Level 3. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The inputs used by the brokers include recent transactions in the security, similar bonds with same name, ratings, maturity and structure, external dealer quotes in the security, Bloomberg evaluated pricing and prior months pricing. None of them are observable to American National as of March 31, 2017. The transfers out of Level 3 during the three months ended March 31, 2017 were securities being priced by the third-party service at the end of the period, using inputs that are observable or derived from market data, which resulted in classification of these assets as Level 2.

 

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Note 10 – Deferred Policy Acquisition Costs

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

 

     Life     Annuity     Accident
& Health
    Property
& Casualty
    Total  

Beginning balance, 2017

   $ 745,840     $ 394,208     $ 40,620     $ 113,775     $ 1,294,443  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Additions

     29,046       17,846       2,871       70,064       119,827  

Amortization

     (21,189     (15,215     (4,203     (69,733     (110,340

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

     (3,137     (2,307     —         —         (5,444
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     4,720       324       (1,332     331       4,043  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2017

   $ 750,560     $ 394,532     $ 39,288     $ 114,106     $ 1,298,486  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

Note 11 – Liability for Unpaid Claims and Claim Adjustment Expenses

The liability for unpaid claims and claim adjustment expenses (“claims”) for accident and health, and property and casualty insurance is included in “Policy and contract claims” in the consolidated statements of financial position and is the amount estimated for incurred but not reported (“IBNR”) claims and claims that have been reported but not settled. Liability for unpaid claims are estimated based upon American National’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, less anticipated salvage and subrogation. The effects of the changes are included in the consolidated results of operations in the period in which the changes occur. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. There have been no significant changes in methodologies or assumptions used to calculate the liability for unpaid claims and claim adjustment expenses.

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

 

     Three months ended March 31,  
     2017      2016  

Unpaid claims balance, beginning

   $ 1,140,723      $ 1,104,302  

Less reinsurance recoverables

     216,903        217,337  
  

 

 

    

 

 

 

Net beginning balance

     923,820        886,965  
  

 

 

    

 

 

 

Incurred related to

     

Current

     282,862        252,781  

Prior years

     (29,054      (7,806
  

 

 

    

 

 

 

Total incurred claims

     253,808        244,975  
  

 

 

    

 

 

 

Paid claims related to

     

Current

     107,669        101,995  

Prior years

     127,397        129,200  
  

 

 

    

 

 

 

Total paid claims

     235,066        231,195  
  

 

 

    

 

 

 

Net balance

     942,562        900,745  

Plus reinsurance recoverables

     195,836        202,386  
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,138,398      $ 1,103,131  
  

 

 

    

 

 

 

The net and gross reserve calculations have shown favorable development as a result of favorable loss emergence compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred claims attributable to insured events of prior years decreased by approximately $29,054,000 during the first three months of 2017 and decreased by approximately $7,806,000 during the first three months of 2016. This was a reflection of lower-than-anticipated losses in the personal auto, business owner and commercial package policy lines of business in 2017.

For short-duration health insurance claims, the total of IBNR plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses at March 31, 2017 was $20,833,000.

 

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Table of Contents

Note 12 – Federal Income Taxes

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

 

     Three months ended March 31,  
     2017     2016  
     Amount      Rate     Amount      Rate  

Income tax on pre-tax income

   $ 18,292        35.0   $ 8,556        35.0

Tax-exempt investment income

     (1,832      (3.5     (1,972      (8.1

Deferred tax change

     (767      (1.5     (10,167      (41.6

Dividend exclusion

     (1,842      (3.5     (2,347      (9.6

Miscellaneous tax credits, net

     (2,257      (4.3     (2,251      (9.2

Low income housing tax credit expense

     1,253        2.4       1,294        5.3  

Other items, net

     181        0.3       257        1.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Provision for federal income tax before interest expense

     13,028        24.9       (6,630      (27.2

Interest expense

     44        0.1       2,560        10.5  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 13,072        25.0   $ (4,070      (16.7 )% 
  

 

 

    

 

 

   

 

 

    

 

 

 

American National made no income tax payments during the three months ended March 31, 2017, and made $5,952,000 in income tax payments for the same period in 2016.

Management believes that sufficient taxable income will be achieved over time to utilize the deferred tax assets in the consolidated federal tax return; therefore, no valuation allowance was recorded as of March 31, 2017 and 2016. There are no ordinary loss tax carryforwards that will expire by December 31, 2017.

American National’s federal income tax returns for years 2013 to 2016 and years 2005 to 2009 are subject to examination by the Internal Revenue Service. In the opinion of management, all prior year deficiencies have been paid or adequate provisions have been made for any tax deficiencies that may be upheld. No provision for penalties was established; however, management accrued an additional $44,000 in interest, net of tax, during 2017 relating to a dispute with the Internal Revenue Service. Management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would decrease American National’s effective tax rate.

 

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Note 13 – Accumulated Other Comprehensive Income

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

 

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

Beginning balance, 2017

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

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

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

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

     64,864       —         —         64,864  

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

     (2,848     —         —         (2,848

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

     (3,231     —         —         (3,231

Foreign currency adjustment (net of tax expense $60)

     —         —         112       112  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2017

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

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2016

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

Amounts reclassified from AOCI (net of tax benefit $1,107 and expense $1,012)

     (2,057     1,879       —         (178

Unrealized holding gains arising during the period (net of tax expense $42,230)

     78,429       —         —         78,429  

Unrealized adjustment to DAC (net of tax benefit $10,972)

     (20,491     —         —         (20,491

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $2,104)

     (3,908     —         —         (3,908

Foreign currency adjustment (net of tax benefit $6)

     —         —         (12     (12
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at March 31, 2016

   $ 505,407     $ (96,010   $ (2,937   $ 406,460  
  

 

 

   

 

 

   

 

 

   

 

 

 

Note 14 – Stockholders’ Equity and Noncontrolling Interests

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

 

     March 31, 2017      December 31, 2016  

Common stock

     

Shares issued

     30,832,449        30,832,449  

Treasury shares

     (3,905,334      (3,917,933
  

 

 

    

 

 

 

Outstanding shares

     26,927,115        26,914,516  

Restricted shares

     (76,000      (76,000
  

 

 

    

 

 

 

Unrestricted outstanding shares

     26,851,115        26,838,516  
  

 

 

    

 

 

 

Stock-based compensation

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

 

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Table of Contents

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

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

 

     SAR      RS Shares      RS Units  
     Shares      Weighted-Average
Grant Date
Fair Value
     Shares      Weighted-Average
Grant Date
Fair Value
     Units     Weighted-Average
Grant Date

Fair Value
 

Outstanding at December 31, 2016

     6,153      $ 113.36        76,000      $ 110.73        100,445     $ 105.97  

Granted

     —          —          —          —          —         —    

Exercised

     —          —          —          —          (53,796     107.51  

Forfeited

     —          —          —          —          —         —    

Expired

     —          —          —          —          —         —    
  

 

 

       

 

 

       

 

 

   

Outstanding at March 31, 2017

     6,153      $ 113.36        76,000      $ 110.73        46,649     $ 104.20  
  

 

 

       

 

 

       

 

 

   

 

     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     0.69        2.88        1.46  

Exercisable shares

     6,153        N/A        N/A  

Weighted-average exercise price

   $ 113.36      $ 110.73      $ 104.20  

Weighted-average exercise price exercisable shares

     113.36        N/A        N/A  

Compensation expense (credit)

        

Three months ended March 31, 2017

   $ (35,000    $ 207,000      $ 130,000  

Three months ended March 31, 2016

     33,000        210,000        4,102,000  

Fair value of liability award

        

March 31, 2017

   $ 44,000        N/A      $ 16,914,000  

December 31, 2016

     213,000        N/A        23,634,000  

The SARs give the holder the right to cash compensation based on the difference between the stock price on the grant date and the stock price on the exercise date. The SARs vest at a rate of 20% per year for five years and expire five years after vesting.

