10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 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 August 01, 2017, there were 26,931,884 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 June 30, 2017 and December 31, 2016      3  
  Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2016      4  
  Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2017 and 2016      5  
  Consolidated Statements of Changes in Equity for the six months ended June 30, 2017 and 2016      5  
  Consolidated Statements of Cash Flows for the six months ended June 30, 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      36  

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      57  

ITEM 3.

  DEFAULTS UPON SENIOR SECURITIES      57  

ITEM 4.

  MINE SAFETY DISCLOSURES      57  

ITEM 5.

  OTHER INFORMATION      57  

ITEM 6.

  EXHIBIT INDEX      58  

 

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Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(Unaudited and in thousands, except share data)

 

     June 30,
2017
    December 31,
2016
 

ASSETS

    

Fixed maturity, bonds held-to-maturity, at amortized cost (Fair value $7,426,776 and $7,496,692)

   $ 7,149,494     $ 7,251,385  

Fixed maturity, bonds available-for-sale, at fair value (Amortized cost $5,711,068 and $5,668,984)

     5,918,462       5,803,276  

Equity securities, at fair value (Cost $740,613 and $732,433)

     1,641,900       1,541,676  

Mortgage loans on real estate, net of allowance

     4,647,426       4,348,046  

Policy loans

     383,928       384,376  

Investment real estate, net of accumulated depreciation of $259,626 and $259,578

     555,797       593,417  

Short-term investments

     576,878       192,226  

Other invested assets

     108,985       113,550  
  

 

 

   

 

 

 

Total investments

     20,982,870       20,227,952  
  

 

 

   

 

 

 

Cash and cash equivalents

     442,933       289,338  

Investments in unconsolidated affiliates

     501,986       490,476  

Accrued investment income

     179,713       180,323  

Reinsurance recoverables

     377,480       401,709  

Prepaid reinsurance premiums

     64,062       63,026  

Premiums due and other receivables

     326,503       296,930  

Deferred policy acquisition costs

     1,322,924       1,294,443  

Property and equipment, net

     118,192       116,028  

Current tax receivable

     68,819       61,423  

Other assets

     140,344       169,962  

Separate account assets

     922,496       941,612  
  

 

 

   

 

 

 

Total assets

   $ 25,448,322     $ 24,533,222  
  

 

 

   

 

 

 

LIABILITIES

    

Future policy benefits

    

Life

   $ 2,970,379     $ 2,939,308  

Annuity

     1,327,925       1,277,220  

Accident and health

     58,302       60,308  

Policyholders’ account balances

     11,540,166       11,068,775  

Policy and contract claims

     1,320,925       1,303,925  

Unearned premium reserve

     878,248       823,938  

Other policyholder funds

     324,986       318,620  

Liability for retirement benefits

     137,840       152,496  

Notes payable

     140,216       136,080  

Deferred tax liabilities, net

     445,959       367,487  

Other liabilities

     581,535       481,958  

Separate account liabilities

     922,496       941,612  
  

 

 

   

 

 

 

Total liabilities

     20,648,977       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 26,931,884 and 26,914,516 shares

     30,832       30,832  

Additional paid-in capital

     18,782       16,406  

Accumulated other comprehensive income

     560,511       455,899  

Retained earnings

     4,282,449       4,250,818  

Treasury stock, at cost

     (101,616     (101,777
  

 

 

   

 

 

 

Total American National stockholders’ equity

     4,790,958       4,652,178  

Noncontrolling interest

     8,387       9,317  
  

 

 

   

 

 

 

Total equity

     4,799,345       4,661,495  
  

 

 

   

 

 

 

Total liabilities and equity

   $
25,448,322
 
  $ 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 June 30,     Six months ended June 30,  
     2017     2016     2017     2016  

PREMIUMS AND OTHER REVENUE

        

Premiums

        

Life

   $ 79,287     $ 77,053     $ 156,761     $ 152,170  

Annuity

     65,389       86,030       95,198       156,238  

Accident and health

     36,593       44,828       73,632       87,141  

Property and casualty

     333,250       304,788       660,700       608,149  

Other policy revenues

     66,076       65,489       129,528       129,836  

Net investment income

     234,618       210,710       463,121       406,764  

Net realized investment gains

     11,401       6,966       25,409       16,028  

Other-than-temporary impairments

     (1,469     (3,551     (8,252     (7,027

Other income

     8,948       8,135       17,793       16,119  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     834,093       800,448       1,613,890       1,565,418  
  

 

 

   

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

        

Policyholder benefits

        

Life

     98,909       91,754       198,017       192,525  

Annuity

     77,798       93,655       121,460       174,902  

Claims incurred

        

Accident and health

     23,258       30,327       47,786       62,619  

Property and casualty

     254,180       230,960       481,710       442,918  

Interest credited to policyholders’ account balances

     94,548       85,901       190,556       162,428  

Commissions for acquiring and servicing policies

     141,440       114,945       266,931       227,829  

Other operating expenses

     137,754       129,197       267,948       259,573  

Change in deferred policy acquisition costs

     (27,695     (16,571     (37,182     (21,164
  

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     800,192       760,168       1,537,226       1,501,630  
  

 

 

   

 

 

   

 

 

   

 

 

 

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

     33,901       40,280       76,664       63,788  
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Provision for federal income taxes