RS awards entitle the participant to full dividend and voting rights. Each RS share awarded has the value of one share of restricted stock and vests 10 years from the grant date. Unvested shares are restricted as to disposition, and are subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years and most of these awards feature a graded vesting schedule in the case of the retirement, death or disability of an award holder. Restricted stock awards for 350,334 shares have been granted at an exercise price of zero, of which 76,000 shares are unvested.

RSU awards allow the recipient of the awards to settle the vested RSUs in either shares of American National’s common stock or cash. RSUs granted vest after a one-year or three-year graded vesting requirement or over a shorter period as a result of death, disability or retirement after age 65.

 

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Table of Contents

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

Earnings per share

Basic earnings per share were calculated using a weighted average number of shares outstanding. Diluted earnings per share include RS and RSU award shares.

 

     Three months ended March 31,  
     2017      2016  

Weighted average shares outstanding

     26,899,648        26,909,511  

Incremental shares from RS awards and RSUs

     72,480        56,456  
  

 

 

    

 

 

 

Total shares for diluted calculations

     26,972,128        26,965,967  
  

 

 

    

 

 

 

Net income attributable to American National (in thousands)

   $ 39,840      $ 29,316  

Basic earnings per share

   $ 1.48      $ 1.09  

Diluted earnings per share

     1.48        1.09  

Statutory Capital and Surplus

Risk Based Capital (“RBC”) is a measure insurance regulators use to evaluate the capital adequacy of American National Insurance Company and its insurance subsidiaries. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level at least 200% of the authorized control level RBC are required to take certain actions. At March 31, 2017 and December 31, 2016, American National Insurance Company’s statutory capital and surplus was $3,013,270,000 and $2,985,909,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2017 and December 31, 2016, substantially above 200% of the authorized control level.

American National and its insurance subsidiaries prepare statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile, which include certain components of the National Association of Insurance Commissioners’ Codification of Statutory Accounting Principles (“NAIC Codification”). NAIC Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting practices continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the statutory capital and surplus of American National Insurance Company and its insurance subsidiaries.

Statutory accounting differs from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, and valuing securities on a different basis. In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus.

One of American National’s insurance subsidiaries has been granted a permitted practice from the Missouri Department of Insurance to record as the valuation of its investment in a wholly-owned subsidiary that is the attorney-in-fact for a Texas domiciled insurer, the statutory capital and surplus of the Texas domiciled insurer. This permitted practice increases the statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary by $66,089,000 and $67,115,000 at March 31, 2017 and March 31, 2016, respectively. The statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary would have remained substantially above the company action level RBC had it not used the permitted practice.

 

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Table of Contents

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

 

The statutory capital and surplus and net income of our life and property and casualty insurance entities in accordance with statutory accounting practices are shown below (in thousands):

 

     March 31,
2017
     December 31,
2016
 

Statutory capital and surplus

     

Life insurance entities

   $ 1,938,251      $ 1,921,171  

Property and casualty insurance entities

     1,084,896        1,074,525  
     Three months ended March 31,  
     2017      2016  

Statutory net income

     

Life insurance entities

   $ 2,467      $ 3,927  

Property and casualty insurance entities

     6,811        4,548  

Dividends

American National Insurance Company’s payment of dividends to stockholders is restricted by insurance law. The restrictions require life insurance companies to maintain minimum amounts of capital and surplus, and in the absence of special approval, limit the payment of dividends to the greater of the prior year’s statutory net income from operations, or 10% of prior year statutory surplus. American National Insurance Company is permitted to pay total dividends of $298,591,000 during 2017, without prior approval of the Texas Department of Insurance. Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to American National Insurance Company apply to its insurance subsidiaries.

Noncontrolling interests

American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company that is owned by its policyholders. American National has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at March 31, 2017 and December 31, 2016.

American National Insurance Company and its subsidiaries exercise significant control or ownership of various joint ventures, resulting in their consolidation into American National’s consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as noncontrolling interests of $1,896,000 and $2,567,000 at March 31, 2017 and December 31, 2016, respectively.

 

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Table of Contents

Note 15 – Segment Information

Management organizes the business into five operating segments:

 

    Life—markets whole, term, universal, indexed and variable life insurance on a national basis primarily through career, multiple-line, and independent agents as well as direct marketing channels.

 

    Annuity—offers fixed, indexed, and variable annuity products. These products are primarily sold through independent agents, brokers, and financial institutions, along with multiple-line and career agents.

 

    Health—primary lines of business are Medicare supplement, stop loss, other supplemental health products and credit disability insurance. Health products are typically distributed through independent agents and managing general underwriters.

 

    Property and Casualty—writes personal, agricultural and targeted commercial coverages and credit-related property insurance. These products are primarily sold through multiple-line and independent agents.

 

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

The accounting policies of the segments are the same as those described in Note 2 to American National’s 2016 annual report on Form 10-K. All revenues and expenses specifically attributable to policy transactions are recorded directly to the appropriate operating segment. Revenues and expenses not specifically attributable to policy transactions are allocated to each segment as follows:

 

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

 

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

 

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

The following summarizes the results of operations measured as the income before federal income taxes, and equity in earnings of unconsolidated affiliates by operating segments (in thousands):

 

     Three months ended March 31,  
     2017      2016  

Life

   $ 7,487      $ (3,481

Annuity

     23,753        17,971  

Health

     2,057        (634

Property and Casualty

     2,423        6,990  

Corporate and Other

     7,043        2,662  
  

 

 

    

 

 

 

Total

   $ 42,763      $ 23,508  
  

 

 

    

 

 

 

 

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Table of Contents

Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at March 31, 2017, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $988,951,000 of which $715,013,000 is expected to be funded in 2017 with the remainder funded in 2018 and beyond.

American National has a $100,000,000 short-term variable rate borrowing facility containing a $55,000,000 sub-feature for the issuance of letters of credit. Borrowings under the facility are at the discretion of the lender and would be used only for funding working capital requirements. The combination of borrowings and outstanding letters of credit cannot exceed $100,000,000 at any time. As of March 31, 2017 and December 31, 2016, the outstanding letters of credit were $9,548,000 and $9,473,000, respectively, and there were no borrowings on this facility. This facility expires on October 30, 2017. American National expects it will be renewed on substantially equivalent terms upon expiration.

Guarantees

American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on a bank loan, American National would be obligated to pay off the loan. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of March 31, 2017, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $210,985,000.

Litigation

American National and certain subsidiaries, in common with the insurance industry in general, are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information presently available, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position, liquidity or results of operations; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future.

Such speculation warrants caution, as the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given lawsuit. These lawsuits are in various stages of development, and future facts and circumstances could result in management changing its conclusions. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than management can anticipate, the resulting liability could have a material impact on our consolidated financial position, liquidity or results of operations. With respect to the existing litigation, management currently believes that the possibility of a material judgment adverse to American National is remote and no estimate of range can be made for loss contingencies that are at least reasonably possible but not accrued.

One-Time Pension Payout Window

The one-time window offering to terminated, vested participants of our qualified defined benefit pension plans allowing participants to take a lump sum or annuity payout of their pension benefit, closed in March 2017. Payments to participants that elected to take a lump sum payout were made from pension plan assets in April, 2017. A portion of the pension actuarial loss included in Accumulated Other Comprehensive Income will be recognized as pension costs in proportion to the reduction of the pension plans’ total benefit obligations. The after-tax expense expected to be recognized in the second quarter is estimated as $5,000,000.

 

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Note 17 – Related Party Transactions

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

 

          Dollar Amount of
Transactions
     Amount due to (from)
American National
 
          Three months
ended March 31,
     March 31,
2017
    December 31,
2016
 

Related Party

  

Financial Statement Line Impacted

   2017      2016       

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 373      $ 347      $ 3,383     $ 3,756  

Gal-Tex Hotel Corporation

   Net investment income      66        92        20       23  

Greer, Herz & Adams, LLP

   Other operating expenses      2,527        2,550        (401     (283

Mortgage Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National holds a first mortgage loan originated in 1999, with an interest rate of 7.25% and final maturity date of April 1, 2019 issued to a subsidiary of Gal-Tex, which is collateralized by a hotel property in San Antonio, Texas. This loan is current as to principal and interest payments.

Transactions with Greer, Herz & Adams, LLP: Irwin M. Herz, Jr. is an American National advisory director and a Partner with Greer, Herz & Adams, LLP, which serves as American National’s General Counsel.

 

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

Set forth on the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three months ended March 31, 2017 and 2016 of American National Insurance Company and its subsidiaries (referred to in this document as “we”, “our”, “us”, or the “Company”). This information should be read in conjunction with our consolidated financial statements included in Item 1, Financial Statements (unaudited), of this Form 10-Q.

Forward-Looking Statements

This document contains forward-looking statements that reflect our estimates and assumptions related to business, economic, competitive and legislative developments. Forward-looking statements generally are indicated by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “estimates,” “will” or words of similar meaning and include, without limitation, statements regarding the outlook of our business and expected financial performance. Forward-looking statements are not guarantees of future performance and involve various risks and uncertainties. Moreover, forward-looking statements speak only as of the date made, and we undertake no obligation to update them. Certain important factors could cause our actual results to differ, possibly materially, from our expectations or estimates. These factors are described in greater detail in Item IA, Risk Factors, in our 2016 Annual Report on Form 10-K filed with the SEC on March 10, 2017, and they include among others:

 

    Economic & Investment Risk Factors

 

    difficult conditions in the economy, which may not improve in the near future, and risks related to persistently low or unpredictable interest rates;

 

    fluctuations in the markets for fixed maturity securities, equity securities, and commercial real estate, which could adversely affect the valuation of our investment portfolio, our net investment income, our retirement expense, and sales of or fees from certain of our products;

 

    lack of liquidity for certain of our investments;

 

    risk of investment losses and defaults;

 

    Operational Risk Factors

 

    differences between actual experience regarding mortality, morbidity, persistency, expense, surrenders and investment returns, and our assumptions for product pricing, establishing liabilities and reserves or for other purposes;

 

    potential ineffectiveness of our risk management policies and procedures;

 

    changes in our experience related to deferred policy acquisition costs;

 

    failures or limitations of our computer, data security and administration systems;

 

    potential employee error or misconduct, which may result in fraud or adversely affect the execution and administration of our policies and claims;

 

    the material weakness in our internal controls over financial reporting, as discussed in Item 4 below;

 

    Catastrophic Event Risk Factors

 

    natural or man-made catastrophes, pandemic disease, or other events resulting in increased claims activity from catastrophic loss of life or property;

 

    the effects of unanticipated events on our disaster recovery and business continuity planning;

 

    Marketplace Risk Factors

 

    the highly competitive nature of the insurance and annuity business;

 

    potential difficulty in attraction and retention of qualified employees and agents;

 

    the introduction of alternative healthcare solutions or changes in federal healthcare policy, both of which could impact our supplement healthcare business;

 

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    Litigation and Regulation Risk Factors

 

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

 

    significant changes in government regulation;

 

    changes in tax law;

 

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

 

    Reinsurance and Counterparty Risk Factors

 

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

 

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

 

    Other Risk Factors

 

    potentially adverse rating agency actions; and

 

    control of our company by a small number of stockholders.

Revision to Previously Reported Amounts

Correction of an Immaterial Error. During the fourth quarter of 2016, the Company revised previously reported amounts to include cash held in a bank custody account representing collateral provided to us by third parties for equity-option derivative transactions. In accordance with Staff Accounting Bulletin (“SAB”) No. 99, Materiality, and SAB No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management evaluated the materiality of the error from qualitative and quantitative perspectives, and concluded the error was immaterial to the current and prior periods. The correction of the immaterial error revised the consolidated statements of financial position and statements of cash flows as disclosed in our 2016 Annual Report on Form 10-K filed with the SEC on March 10, 2017. Detail regarding the revision amounts is included in Part I, Item 1, Note 2 - Summary of Significant Accounting Policies and Practices, of the Notes to the Unaudited Consolidated Financial Statements.

Overview

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

General Trends

American National had no material changes to the general trends, as discussed in the MD&A included in our 2016 Annual Report on Form 10-K filed with the SEC on March 10, 2017.

 

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Critical Accounting Estimates

The unaudited interim consolidated financial statements have been prepared in conformity with GAAP. In addition to GAAP, insurance companies apply specific SEC regulations when preparing the consolidated financial statements. The preparation of the consolidated financial statements and notes requires us to make estimates and assumptions that affect the amounts reported. Actual results could differ from results reported using those estimates and assumptions. Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity, persistency, expenses, interest rates, and property and casualty loss frequency, severity, claim reporting and settlement patterns. Due to the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could vary from those reported in the consolidated financial statements.

For a discussion of our critical accounting estimates, see the MD&A in our 2016 Annual Report on Form 10-K filed with the SEC on March 10, 2017. There have been no material changes in accounting policies since December 31, 2016.

Recently Issued Accounting Pronouncements

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

Consolidated Results of Operations

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

 

     Three months ended March 31,         
     2017      2016      Change  

Premiums and other revenues

        

Premiums

   $ 471,772      $ 490,999      $ (19,227

Other policy revenues

     63,452        64,347        (895

Net investment income

     228,503        196,054        32,449  

Realized investments gains (losses), net

     7,225        5,586        1,639  

Other income

     8,845        7,984        861  
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     779,797        764,970        14,827  
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     142,770        182,018        (39,248

Claims incurred

     252,058        244,250        7,808  

Interest credited to policyholders’ account balances

     96,008        76,527        19,481  

Commissions for acquiring and servicing policies

     125,491        112,884        12,607  

Other operating expenses

     130,194        130,376        (182

Change in deferred policy acquisition costs (1)

     (9,487      (4,593      (4,894
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     737,034        741,462        (4,428
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 42,763      $ 23,508      $ 19,255  
  

 

 

    

 

 

    

 

 

 

 

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

 

   A positive net change indicates less expense was amortized and represents an increase to expenses in the period indicated.

Consolidated earnings increased during the three months ended March 31, 2017 compared to 2016 primarily due to an increase in life earnings with a higher return on invested assets and an increase in annuity earnings.

 

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Life

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

 

     Three months ended March 31,         
     2017      2016      Change  

Premiums and other revenues

        

Premiums

   $ 77,474      $ 75,117      $ 2,357  

Other policy revenues

     59,909        61,608        (1,699

Net investment income

     62,209        54,184        8,025  

Other income

     616        593        23  
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     200,208        191,502        8,706  
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     99,108        100,771        (1,663

Interest credited to policyholders’ account balances

     15,405        16,085        (680

Commissions for acquiring and servicing policies

     34,810        29,794        5,016  

Other operating expenses

     51,255        51,379        (124

Change in deferred policy acquisition costs (1)

     (7,857      (3,046      (4,811
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     192,721        194,983        (2,262
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 7,487      $ (3,481    $ 10,968  
  

 

 

    

 

 

    

 

 

 

 

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

 

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

Earnings increased during the three months ended March 31, 2017 compared to 2016 primarily due to a higher return on invested assets. In addition, an expense was incurred in 2016 relating to certain policies that lapsed with insufficient value to cover their outstanding policy loan balances.