        

Current

     5,148       7,603       3,944       2,889  

Deferred

     5,367       2,287       19,643       2,931  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total provision for federal income taxes

     10,515       9,890       23,587       5,820  

Equity in earnings of unconsolidated affiliates

     12,313       1,798       21,813       2,735  
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

     35,699       32,188       74,890       60,703  

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

     (260     (437     (909     (1,238
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income attributable to American National

   $ 35,959     $ 32,625     $ 75,799     $ 61,941  
  

 

 

   

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

        

Earnings per share

        

Basic

   $ 1.34     $ 1.21     $ 2.82     $ 2.30  

Diluted

     1.33       1.21       2.81       2.30  

Cash dividends to common stockholders

     0.82       0.82       1.64       1.62  

Weighted average common shares outstanding

     26,892,656       26,908,077       26,896,965       26,908,748  

Weighted average common shares outstanding and dilutive potential common shares

     26,955,881       26,970,597       26,966,175       26,965,702  

See accompanying notes to the consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)

 

     Three months ended June 30,     Six months ended June 30,  
     2017     2016     2017     2016  

Net income

   $ 35,699     $ 32,188     $ 74,890     $ 60,703  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

        

Change in net unrealized gains on securities

     40,676       78,803       96,588       130,776  

Foreign currency transaction and translation adjustments

     171       442       283       430  

Defined benefit pension plan adjustment

     6,207       2,377       7,741       4,256  
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

     47,054       81,622       104,612       135,462  
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income

     82,753       113,810       179,502       196,165  

Less: Comprehensive loss attributable to noncontrolling interest

     (260     (437     (909     (1,238
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income attributable to American National

   $ 83,013     $ 114,247     $ 180,411     $ 197,403  
  

 

 

   

 

 

   

 

 

   

 

 

 
AMERICAN NATIONAL INSURANCE COMPANY         
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY         
(Unaudited and in thousands)         
                 Six months ended June 30,  
                 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

         1,963       1,795  

Income tax effect from restricted stock arrangement

         —         47  

Amortization of restricted stock

         413       419  
      

 

 

   

 

 

 

Balance at end of the period

         18,782       15,950  
      

 

 

   

 

 

 

Accumulated Other Comprehensive Income

        

Balance as of January 1,

         455,899       352,620  

Other comprehensive income

         104,612       135,462  
      

 

 

   

 

 

 

Balance at end of the period

         560,511       488,082  
      

 

 

   

 

 

 

Retained Earnings

        

Balance as of January 1,

         4,250,818       4,157,184  

Net income attributable to American National

         75,799       61,941  

Cash dividends to common stockholders

         (44,168     (43,601
      

 

 

   

 

 

 

Balance at end of the period

         4,282,449       4,175,524  
      

 

 

   

 

 

 

Treasury Stock

        

Balance as of January 1,

         (101,777     (102,043

Reissuance of treasury shares

         161       262  
      

 

 

   

 

 

 

Balance at end of the period

         (101,616     (101,781
      

 

 

   

 

 

 

Noncontrolling Interest

        

Balance as of January 1,

         9,317       10,189  

Contributions

         224       —    

Distributions

         (245     (163

Net loss attributable to noncontrolling interest

         (909     (1,238
      

 

 

   

 

 

 

Balance at end of the period

         8,387       8,788  
      

 

 

   

 

 

 

Total Equity

       $
4,799,345
 
  $ 4,617,395  
      

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

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AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

     Six months ended June 30,  
     2017     2016  
           (As Revised)  

OPERATING ACTIVITIES

    

Net income

   $ 74,890     $ 60,703  

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

    

Net realized investment gains

     (25,409     (16,028

Other-than-temporary impairments

     8,252       7,027  

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

     (5,368     1,725  

Net capitalized interest on policy loans and mortgage loans

     (18,110     (14,046

Depreciation

     28,037       24,845  

Interest credited to policyholders’ account balances

     190,556       162,428  

Charges to policyholders’ account balances

     (129,528     (129,836

Deferred federal income tax expense

     19,643       2,931  

Equity in earnings of unconsolidated affiliates

     (21,813     (2,735

Distributions from equity method investments

     852       572  

Changes in

    

Policyholder liabilities

     149,262       136,237  

Deferred policy acquisition costs

     (37,182     (21,164

Reinsurance recoverables

     24,229       49,785  

Premiums due and other receivables

     (29,573     (36,399

Prepaid reinsurance premiums

     (1,036     15,906  

Accrued investment income

     610       259  

Current tax receivable/payable

     (7,397     (37,322

Liability for retirement benefits

     (2,748     (8,507

Other, net

     13,618       34,787  
  

 

 

   

 

 

 

Net cash provided by operating activities

     231,785       231,168  
  

 

 

   

 

 

 

INVESTING ACTIVITIES

    

Proceeds from sale/maturity/prepayment of

    

Held-to-maturity securities

     421,911       236,480  

Available-for-sale securities

     314,284       267,510  

Investment real estate

     40,549       6,701  

Mortgage loans

     319,991       204,886  

Policy loans

     26,258       27,919  

Other invested assets

     41,684       8,143  

Disposals of property and equipment

     3,049       8,604  

Distributions from unconsolidated affiliates

     15,199       9,862  

Payment for the purchase/origination of

    

Held-to-maturity securities

     (285,293     (89,169

Available-for-sale securities

     (301,598     (443,085

Investment real estate

     (18,538     (26,578

Mortgage loans

     (607,374     (713,247

Policy loans

     (12,442     (12,130

Other invested assets

     (21,014     (12,471

Additions to property and equipment

     (17,698     (20,629

Contributions to unconsolidated affiliates

     (16,611     (97,079

Change in short-term investments

     (384,652     208,181  

Change in collateral held for derivatives

     16,713       (4,266

Other, net

     17,082       1,904  
  

 

 

   

 

 

 

Net cash used in investing activities

     (448,500     (438,464
  

 

 

   

 

 

 

FINANCING ACTIVITIES

    

Policyholders’ account deposits

     1,080,435       860,140  

Policyholders’ account withdrawals

     (670,071     (683,760

Change in notes payable

     4,135       11,802  

Dividends to stockholders

     (44,168     (43,601

Payments to noncontrolling interest

     (21     (163
  

 

 

   

 

 

 

Net cash provided by financing activities

     370,310       144,418  
  

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     153,595       (62,878

Beginning of the period

     289,338       310,930  
  

 

 

   

 

 

 

End of the period

   $ 442,933     $ 248,052  
  

 

 

   

 

 

 

 

See accompanying notes to the consolidated financial statements.

 

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NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Operations

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

Note 2 – Summary of Significant Accounting Policies and Practices

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

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

The interim consolidated financial statements and notes should be read in conjunction with the annual consolidated financial statements and notes thereto included in American National’s Annual Report on Form 10-K as of and for the year ended December 31, 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):

 

     Six months ended June 30, 2016         
     As Reported      As Revised      Effect of Change  

Statement of Cash Flow

        

Change in collateral held for derivatives

   $ —        $ (4,266    $ (4,266

Other investing activities, net

     4,168        1,904        (2,264

Net cash used in investing activities

     (431,934      (438,464      (6,530

Net decrease in cash and cash equivalents

     (56,348      (62,878      (6,530

Cash at beginning of period

     190,237        310,930        120,693  

Cash at end of period

     133,889        248,052        114,163  

 

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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 using a modified retrospective approach. 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. The Company is currently identifying those contracts which are in the scope of the standard, and assessing the impact to those non-insurance revenue streams.

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 the changes in fair value are recognized through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance also simplifies the impairment assessment of equity investments and eliminates the disclosure requirements for methods and significant assumptions used to estimate fair value of financial instruments that are measured at amortized cost on the statement of financial position. The 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 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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Table of Contents

Note 4 – Investment in Securities

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

 

     June 30, 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

   $ 270,349      $ 16,462      $ (2   $ 286,809  

Foreign governments

     4,034        651        —         4,685  

Corporate debt securities

     6,662,827        270,611        (22,229     6,911,209  

Residential mortgage-backed securities

     209,063        12,508        (855     220,716  

Collateralized debt securities

     927        49        —         976  

Other debt securities

     2,294        87        —         2,381  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     7,149,494        300,368        (23,086     7,426,776  
  

 

 

    

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

          

U.S. treasury and government

     26,276        564        (43     26,797  

U.S. states and political subdivisions

     916,877        31,919        (2,008     946,788  

Foreign governments

     5,000        1,562        —         6,562  

Corporate debt securities

     4,741,109        191,476        (20,659     4,911,926  

Residential mortgage-backed securities

     16,436        3,657        (182     19,911  

Collateralized debt securities

     3,411        701        (3     4,109  

Other debt securities

     1,959        410        —         2,369  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     5,711,068        230,289        (22,895     5,918,462  
  

 

 

    

 

 

    

 

 

   

 

 

 

Equity securities

          

Common stock

     721,483        907,231        (10,666     1,618,048  

Preferred stock

     19,130        4,722        —         23,852  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total equity securities

     740,613        911,953        (10,666     1,641,900  
  

 

 

    

 

 

    

 

 

   

 

 

 

Total investments in securities

   $ 13,601,175      $ 1,442,610      $ (56,647   $ 14,987,138  
  

 

 

    

 

 

    

 

 

   

 

 

 
     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):

 

     June 30, 2017  
     Bonds Held-to-Maturity      Bonds Available-for-Sale  
     Amortized Cost      Fair Value      Amortized Cost      Fair Value  

Due in one year or less

   $ 510,417      $ 519,885      $ 222,627      $ 227,075  

Due after one year through five years

     3,429,929        3,607,802        1,547,018        1,624,300  

Due after five years through ten years

     2,874,949        2,955,702        3,364,202        3,478,405  

Due after ten years

     328,349        338,256        572,221        583,666  

Without single maturity date

     5,850        5,131        5,000        5,016  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 7,149,494      $ 7,426,776      $ 5,711,068      $ 5,918,462  
  

 

 

    

 

 

    

 

 

    

 

 

 

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 June 30,      Six months ended June 30,  
     2017      2016      2017      2016  

Proceeds from sales of available-for-sale securities

   $ 16,834      $ 27,026      $ 44,557      $ 42,731  

Gross realized gains

     4,162        3,517        14,988        8,584  

Gross realized losses

     (140      (214      (146      (338

Gains and losses are determined using specific identification of the securities sold. During the six months ended June 30, 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 six months ended June 30, 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):