Premiums and other revenues

Premiums increased during the three months ended March 31, 2017 compared to 2016 primarily due to continued growth in renewal premium on our traditional life products. Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies.

Life insurance sales

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

 

     Three months ended March 31,         
     2017      2016      Change  

Traditional Life

   $ 14,265      $ 13,539      $ 726  

Universal Life

     5,325        4,158        1,167  

Indexed UL

     5,909        5,078        831  
  

 

 

    

 

 

    

 

 

 

Total Recurring

   $ 25,499      $ 22,775      $ 2,724  
  

 

 

    

 

 

    

 

 

 

Single and excess

   $ 601      $ 423      $ 178  

Credit life

     1,009        880        129  

 

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Life insurance sales are based on the total yearly premium that insurance companies would expect to receive if all recurring premium policies would remain in force, plus 10% of single and excess premiums and 15% of credit life premium. Life insurance sales measure activity associated with gaining new insurance business in the current period, and includes deposits received related to interest sensitive life and universal life-type products.

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

Life insurance sales increased for all major lines during the three months ended March 31, 2017 compared to 2016.

Benefits, losses and expenses

Policyholder benefits decreased during the three months ended March 31, 2017 compared to 2016 primarily due to an expense incurred in 2016 relating to certain policies that lapsed with insufficient value to cover their outstanding policy loan balances.

Commissions increased during the three months ended March 31, 2017 compared to 2016 commensurate with the increase in sales.

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

 

     Three months ended March 31,         
     2017      2016      Change  

Acquisition cost capitalized

   $ 29,046      $ 25,217      $ 3,829  

Amortization of DAC

     (21,189      (22,171      982  
  

 

 

    

 

 

    

 

 

 

Change in DAC

   $ 7,857      $ 3,046      $ 4,811  
  

 

 

    

 

 

    

 

 

 

Policy in-force information

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

 

     March 31,
2017
     December 31,
2016
     Change  

Life insurance in-force

        

Traditional life

   $ 68,728,895      $ 67,649,433      $ 1,079,462  

Interest-sensitive life

     28,288,115        27,971,646        316,469  
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 97,017,010      $ 95,621,079      $ 1,395,931  
  

 

 

    

 

 

    

 

 

 

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

 

     March 31,
2017
     December 31,
2016
     Change  

Number of policies in-force

        

Traditional life

     1,830,555        1,841,359        (10,804

Interest-sensitive life

     225,400        222,845        2,555  
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,055,955        2,064,204        (8,249
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the three months ended March 31, 2017 compared to December 31, 2016, while the total number of policies decreased for the same periods, reflecting the transition to policies with higher face amounts.

 

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Annuity

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

 

     Three months ended March 31,         
     2017      2016      Change  

Premiums and other revenues

        

Premiums

   $ 29,809      $ 70,208      $ (40,399

Other policy revenues

     3,543        2,739        804  

Net investment income

     139,677        116,896        22,781  

Other income

     665        960        (295
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     173,694        190,803        (17,109
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Policyholder benefits

     43,662        81,247        (37,585

Interest credited to policyholders’ account balances

     80,603        60,442        20,161  

Commissions for acquiring and servicing policies

     17,284        21,908        (4,624

Other operating expenses

     11,023        13,158        (2,135

Change in deferred policy acquisition costs (1)

     (2,631      (3,923      1,292  
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     149,941        172,832        (22,891
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 23,753      $ 17,971      $ 5,782  
  

 

 

    

 

 

    

 

 

 

 

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

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

Earnings increased during the three months ended March 31, 2017 compared to 2016 primarily due to increased assets, as measured by account value and reserves, leading to an increase in margins earned on net investment income. Additionally, lower than expected surrenders in 2017 led to less DAC amortization expense.

Premiums and other revenues

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

 

     Three months ended March 31,         
     2017      2016      Change  

Fixed deferred annuity

   $ 147,202      $ 184,156      $ (36,954

Single premium immediate annuity

     36,177        78,612        (42,435

Equity-indexed deferred annuity

     132,901        141,979        (9,078

Variable deferred annuity

     20,306        19,889        417  
  

 

 

    

 

 

    

 

 

 

Total premium and deposits

     336,586        424,636        (88,050

Less: Policy deposits

     306,777        354,428        (47,651
  

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 29,809      $ 70,208      $ (40,399
  

 

 

    

 

 

    

 

 

 

Annuity premiums were down in the first quarter 2017 compared to 2016 primarily in the fixed deferred annuity and SPIA products. These reductions are attributed to the competitiveness of our interest crediting rates, primarily in the early part of the first quarter 2017. Sales strengthened during the first quarter led by the fixed deferred annuity product.

 

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

 

     Three months ended March 31,  
     2017      2016  

Fixed deferred and equity-indexed annuity

     

Account value, beginning of period

   $ 9,118,350      $ 8,880,448  

Net inflows

     212,995        253,769  

Surrenders

     (199,701      (202,981

Fees

     (1,882      (1,506

Interest credited

     79,001        57,558  
  

 

 

    

 

 

 

Account value, end of period

     9,208,763        8,987,288  
  

 

 

    

 

 

 

Single premium immediate annuity

     

Reserve, beginning of period

     1,566,440        1,398,481  

Net inflows

     (8,110      38,768  

Interest and mortality

     15,136        14,031  
  

 

 

    

 

 

 

Reserve, end of period

     1,573,466        1,451,280  
  

 

 

    

 

 

 

Variable deferred annuity

     

Account value, beginning of period

     392,345        417,821  

Net inflows

     17,004        19,070  

Surrenders

     (40,037      (24,499

Fees

     (1,155      (1,167

Change in market value and other

     20,454        (3,468
  

 

 

    

 

 

 

Account value, end of period

     388,611        407,757  
  

 

 

    

 

 

 

Total account value, end of period

   $ 11,170,840      $ 10,846,325  
  

 

 

    

 

 

 

Benefits, losses and expenses

Policyholder benefits consist of annuity payments and reserve increases for SPIA contracts. Reserve increases are highly correlated to the sales volume of SPIA contracts. The decrease in the level of benefits for the three months ended March 31, 2017 was commensurate with decreases in SPIA premium relative to prior year.

Commissions decreased during the three months ended March 31, 2017 compared to 2016 driven by the decrease in annuity sales.

Other operating expenses decreased during three months ended March 31, 2017 compared to 2016 as annuity volume decreased.

The change in DAC represents acquisition costs capitalized less the amortization of existing DAC, which is calculated in proportion to expected gross profits. The following shows the components of the change in DAC (in thousands):

 

     Three months ended March 31,         
     2017      2016      Change  

Acquisition cost capitalized

   $ 17,846      $ 20,946      $ (3,100

Amortization of DAC

     (15,215      (17,023      1,808  
  

 

 

    

 

 

    

 

 

 

Change in DAC

   $ 2,631      $ 3,923      $ (1,292
  

 

 

    

 

 

    

 

 

 

The change in DAC decreased during the three months ended March 31, 2017 compared to 2016 due to a decrease in capitalization which is primarily driven by the decrease in commissions.