 

     Six months ended June 30,  
     2017      2016  

Bonds available-for-sale

   $ 73,102      $ 256,233  

Equity securities

     92,044        21,232  
  

 

 

    

 

 

 

Change in net unrealized gains on securities during the year

     165,146        277,465  

Adjustments for

     

Deferred policy acquisition costs

     (8,701      (64,746

Participating policyholders’ interest

     (8,185      (11,882

Deferred federal income tax expense

     (51,672      (70,061
  

 

 

    

 

 

 

Change in net unrealized gains on securities, net of tax

   $ 96,588      $ 130,776  
  

 

 

    

 

 

 

 

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):

 

     June 30, 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

   $ (2   $ 204      $ —       $ —        $ (2   $ 204  

Corporate debt securities

     (9,407     606,313        (12,822     148,030        (22,229     754,343  

Residential mortgage-backed securities

     (321     28,163        (534     8,375        (855     36,538  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds held-to-maturity

     (9,730     634,680        (13,356     156,405        (23,086     791,085  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Fixed maturity securities, bonds available-for-sale

              

U.S. treasury and government

     (43     21,939        —         —          (43     21,939  

U.S. states and political subdivisions

     (2,006     83,470        (2     120        (2,008     83,590  

Corporate debt securities

     (8,140     433,962        (12,519     92,426        (20,659     526,388  

Residential mortgage-backed securities

     (47     11,171        (135     2,241        (182     13,412  

Collateralized debt securities

     —         —          (3     130        (3     130  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total bonds available-for-sale

     (10,236     550,542        (12,659     94,917        (22,895     645,459  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Equity securities

              

Common stock

     (10,666     53,184        —         —          (10,666     53,184  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total equity securities

     (10,666     53,184        —         —          (10,666     53,184  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ (30,632   $ 1,238,406      $ (26,015   $ 251,322      $ (56,647   $ 1,489,728  
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

 

     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 June 30, 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.

 

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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):

 

     June 30, 2017     December 31, 2016  
     Amortized      Estimated      % of Fair     Amortized      Estimated      % of Fair  
     Cost      Fair Value      Value     Cost      Fair Value      Value  

AAA

   $ 647,845      $ 677,568        5.1   $ 667,561      $ 691,296        5.2

AA

     1,312,690        1,367,924        10.3       1,393,137        1,440,667        10.8  

A

     4,545,127        4,727,609        35.4       4,538,471        4,696,909        35.3  

BBB

     5,801,135        6,032,590        45.2       5,758,560        5,931,112        44.6  

BB and below

     553,765        539,547        4.0       562,640        539,984        4.1  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 12,860,562      $ 13,345,238        100.0   $ 12,920,369      $ 13,299,968        100.0
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Equity securities by market sector distribution are shown below:

 

     June 30, 2017     December 31, 2016  

Consumer goods

     20.6     20.4

Energy and utilities

     9.0       11.1  

Finance

     21.8       22.1  

Healthcare

     13.5       12.7  

Industrials

     9.1       9.0  

Information technology

     18.6       17.1  

Other

     7.4       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:

 

     June 30, 2017     December 31, 2016  

East North Central

     15.3     16.2

East South Central

     3.6       3.7  

Mountain

     12.9       10.6  

Pacific

     18.1       17.6  

South Atlantic

     14.7       15.1  

West South Central

     29.3       31.0  

Other

     6.1       5.8  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 

For the six months ended June 30, 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 did not sell any loans during the six months ended June 30, 2017 or 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      60-89 Days      More Than                    Total  
June 30, 2017    Past Due      Past Due      90 Days      Total      Current      Amount     Percent  

Industrial

   $ —        $ —        $ —        $ —        $ 764,419      $ 764,419       16.4  

Office

     —          —          6,059        6,059        1,656,769        1,662,828       35.6  

Retail

     —          —          —          —          713,687        713,687       15.3  

Other

     8,350        —          —          8,350        1,515,337        1,523,687       32.7  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 8,350      $ —        $ 6,059      $ 14,409      $ 4,650,212      $ 4,664,621       100.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

 

Allowance for loan losses

                    (17,195  
                 

 

 

   

Total, net of allowance

                  $ 4,647,426    
                 

 

 

   

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 $119,000 and $233,000 and unamortized origination fees of $32,041,000 and $33,019,000 at June 30, 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

     —          —          1,559        —          —          3,146        —          —          4,705  

Net change in recorded investment

     2        279,995        —          2        6,895        —          4        286,890        —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Ending balance at June 30, 2017

     432      $ 4,638,591      $ 13,047        4      $ 8,835      $ 4,148        436      $ 4,647,426      $ 17,195  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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):

 

     Six months ended June 30,  
     2017      2016  
     Number of
loans
     Recorded
investment pre-
modification
     Recorded
investment post
modification
     Number of
loans
     Recorded
investment pre-
modification
     Recorded
investment post
modification
 

Retail

     —        $ —        $ —          1      $ 3,934      $ 3,934  

Other (hotel/motel)

     5        24,801        24,801        —          —          —    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

     5      $ 24,801      $ 24,801        1      $ 3,934      $ 3,934  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There are $7,919,000 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:

 

     June 30, 2017     December 31, 2016  

Industrial

     6.5     9.2

Office

     38.5       37.8  

Retail

     38.9       37.2  

Other

     16.1       15.8  
  

 

 

   

 

 

 

Total

     100.0     100.0
  

 

 

   

 

 

 
     June 30, 2017     December 31, 2016  

East North Central

     6.1     8.8

East South Central

     3.5       3.4  

Mountain

     12.6       12.0  

Pacific

     7.4       6.1  

South Atlantic

     13.7       13.0  

West South Central

     52.3       52.2  

Other

     4.4       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):

 

     June 30, 2017      December 31, 2016  

Investment real estate

   $ 157,694      $ 173,816  

Short-term investments

     1,001        1  

Cash and cash equivalents

     2,243        6,099  

Other receivables

     5,496        6,456  

Other assets

     10,420        8,820  
  

 

 

    

 

 

 

Total assets of consolidated VIEs

   $ 176,854      $ 195,192  
  

 

 

    

 

 

 

Notes payable

   $ 140,216      $ 136,080  

Other liabilities

     3,663        10,037  
  

 

 

    

 

 

 

Total liabilities of consolidated VIEs

   $ 143,879      $ 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 $30,482,000 and $31,795,000 at June 30, 2017 and December 31, 2016, respectively.

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

 

Interest rate

  

    Maturity    

   June 30, 2017      December 31, 2016  

Prime

   2018    $ 1,698      $ 1,267  

LIBOR

   2020      9,407        7,318  

90 day LIBOR + 2.5%

   2021      40,070        37,074  

4% fixed

   2022      89,041        90,421  
     

 

 

    

 

 

 

        Total

      $ 140,216      $ 136,080  
     

 

 

    

 

 

 

 

16


Table of Contents

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

 

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

 

     June 30, 2017      December 31, 2016  
     Carrying
Amount
     Maximum
Exposure
to Loss
     Carrying
Amount
     Maximum
Exposure
to Loss
 

Investment in unconsolidated affiliates

   $ 329,601      $ 329,601      $ 323,933      $ 323,933  

Mortgage loans

     563,487        563,487        481,799        481,799  

Accrued investment income

     1,997        1,997        1,919        1,919  

As of June 30, 2017, no real estate investments were classified as held for sale.

Note 7 – Derivative Instruments

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

 

          June 30, 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      449      $ 1,605,800      $ 172,377        442      $ 1,414,100      $ 156,479  

Equity-indexed embedded derivative

   Policyholders’
account balances
     69,064        1,504,000        390,189        62,481        1,289,800        314,330  

 

Derivatives Not Designated

as Hedging Instruments

  

Location in the Consolidated

Statements of Operations

   Gains (Losses) Recognized in Income on Derivatives  
      Three months ended June 30,     Six months ended June 30,  
      2017     2016     2017     2016  

Equity-indexed options

  

Net investment income

   $ 13,430     $ 5,789     $ 36,563     $ 2,150  

Equity-indexed embedded derivative

  

Interest credited to policyholders’ account balances

     (18,977     (8,725     (44,104     (6,173

 

17


Table of Contents

Note 7 – Derivative Instruments – (Continued)

 

The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by the counterparties. The Company has a policy of only dealing with counterparties we believe are credit worthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less collateral held. The Company maintains master netting agreements with its current active trading partners. As such, a right of offset has been applied to 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):

 

          June 30, 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    $ 41,063      $ 41,153      $ 41,063      $ 90      $ —    

Goldman-Sachs

   A3/BBB+      1,136        1,150        1,136        13        —    

ING

   Baa1/A-      30,111        28,460        28,460        —          1,651  

JP Morgan

   A3/A-      180        —          —          —          180  

Morgan Stanley

   A3/BBB+      13,802        14,186        13,802        384        —    

NATIXIS*

   A2/A      27,666        27,450        —          27,450        27,666  

SunTrust

   Baa1/BBB+      27,104        26,740        26,740        —          364  

Wells Fargo

   A2/A      31,315        32,160        30,960        1,201        355  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
   Total    $ 172,377      $ 171,299      $ 142,161      $ 29,138      $ 30,216  
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
          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 June 30,      Six months ended June 30,  
     2017      2016      2017      2016  

Bonds

   $ 135,453      $ 138,786      $ 269,803      $ 278,979  

Equity securities

     10,274        10,048        19,006        19,327  

Mortgage loans

     67,316        49,314        125,020        97,316  

Real estate

     (554      429        (1,749      (1,445

Options

     13,430        5,789        36,563        2,150  

Other invested assets

     8,699        6,344        14,478        10,437  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 234,618      $ 210,710      $ 463,121      $ 406,764  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended June 30,      Six months ended June 30,  
     2017      2016      2017      2016  

Bonds

   $ 6,564      $ 1,854      $ 10,068      $ 4,593  

Equity securities

     3,735        6,065        15,095        10,930  

Mortgage loans

     (3,079      (433      (4,705      1,059  

Real estate

     4,211        273        4,999        273  

Other invested assets

     (30      (793      (48      (827
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 11,401      $ 6,966      $ 25,409      $ 16,028  
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three months ended June 30,      Six months ended June 30,  
     2017      2016      2017      2016  

Bonds

   $ —        $ —        $ (6,000    $ —    

Equity securities

     (1,469      (3,551      (2,252      (7,027
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ (1,469    $ (3,551    $ (8,252    $ (7,027
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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):

 

     June 30, 2017      December 31, 2016  
     Carrying             Carrying         
     Amount      Fair Value      Amount      Fair Value  

Financial assets

  

Fixed maturity securities, bonds held-to-maturity

   $ 7,149,494      $ 7,426,776      $ 7,251,385      $ 7,496,692  

Fixed maturity securities, bonds available-for-sale

     5,918,462        5,918,462        5,803,276        5,803,276  

Equity securities

     1,641,900        1,641,900        1,541,676        1,541,676  

Equity-indexed options

     172,377        172,377        156,479        156,479  

Mortgage loans on real estate, net of allowance

     4,647,426        4,744,780        4,348,046        4,435,530  

Policy loans

     383,928        383,928        384,376        384,376  

Short-term investments

     576,878        576,878        192,226        192,226  

Separate account assets

     922,496        922,496        941,612        941,612  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 21,412,961      $ 21,787,597      $ 20,619,076      $ 20,951,867  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

  

Investment contracts

   $ 8,797,440      $ 8,797,440      $ 8,785,412      $ 8,785,412  

Embedded derivative liability for equity-indexed contracts

     390,189        390,189        314,330        314,330  

Notes payable

     140,216        140,216        136,080        136,080  

Separate account liabilities

     922,496        922,496        941,612        941,612  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,250,341      $ 10,250,341      $ 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-indexed options and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is performed quarterly.

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

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

 

21


Table of Contents

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

 

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

 

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

 

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

 

    Equity volatility assumptions begin with current market volatilities and grow to long-term values. Increases to the assumed volatility will increase the fair value of liabilities, as future projections will produce higher increases in the linked index. At June 30, 2017 and December 31, 2016, the one year implied volatility used to estimate embedded derivative value was 13.9% and 16.5%, respectively.

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

 

     Fair Value              
     June 30, 2017      December 31, 2016     

Unobservable Input

   Range  

Indexed Annuities

   $ 379.9      $ 306.5      Lapse Rate      1%-66%  
         Mortality Multiplier      90%-100%  
         Equity Volatility      12%-40%  

Indexed Life

     10.3        7.8      Lapse Rate      —    
         Mortality Multiplier      —    
         Equity Volatility      12%-40%  

 

22


Table of Contents

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

 

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.

 

23


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 June 30, 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

   $ 286,809      $ —        $ 286,809      $ —    

Foreign governments

     4,685        —          4,685        —    

Corporate debt securities

     6,911,209        —          6,884,647        26,562  

Residential mortgage-backed securities

     220,716        —          219,836        880  

Collateralized debt securities

     976        —          976        —    

Other debt securities

     2,381        —          —          2,381  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds held-to-maturity

     7,426,776        —          7,396,953        29,823  
  

 

 

    

 

 

    

 

 

    

 

 

 

Fixed maturity securities, bonds available-for-sale

           

U.S. treasury and government

     26,797        —          26,797        —    

U.S. states and political subdivisions

     946,788        —          944,323        2,465  

Foreign governments

     6,562        —          6,562        —    

Corporate debt securities

     4,911,926        —          4,902,539        9,387  

Residential mortgage-backed securities

     19,911        —          15,911        4,000  

Collateralized debt securities

     4,109        —          4,109        —    

Other debt securities

     2,369        —          2,369        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total bonds available-for-sale

     5,918,462        —          5,902,610        15,852  
  

 

 

    

 

 

    

 

 

    

 

 

 

Equity securities

           

Common stock

     1,618,048        1,618,048        —          —    

Preferred stock

     23,852        23,852        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

     1,641,900        1,641,900        —          —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Options

     172,377        —          —          172,377  

Mortgage loans on real estate

     4,744,780        —          4,744,780        —    

Policy loans

     383,928        —          —          383,928  

Short-term investments

     576,878        —          576,878        —    

Separate account assets

     922,496        —          922,496        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial assets

   $ 21,787,597      $ 1,641,900      $ 19,543,717      $ 601,980  
  

 

 

    

 

 

    

 

 

    

 

 

 

Financial liabilities

           

Investment contracts

   $ 8,797,440      $ —        $ —        $ 8,797,440  

Embedded derivative liability for equity-indexed contracts

     390,189        —          —          390,189  

Notes payable

     140,216        —          —          140,216  

Separate account liabilities

     922,496        —          922,496        —    
  

 

 

    

 

 

    

 

 

    

 

 

 

Total financial liabilities

   $ 10,250,341      $ —        $ 922,496      $ 9,327,845  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

24


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  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


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 June 30,      Six months ended June 30,  
     Assets     Liability      Assets     Liability  
     Investment
Securities
    Equity-Indexed
Options
    Embedded
Derivative
     Investment
Securities
    Equity-Indexed
Options
    Embedded
Derivative
 

Beginning balance, 2017

   $ 17,329     $ 174,258     $ 346,634      $ 14,264     $ 156,479     $ 314,330  

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

     105       —         —          (4,362     —         —    

Net fair value change included in realized gains (losses)