The amortization of DAC as a percentage of gross profits is an important ratio for the Annuity segment. Changes in this ratio reflect the impact of emerging experience. The ratios for the three months ended March 31, 2017 and 2016 were 30.8% and 34.7% respectively. The favorable decrease in the 2017 ratio is due to lower than expected surrenders in 2017.

 

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Options and Derivatives

Net investment income without equity-indexed options or “option return” remained relatively flat for the three months ended March 31, 2017 compared to 2016.

The S&P 500 Index increased by approximately 5.5% and 0.8% in the three months ended March 31, 2017 and 2016, respectively. This change in index performance led to an increase in the option return of $23.2 million during the three months ended March 31, 2017 compared to 2016, offset by a $24.7 million increase in the related equity-indexed embedded derivative for a net decrease in earnings of $1.5 million.

The following table summarizes the incremental impact of the investment performance of “option return” on net investment income, and the impact of the equity-indexed annuity embedded derivatives to interest credited to policyholder’s account balances (in thousands):

 

     Three months ended March 31,         
     2017      2016      Change  

Net investment income

        

Without option return

   $ 119,501      $ 119,953      $ (452

Option return

     20,176        (3,057      23,233  

Interest credited to policy account balances

        

Without embedded derivatives

     58,210        62,751        (4,541

Equity-indexed annuity embedded derivatives

     22,393        (2,309      24,702  

Health

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

 

     Three months ended March 31,         
     2017      2016      Change  

Premiums and other revenues

        

Premiums

   $ 37,039      $ 42,313      $ (5,274

Net investment income

     2,507        2,449        58  

Other income

     4,346        4,179        167  
  

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     43,892        48,941        (5,049
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Claims incurred

     24,528        32,292        (7,764

Commissions for acquiring and servicing policies

     5,890        4,878        1,012  

Other operating expenses

     10,085        10,832        (747

Change in deferred policy acquisition costs (1)

     1,332        1,573        (241
  

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     41,835        49,575        (7,740
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 2,057      $ (634    $ 2,691  
  

 

 

    

 

 

    

 

 

 

 

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

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

Premiums decreased and earnings increased during the three months ended March 31, 2017 compared to 2016, primarily due to the absence of group major medical plans with losses that were not renewed effective January 1, 2017.

 

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Premiums and other revenues

Health earned premiums for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,  
     2017     2016  

Medicare Supplement

   $ 16,451        44.4   $ 17,640        41.7

Credit accident and health

     4,768        12.9       2,791        6.6  

MGU

     4,513        12.2       3,419        8.1  

Supplemental insurance

     6,219        16.8       5,257        12.4  

Medical expense

     3,213        8.7       3,700        8.7  

Group health

     623        1.7       8,231        19.5  

All other

     1,252        3.3       1,275        3.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 37,039        100.0   $ 42,313        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Earned premiums decreased during the three months ended March 31, 2017 compared to 2016 primarily due to the non-renewal of a group health plan included in 2016 health results. Credit accident and health increased primarily due to the onboarding of new producers writing new credit business. Supplement Insurance increased due to increased sales in group worksite health benefit programs.

Our in-force certificates or policies as of the dates indicated are as follows:

 

     Three months ended March 31,  
     2017     2016  

Medicare Supplement

     33,690        7.0     34,365        6.5

Credit accident and health

     189,038        39.5       196,104        37.2  

MGU

     157,582        32.8       179,406        34.1  

Supplemental insurance

     49,937        10.4       61,097        11.6  

Medical expense

     2,126        0.4       2,477        0.5  

Group health

     14,915        3.1       16,756        3.2  

All other

     32,812        6.8       36,408        6.9  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     480,100        100.0     526,613        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total in-force policies decreased during the three months ended March 31, 2017 compared to 2016, primarily due to the decrease in the MGU line, Supplemental Insurance, and continued shrinkage of the closed Medical Expense and All Other blocks. Although Supplemental Insurance sales began to increase, policy counts decreased due to termination of a large accidental death and dismemberment group coverage with low coverage amounts.

Benefits, losses and expenses

Claims incurred decreased during the three months ended March 31, 2017 compared to 2016 due to the non-renewal of a group health plan included in 2016 health results.

Commissions increased slightly during the three months ended March 31, 2017 compared to 2016 primarily due to increased sales in Credit accident and health and Supplemental Insurance.

 

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Change in Deferred Policy Acquisition Costs

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

 

     Three months ended March 31,         
     2017      2016      Change  

Acquisition cost capitalized

   $ 2,871      $ 3,980      $ (1,109

Amortization of DAC

     (4,203      (5,553      1,350  
  

 

 

    

 

 

    

 

 

 

Change in DAC

   $ (1,332    $ (1,573    $ 241  
  

 

 

    

 

 

    

 

 

 

Property and Casualty

Property and Casualty results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,        
     2017     2016     Change  

Premiums and other revenues

      

Net premiums written

   $ 350,112     $ 313,345     $ 36,767  
  

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 327,450     $ 303,361     $ 24,089  

Net investment income

     14,040       14,912       (872

Other income

     1,938       990       948  
  

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     343,428       319,263       24,165  
  

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

      

Claims incurred

     227,530       211,958       15,572  

Commissions for acquiring and servicing policies

     67,508       56,306       11,202  

Other operating expenses

     46,298       43,206       3,092  

Change in deferred policy acquisition costs (1)

     (331     803       (1,134
  

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     341,005       312,273       28,732  
  

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 2,423     $ 6,990     $ (4,567
  

 

 

   

 

 

   

 

 

 

Loss ratio

     69.5     69.9     (0.4

Underwriting expense ratio

     34.7       33.1       1.6  
  

 

 

   

 

 

   

 

 

 

Combined ratio

     104.2     103.0     1.2  
  

 

 

   

 

 

   

 

 

 

Impact of catastrophe events on combined ratio

     8.2       7.4       0.8  
  

 

 

   

 

 

   

 

 

 

Combined ratio without impact of catastrophe events

     96.0     95.6     0.4  
  

 

 

   

 

 

   

 

 

 

Gross catastrophe losses

   $ 26,772     $ 22,327     $ 4,445  

Net catastrophe losses

     26,775       22,143       4,632  

 

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

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

Property and Casualty results decreased during the three months ended March 31, 2017 compared to 2016 primarily due to increased catastrophe losses impacting the homeowners and agribusiness lines.

Premiums and other revenues

Net premiums written and earned increased during three months ended March 31, 2017 compared to 2016 for all major lines of business. The largest increases were in the personal automobile and other commercial lines of business.

 

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Benefits, losses and expenses

Claims incurred increased during the three months ended March 31, 2017 compared to 2016, as a result of increases in catastrophe losses as well as non-catastrophe property losses.

Commissions for acquiring and servicing policies increased during the three months ended March 31, 2017 compared to 2016, primarily as result of the premium growth as well as the mix of products.

Operating expenses increased during the three months ended March 31, 2017 compared to 2016, as a result of costs related to growth initiatives.

Products

Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 53.9% of net premiums written; (ii) Commercial products, which focus primarily on agricultural and other markets, representing 33.8% of net premiums written; and (iii) Credit-related property insurance products, which are marketed to and through financial institutions and retailers, representing 12.3% of net premiums written.