     —         —         —          —         —         —    

Net gain for derivatives included in net investment income

     —         13,275       —          —         36,333       —    

Net change included in interest credited

     —         —         18,977        —         —         44,104  

Purchases, sales and settlements or maturities

             

Purchases

     —         13,463       —          —         21,015       —    

Sales

     (1,582     (12,837     —          (3,539     (12,837     —    

Settlements or maturities

     —         (15,782     —          (3,010     (28,613     —    

Premiums less benefits

     —         —         24,578        —         —         31,755  

Carry value transfers in

     —         —         —          15,000       —         —    

Gross transfers into Level 3

     —         —         —          382       —         —    

Gross transfers out of Level 3

     —         —         —          (2,883     —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2017

   $ 15,852     $ 172,377     $ 390,189      $ 15,852     $ 172,377     $ 390,189  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Beginning balance, 2016

   $ 21,689     $ 123,761     $ 258,267      $ 20,130     $ 123,007     $ 242,412  

Total realized and unrealized investment gains included in other comprehensive income

     352       —         —          511       —         —    

Net fair value change included in realized gains

     1       —         —          1       —         —    

Net gain for derivatives included in net investment income

     —         5,789       —          —         2,150       —    

Net change included in interest credited

     —         —         8,725        —         —         6,173  

Purchases, sales and settlements or maturities

             

Purchases

     —         7,178       —          —         12,471       —    

Sales

     —         —         —          —         —         —    

Settlements or maturities

     (376     (2,153     —          (389     (3,053     —    

Premiums less benefits

     —         —         11,578        —         —         29,985  

Gross transfers into Level 3

     —         —         —          1,413       —         —    

Gross transfers out of Level 3

     —         —         —          —         —         —    
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2016

   $ 21,666     $ 134,575     $ 278,570      $ 21,666     $ 134,575     $ 278,570  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Within the net gain for derivatives included in net investment income were unrealized gains of $13,660,000, and $19,745,000 relating to assets still held at June 30, 2017, and 2016, respectively.

There were no transfers between Level 1 and Level 2 fair value hierarchies. The transfers into Level 3 during the six months ended June 30, 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 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 June 30, 2017. The transfers out of Level 3 during the six months ended June 30, 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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Table of Contents

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

     60,650       50,856       5,603       142,022       259,131  

Amortization

     (42,086     (33,686     (7,752     (138,425     (221,949

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

     (3,982     (4,719     —         —         (8,701
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net change

     14,582       12,451       (2,149     3,597       28,481  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2017

   $ 760,422     $ 406,659     $ 38,471     $ 117,372     $ 1,322,924  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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):

 

     Six months ended June 30,  
     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

     563,959        523,388  

Prior years

     (40,137      (16,628
  

 

 

    

 

 

 

Total incurred claims

     523,822        506,760  
  

 

 

    

 

 

 

Paid claims related to

     

Current

     288,731        266,566  

Prior years

     205,702        209,805  
  

 

 

    

 

 

 

Total paid claims

     494,433        476,371  
  

 

 

    

 

 

 

Net balance

     953,209        917,354  

Plus reinsurance recoverables

     195,072        206,962  
  

 

 

    

 

 

 

Unpaid claims balance, ending

   $ 1,148,281      $ 1,124,316  
  

 

 

    

 

 

 

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 $40,137,000 during the first six months of 2017 and decreased by approximately $16,628,000 during the first six months of 2016. This was a reflection of lower-than-anticipated losses in the 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 June 30, 2017 was $24,587,000.

 

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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 June 30,     Six months ended June 30,  
     2017     2016     2017     2016  
     Amount     Rate     Amount     Rate     Amount     Rate     Amount     Rate  

Income tax on pre-tax income

   $ 16,175       35.0   $ 14,727       35.0   $ 34,467       35.0   $ 23,283       35.0

Tax-exempt investment income

     (1,769     (3.8     (1,974     (4.7     (3,601     (3.7     (3,946     (5.9

Deferred tax change

     (464     (1.0     (341     (0.8     (1,231     (1.2     (10,508     (15.8

Dividend exclusion

     (2,322     (5.0     (1,879     (4.5     (4,164     (4.2     (4,226     (6.4

Miscellaneous tax credits, net

     (2,542     (5.5     (2,865     (6.8     (4,799     (4.9     (5,116     (7.7

Low income housing tax credit expense

     1,256       2.7       1,295       3.1       2,509       2.5       2,589       3.9  

Other items, net

     141       0.3       885       2.1       322       0.4       1,142       1.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Provision for federal income tax before interest expense

     10,475       22.7       9,848       23.4       23,503       23.9       3,218       4.8  

Interest expense

     40       0.1       42       0.1       84       0.1       2,602       3.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 10,515       22.8   $ 9,890       23.5   $ 23,587       24.0   $ 5,820       8.7
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

American National made income tax payments of $8,466,000 and $35,458,000 during the six months ended June 30, 2017 and 2016, respectively.