 

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Personal Products

Personal Products results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,        
     2017     2016     Change  

Net premiums written

      

Automobile

   $ 122,865     $ 110,043     $ 12,822  

Homeowner

     54,456       49,879       4,577  

Other Personal

     11,465       10,944       521  
  

 

 

   

 

 

   

 

 

 

Total net premiums written

   $ 188,786     $ 170,866     $ 17,920  
  

 

 

   

 

 

   

 

 

 

Net premiums earned

      

Automobile

   $ 112,949     $ 103,869     $ 9,080  

Homeowner

     58,925       55,959       2,966  

Other Personal

     10,507       10,366       141  
  

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 182,381     $ 170,194     $ 12,187  
  

 

 

   

 

 

   

 

 

 

Loss ratio

      

Automobile

     75.2     81.8     (6.6 )% 

Homeowner

     78.1       65.3       12.8  

Other Personal

     55.3       34.2       21.1  

Personal line loss ratio

     75.0     73.5     1.5

Combined Ratio

      

Automobile

     99.7     109.0     (9.3 )% 

Homeowner

     114.9       95.2       19.7  

Other Personal

     98.8       62.1       36.7  

Personal line combined ratio

     104.6     101.6     3.0

Automobile: Net premiums written and earned increased in our personal automobile line during the three months ended March 31, 2017 compared to 2016, due to an increase of policies in force and rate increases. The loss and combined ratio decreased during the three months ended March 31, 2017 compared to 2016 primarily due to the decrease in a frequency and severity of claims and catastrophe losses compared to prior year.

Homeowners: Net premiums written and earned increased during the three months ended March 31, 2017 compared to 2016 primarily due to increased sales of homeowner products to renters. The loss and combined ratios increased during the three months ended March 31, 2017 compared to 2016, due to an increase in catastrophe claim activity compared to the prior year.

Other Personal: These products include watercraft, rental-owner and umbrella coverages for individuals seeking to protect their personal property and liability not covered within their home and auto policies. The loss and combined ratios increased during the three months ended March 31, 2017 compared to 2016 due to an umbrella claim re-designation from personal lines to commercial lines during 2016. The 2017 results reflect a return to what has been a typical loss ratio.

 

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Commercial Products

Commercial Products results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,    

 

 
     2017     2016     Change  

Net premiums written

      

Other Commercial

   $ 54,150     $ 45,612     $ 8,538  

Agricultural Business

     34,480       32,908       1,572  

Automobile

     29,779       27,964       1,815  
  

 

 

   

 

 

   

 

 

 

Total net premiums written

   $ 118,409     $ 106,484     $ 11,925  
  

 

 

   

 

 

   

 

 

 

Net premiums earned

      

Other Commercial

   $ 44,962     $ 38,709     $ 6,253  

Agricultural Business

     33,663       31,888       1,775  

Automobile

     23,979       22,696       1,283  
  

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 102,604     $ 93,293     $ 9,311  
  

 

 

   

 

 

   

 

 

 

Loss ratio

      

Other Commercial

     54.6     69.5     (14.9

Agricultural Business

     87.2       79.6       7.6  

Automobile

     69.5       74.1       (4.6

Commercial line loss ratio

     68.8     74.1     (5.3

Combined ratio

      

Other Commercial

     88.7     101.8     (13.1

Agricultural Business

     125.4       118.0       7.4  

Automobile

     94.8       99.0       (4.2

Commercial line combined ratio

     102.2     106.6     (4.4

Other Commercial: Net premiums written and earned increased during the three months ended March 31, 2017 compared to 2016 primarily due to increased sales of mortgage security insurance and workers’ compensation. The decrease in the loss and combined ratios for the three months ended March 31, 2017 compared to 2016 are primarily due to decreased claim activity on the workers compensation and business owners’ lines of business.

Agricultural Business: Our agricultural business product allows policyholders to customize and cover their agriculture exposure using a package policy which includes coverage for residences and household contents, farm buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased during the three months ended March 31, 2017 compared to 2016 primarily as a result of improved rate adequacy. The loss and combined ratios increased during the three months ended March 31, 2017 compared to 2016 primarily due to an increase in catastrophe losses as well as non-catastrophe property losses.

Commercial Automobile: Net premiums written and earned increased during the three months ended March 31, 2017 compared to 2016, primarily due to improved rate adequacy. The loss and combined ratios decreased during the three months ended March 31, 2017 compared to 2016 primarily due to a decrease in the average severity of losses.

 

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Credit Products

Credit-related property product results for the periods indicated were as follows (in thousands, except percentages):

 

     Three months ended March 31,        
     2017     2016     Change  

Net premiums written

   $ 42,917     $ 35,995     $ 6,922  

Net premiums earned

     42,465       39,874       2,591  

Loss ratio

     47.5     44.7     2.8

Combined ratio

     106.7     102.5     4.2

Credit-related property products are offered on automobiles, furniture and appliances in connection with the financing of those items. These policies pay an amount if the insured property is lost or damaged and the amount paid is not directly related to an event affecting the consumer’s ability to pay the debt.

Net written and earned premiums increased during the three months ended March 31, 2017 compared to 2016 primarily due to increases in our Collateral Protection and debt cancellation business. The loss and combined ratio increased during the three months ended March 31, 2017 compared to 2016 primarily due to an increase in claims in our Guaranteed Auto Protection (GAP) business.

Corporate and Other

Corporate and Other segment financial results for the periods indicated were as follows (in thousands):

 

     Three months ended March 31,         
     2017      2016      Change  

Other revenues

        

Net investment income

   $ 10,070      $ 7,613      $ 2,457  

Realized investment gains (losses), net

     7,225        5,586        1,639  

Other Income

     1,280        1,262        18  
  

 

 

    

 

 

    

 

 

 

Total other revenues

     18,575        14,461        4,114  
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

        

Commissions

     (1      (2      1  

Other operating expenses

     11,533        11,801        (268
  

 

 

    

 

 

    

 

 

 

Total benefits, losses and expenses

     11,532        11,799        (267
  

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 7,043      $ 2,662      $ 4,381  
  

 

 

    

 

 

    

 

 

 

Earnings increased during the three months ended March 31, 2017 compared to 2016 primarily due to an increase in net investment income. The increase in net investment income is primarily attributable to real estate investments.

Investments

We manage our investment portfolio to optimize the rate of return commensurate with sound and prudent asset selection and to maintain a well-diversified portfolio. Our investment operations are regulated primarily by the state insurance departments where our insurance companies are domiciled. Investment activities, including setting investment policies and defining acceptable risk levels, are subject to oversight by our Board of Directors, which is assisted by our Finance Committee and Management Risk Committee.

Our insurance and annuity products are supported by investment-grade bonds and commercial mortgage loans. We also invest in equity options as a hedge for our indexed products. We purchase fixed maturity securities and designate them as either held-to-maturity or available-for-sale considering our estimated future cash flow needs. We also monitor the composition of our fixed maturity securities classified as held-to-maturity and available-for-sale and adjust the mix within the portfolio as investments mature or new investments are purchased.

 

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We invest in commercial mortgage loans when the yield and credit risk compare favorably with fixed maturity securities. Individual residential mortgage loans including sub-prime or Alt-A mortgage loans have not been and are not expected to be part of our investment portfolio. We purchase real estate and equity investments based on a risk and reward analysis where we believe there are opportunities for enhanced returns.

The following summarizes the carrying values of our invested assets (other than investments in unconsolidated affiliates) by asset class (in thousands, except percentages):

 

     March 31, 2017     December 31, 2016  

Bonds held-to-maturity, at amortized cost

   $ 7,063,930        34.3   $ 7,251,385        35.8

Bonds available-for-sale, at fair value

     5,900,702        28.7       5,803,276        28.7  

Equity securities, at fair value

     1,616,318        7.9       1,541,676        7.6  

Mortgage loans, net of allowance

     4,463,197        21.7       4,348,046        21.5  

Policy loans

     383,911        1.9       384,376        1.9  

Investment real estate, net of accumulated depreciation

     586,316        2.9       593,417        2.9  

Short-term investments

     411,949        2.0       192,226        1.0  

Other invested assets

     115,474        0.6       113,550        0.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 20,541,797        100.0   $ 20,227,952        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The increase in our total investments at March 31, 2017 compared to 2016 was primarily a result of the purchase of bonds available-for-sale, increased mortgage loan activity and an increase in short-term investments.

Bonds—We allocate most of our fixed maturity securities to support our insurance business. At March 31, 2017, our fixed maturity securities had an estimated fair value of $13.2 billion, which was $0.4 billion, or 3.4%, above amortized cost. At December 31, 2016, our fixed maturity securities had an estimated fair value of $13.3 billion, which was $0.4 billion, or 2.9%, above amortized cost. The estimated fair value for securities due in one year or less increased from $0.7 billion as of December 31, 2016 to $0.8 billion as of March 31, 2017, primarily as a result of maturities. For additional information regarding total bonds by credit quality rating refer to Note 4, Investments in Securities, of the Notes to the Unaudited Consolidated Financial Statements.

Equity Securities—We invest in companies publicly traded on national U.S. stock exchanges: See Note 4, Investments in Securities, of the Notes to the Unaudited Consolidated Financial Statements for the cost, gross unrealized gains and losses, and fair value of the equity securities.

Mortgage Loans— We invest in commercial mortgage loans that are diversified by property-type and geography. Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. Mortgage loans are carried at outstanding principal balances, adjusted for any unamortized premium or discount, deferred fees or expenses, and net of allowances. The weighted average coupon yield on the principal funded for mortgage loans was 4.7% at March 31, 2017 and December 31, 2016, respectively.

Policy Loans—For certain life insurance products, policyholders may borrow funds using the policy’s cash value as collateral. The maximum amount of the policy loan depends upon the policy’s surrender value. As of March 31, 2017, we had $383.9 million in policy loans with a loan to surrender value of 64.0%, and at December 31, 2016, we had $384.4 million in policy loans with a loan to surrender value of 64.6%. Interest rates on policy loans primarily range from 3.0% to 12.0% per annum. Policy loans may be repaid at any time by the policyholder and have priority to any claims on the policy. If the policyholder fails to repay the policy loan, funds are withdrawn from the policy’s benefits.

Investment Real Estate—We invest in commercial real estate where positive cash flows and/or appreciation in value is expected. Real estate may be owned directly by our insurance companies or non-insurance affiliates or indirectly in joint ventures with real estate developers or investors we determine share our perspective regarding risk and return relationships. The carrying value of real estate is stated at cost, less accumulated depreciation and valuation allowances, if any. Depreciation is provided over the estimated useful lives of the properties.

 

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Short-Term Investments—Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor’s and Moody’s, respectively. The amount fluctuates depending on our view of the desirability of investing in the available long-term investment opportunities and our liquidity needs, including mortgage investment-funding commitments.

Net Investment Income and Net Realized Gains (Losses)

Net investment income increased $32.4 million during the three months ended March 31, 2017 compared to 2016 primarily due to an increase in unrealized gains of equity-indexed options as a result of increases in the S&P 500. Equity-indexed options are recorded at fair value with changes in fair value recorded as investment income.

Interest income on mortgage loans is accrued on the principal amount of the loan at the contractual interest rate. Accretion of discounts is recorded using the effective yield method. Interest income, accretion of discounts and prepayment fees are reported in net investment income. Interest is not accrued on loans generally more than 90 days past due or when the collection of interest is not considered probable. Loans in foreclosure are placed on non-accrual status. Interest received on non-accrual status mortgage loans is included in net investment income in the period received.

Net realized gains increased $4.9 million during the three months ended March 31, 2017 compared to 2016. Other-than-temporary impairment on investment securities increased $3.3 million during three months ended March 31, 2017 compared to 2016.

Net Unrealized Gains and Losses

The unrealized gains and losses of our fixed maturity and equity securities investment portfolio are shown below (in thousands):

 

     March 31, 2017      December 31, 2016      Change  

Held-to-Maturity

        

Gains

   $ 290,503      $ 285,315      $ 5,188  

Losses

     (25,131      (40,008      14,877  
  

 

 

    

 

 

    

 

 

 

Net Gain

     265,372        245,307        20,065  
  

 

 

    

 

 

    

 

 

 

Available-for-Sale (1)

        

Gains

     1,072,378        986,635        85,743  

Losses

     (33,472      (43,100      9,628  
  

 

 

    

 

 

    

 

 

 

Net Gain

     1,038,906        943,535        95,371  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,304,278      $ 1,188,842      $ 115,436  
  

 

 

    

 

 

    

 

 

 

 

(1)  Includes bonds and equity securities

The net change in the unrealized gains on fixed maturity securities between December 31, 2016 and March 31, 2017 is primarily attributable to the decrease in interest rates. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.

The net unrealized gains of our equity securities were $868.5 million and $809.2 million at March 31, 2017 and December 31, 2016, respectively. The increase is attributable to favorable market conditions.

Liquidity

Our liquidity requirements have been and are expected to continue to be met by funds from operations, comprised of premiums received from our customers, collateral for derivative transactions, and investment income. The primary use of cash has been and is expected to continue to be payment of policyholder benefits and claims incurred. Current and expected patterns of claim frequency and severity may change from period to period but continue to be within historical norms. Management considers our current liquidity position to be sufficient to meet anticipated demands over the next twelve months. Our contractual obligations are not expected to have a significant negative impact to cash flow from operations.

 

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Changes in interest rates during 2017 and market expectations for potentially higher rates through 2018, may lead to an increase in the volume of annuity contracts, which may be partially offset by increases in surrenders. Our defined benefit plans are frozen and currently adequately funded; however, low interest rates, increased longevity of participants, and rising Pension Benefit Guaranty Corporation (PBGC) premiums may cause us to increase our funding of the plans. Future contributions to our defined benefit plans are not expected to significantly impact cash flow and are expected to enhance overall funded status of plans. No unusually large capital expenditures are expected in the next 12-24 months. We have paid dividends to stockholders for over 110 consecutive years and expect to continue this trend. There are no other known trends or uncertainties regarding product pricing, changes in product lines or rising costs that are expected to have a significant impact to cash flows from operations.

Funds received as premium payments and deposits are generally invested in bonds and commercial mortgages. Funds are invested with the intent that income from the investments and proceeds from the maturities will meet our ongoing cash flow needs. We historically have not had to liquidate invested assets in order to cover cash flow needs. We believe our portfolio of highly liquid available-for-sale investment securities, including equity securities, is sufficient to meet future liquidity needs as necessary.

The Company holds collateral to offset exposure from its derivative counterparties. Cash flows associated with collateral received from counterparties change as the market value of the underlying derivative contract changes. As the value of a derivative asset declines or increases, the collateral requirements would also decline or increase respectively. For more information, see Note 7, Derivative Instruments, of the Notes to the Unaudited Consolidated Financial Statements.

Our cash and cash equivalents and short-term investment position increased from $481.6 million at December 31, 2016 to $708.2 million at March 31, 2017.

A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flow from operations.

Further information regarding additional sources or uses of cash is described in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

Capital Resources

Our capital resources are summarized below (in thousands):

 

     March 31,
2017
     December 31,
2016
 

American National stockholders’ equity, excluding accumulated other comprehensive income, net of tax (“AOCI”)

   $ 4,215,807      $ 4,196,279  

AOCI

     513,457        455,899  
  

 

 

    

 

 

 

Total American National stockholders’ equity

   $ 4,729,264      $ 4,652,178  
  

 

 

    

 

 

 

We have notes payable relating to borrowings by real estate joint ventures that we consolidate into our financial statements that are not part of our capital resources. The lenders for the notes payable have no recourse against us in the event of default by the joint ventures. Therefore, the liability we have for these notes payable is limited to our investment in the respective ventures, which totaled $31.3 million and $31.8 million at March 31, 2017 and December 31, 2016, respectively.

 

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The changes in our capital resources are summarized below (in thousands):

 

     Three months ended March 31, 2017  
     Capital and
Retained
Earnings
     AOCI      Total  

Net income attributable to American National

   $ 39,840      $ —        $ 39,840  

Dividends to shareholders

     (22,080      —          (22,080

Change in net unrealized gains

     —          55,912        55,912  

Defined benefit pension plan adjustment

     —          1,534        1,534  

Foreign currency transaction and translation adjustment

     —          112        112  

Other

     1,768        —          1,768  
  

 

 

    

 

 

    

 

 

 

Total

   $ 19,528      $ 57,558      $ 77,086  
  

 

 

    

 

 

    

 

 

 

Statutory Capital and Surplus and Risk-based Capital

Statutory capital and surplus is the capital of our insurance companies reported in accordance with accounting practices prescribed or permitted by the applicable state insurance departments. RBC is calculated using formulas applied to certain financial balances and activities that consider, among other things, investment risks related to the type and quality of investments, insurance risks associated with products and liabilities, interest rate risks and general business risks. Insurance companies that do not maintain capital and surplus at a level of at least 200% of the authorized control level RBC are required to take certain actions. At March 31, 2017 and December 31, 2016, American National Insurance Company’s statutory capital and surplus was $3,013,270,000 and $2,985,909,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at March 31, 2017 and December 31, 2016, substantially above 200% of the authorized control level.

The achievement of long-term growth will require growth in American National Insurance Company’s and our insurance subsidiaries’ statutory capital and surplus. Our subsidiaries may obtain additional statutory capital through various sources, such as retained statutory earnings or equity contributions from us.

Contractual Obligations

Our future cash payments associated with claims and claims adjustment expenses, life, annuity and disability obligations, contractual obligations pursuant to operating leases for office space and equipment, and notes payable have not materially changed since December 31, 2016. We expect to have the capacity to pay our obligations as they come due.

One-Time Pension Payout Window

The one-time window offering to terminated, vested participants of our qualified defined benefit pension plans allowing participants to take a lump sum or annuity payout of their pension benefit, closed in March 2017. Payments to participants that elected to take a lump sum payout were made from pension plan assets in April, 2017. A portion of the pension actuarial loss included in Accumulated Other Comprehensive Income will be recognized as pension costs in proportion to the reduction of the pension plans’ total benefit obligations. The after-tax expense expected to be recognized in the second quarter is estimated as $5,000,000.

Off-Balance Sheet Arrangements

We have off-balance sheet arrangements relating to third-party marketing operation bank loans as discussed in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements. We could be exposed to a liability for these loans, which are supported by the cash value of the underlying insurance contracts. The cash value of the life insurance policies is designed to always equal or exceed the balance of the loans. Accordingly, management does not foresee any loss related to these arrangements.

 

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Related-Party Transactions

We have various agency, consulting and service arrangements with individuals and entities considered to be related parties. Each of these arrangements has been reviewed and approved by our Audit Committee, which retains final decision-making authority for these transactions. The amounts involved, both individually and in the aggregate, with these arrangements are not material to any segment or to our overall operations. For additional details see Note 17, Related Party Transactions, of the Notes to the Unaudited Consolidated Financial Statements.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our market risks have not changed materially from those disclosed in our 2016 Annual Report on Form 10-K filed with the SEC on March 10, 2017.

 

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

The Company’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of March 31, 2017. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2017, the design and operation of the Company’s disclosure controls and procedures were not effective because of the two material weaknesses disclosed in our 2016 Annual Report on Form 10-K. No additional material weaknesses in the Company’s disclosure controls and procedures were identified in the current evaluation.

Changes in Internal Control Over Financial Reporting

Management has monitored the internal controls over financial reporting, including any material changes to the internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting, other than changes in internal control related to the two material weaknesses identified in our Annual Report on form 10-K for the year ended December 31, 2016 as described below.

Remediation Actions

The Company is committed to remediating the material weaknesses in a timely manner. We have developed a remediation plan and are executing changes in our financial reporting processes and related internal controls to address the material weaknesses in internal control over financial reporting identified in our Annual Report on form 10-K for the year ended December 31, 2016. Specifically, we have begun and intend to continue to implement and monitor the following actions to accumulate adequate evidence over a reasonable period of time to determine that new or modified processes, procedures, controls and oversight relating to such controls are operating effectively.

 

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Deferred Income Taxes

 

    Engaging tax advisors to assist with enhancing internal controls over financial reporting for income taxes and developing and implementing a remediation plan;

 

    Hiring accountants with more expertise in federal income taxes and providing additional income tax accounting training to tax and financial personnel;

 

    Working with the investing and operating areas to enhance the quality of information, analysis, review and documentation provided to the tax department; and

 

    Reviewing the new tax processes and system, including controls, with necessary Company personnel, including relevant internal bodies responsible for testing internal controls.

Equity Option Derivatives Collateral

 

    Requiring notice of relevant facts from the investment area to Corporate Controllers when new investment arrangements or types are contemplated;

 

    In the event of any such new investment arrangements or types, requiring the Corporate Controllers area (with outside assistance when appropriate) to determine if existing accounting processes and policies are adequate and to specify new accounting processes as appropriate; and

 

    Verifying that the approved accounting is installed and operational by necessary Company personnel, including relevant internal bodies responsible for testing internal controls.

While management believes that significant progress has been made in enhancing internal controls as of March 31, 2017 and in the period since, the material weaknesses have not been fully remediated due to insufficient time to fully implement and assess the design and operating effectiveness of the related controls. Management, with oversight from the Company’s Audit Committee, will continue the process to enhance internal controls throughout 2017 and will make any further changes management deems appropriate.

 

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PART II OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

Information required for Item 1 is incorporated by reference to the discussion under the heading “Litigation” in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.

 

ITEM 1A. RISK FACTORS

There have been no material changes with respect to the risk factors as previously disclosed in our 2016 Annual Report on Form 10-K filed with the SEC on March 10, 2017.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

 

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

 

ITEM 5. OTHER INFORMATION

None

 

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ITEM 6. EXHIBITS

 

Exhibit
Number
   Basic Documents
3.1    Restated Articles of Incorporation, as amended (incorporated by reference to Exhibit No. 3.1 to the registrant’s Registration Statement on Form 10-12B filed April 10, 2009).
3.2    Amended and Restated Bylaws (incorporated by reference to Exhibit No. 3.2 to the registrant’s Current Report on Form 8-K filed July 31, 2015).
31.1    Certification of the principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
31.2    Certification of the principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith).
32.1    Certification of the principal executive officer and principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith).
101    The following unaudited financial information from American National Insurance Company’s Quarterly Report on Form 10-Q for three months ended March 31, 2017 formatted in eXtensible Business Reporting Language (“XBRL”): (i) Consolidated Statements of Financial Position, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) Notes to the Unaudited Consolidated Financial Statements.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

By:  

/s/ James E. Pozzi

  Name:   James E. Pozzi
  Title:   President and
    Chief Executive Officer
By:  

/s/ John J. Dunn, Jr.

  Name:   John J. Dunn, Jr.,
  Title:   Executive Vice President,
    Chief Financial Officer

Date: May 8, 2017

 

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