Management believes 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 June 30, 2017 and 2016. There are no net operating or capital loss 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 $84,000 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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Table of Contents

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 $5,809 and expense $4,168)

     (10,789     7,741       —         (3,048

Unrealized holding gains arising during the period (net of tax expense $63,610)

     118,134       —         —         118,134  

Unrealized adjustment to DAC (net of tax benefit $3,264)

     (5,437     —         —         (5,437

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $2,865)

     (5,320     —         —         (5,320

Foreign currency adjustment (net of tax expense $152)

     —         —         283       283  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2017

   $ 643,726     $ (80,862   $ (2,353   $ 560,511  
  

 

 

   

 

 

   

 

 

   

 

 

 

Beginning balance, 2016

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

Amounts reclassified from AOCI (net of tax benefit $2,105 and expense $2,292)

     (3,910     4,256       —         346  

Unrealized holding gains arising during the period (net of tax expense $99,218)

     184,262       —         —         184,262  

Unrealized adjustment to DAC (net of tax benefit $22,893)

     (41,853     —         —         (41,853

Unrealized gains on investments attributable to participating policyholders’ interest (net of tax benefit $4,159)

     (7,723     —         —         (7,723

Foreign currency adjustment (net of tax expense $232)

     —         —         430       430  
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance at June 30, 2016

   $ 584,210     $ (93,633   $ (2,495   $ 488,082  
  

 

 

   

 

 

   

 

 

   

 

 

 

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:

 

     June 30, 2017      December 31, 2016  

Common stock

     

Shares issued

     30,832,449        30,832,449  

Treasury shares

     (3,900,565      (3,917,933
  

 

 

    

 

 

 

Outstanding shares

     26,931,884        26,914,516  

Restricted shares

     (74,000      (76,000
  

 

 

    

 

 

 

Unrestricted outstanding shares

     26,857,884        26,838,516  
  

 

 

    

 

 

 

Stock-based compensation

American National has a stock-based compensation plan, which allows for grants of Non-Qualified Stock Options, Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, Restricted Stock Units (“RSU”), Performance Awards, Incentive Awards or any combination thereof. This plan is administered by the American National Board Compensation Committee. 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 meeting established performance objectives 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

     —         —          —         —          16,500       117.69  

Exercised

     —         —          (2,000     130.52        (61,386     108.81  

Forfeited

     —         —          —         —          (33     104.75  

Expired

     (3,034     118.50        —         —          —         —    
  

 

 

      

 

 

      

 

 

   

Outstanding at June 30, 2017

     3,119     $ 108.37        74,000     $ 110.19        55,526     $ 106.32  
  

 

 

      

 

 

      

 

 

   

 

     SAR      RS Shares      RS Units  

Weighted-average contractual remaining life (in years)

     0.97        2.89        1.11  

Exercisable shares

     3,119        N/A        N/A  

Weighted-average exercise price

   $ 108.37      $ 110.19      $ 106.32  

Weighted-average exercise price exercisable shares

     108.37        N/A        N/A  

Compensation expense (credit)

        

Three months ended June 30, 2017

   $ (14,000    $ 205,000      $ 1,519,000  

Three months ended June 30, 2016

     4,000        209,000        345,000  

Six months ended June, 2017

     (49,000      412,000        1,649,000  

Six months ended June, 2016

     37,000        419,000        4,447,000  

Fair value of liability award

        

June 30, 2017

   $ 30,000        N/A      $ 6,468,000  

December 31, 2016 (restated)

     213,000        N/A        13,197,000  

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

RS awards entitle the participant to full dividend and voting rights. Each RS share awarded has the value of one share of restricted stock and vests 10 years from the grant date. Unvested shares are restricted as to disposition, and are subject to forfeiture under certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years and most of these awards feature a graded vesting schedule in the case of the retirement, death or disability of an award holder. Restricted stock awards for 350,334 shares have been granted at an exercise price of zero, of which 74,000 shares are unvested.

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

 

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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 June 30,      Six months ended June 30,  
     2017      2016      2017      2016  

Weighted average shares outstanding

     26,892,656        26,908,077        26,896,965        26,908,748  

Incremental shares from RS awards and RSUs

     63,225        62,520        69,210        56,954  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total shares for diluted calculations

     26,955,881        26,970,597        26,966,175        26,965,702  
  

 

 

    

 

 

    

 

 

    

 

 

 

Net income attributable to American National (in thousands)

   $ 35,959      $ 32,625      $ 75,799      $ 61,941  

Basic earnings per share

   $ 1.34      $ 1.21      $ 2.82      $ 2.30  

Diluted earnings per share

     1.33        1.21        2.81        2.30  

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 June 30, 2017 and December 31, 2016, American National Insurance Company’s statutory capital and surplus was $3,028,989,000 and $2,985,909,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at June 30, 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 $64,533,000 and $64,555,000 at June 30, 2017 and June 30, 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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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):

 

     June 30, 2017      December 31, 2016  

Statutory capital and surplus

     

Life insurance entities

   $ 1,959,927      $ 1,921,171  

Property and casualty insurance entities

     1,079,183        1,074,525  

 

     Three months ended June 30,      Six months ended June 30,  
     2017      2016      2017      2016  

Statutory net income (loss)

           

Life insurance entities

   $ 20,809      $ 19,182      $ 18,342      $ 23,109  

Property and casualty insurance entities

     (5,639      (1,291      1,172        3,257  

Dividends

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

Noncontrolling interests

American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company owned by its policyholders. American National has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at June 30, 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 $1,637,000 and $2,567,000 at June 30, 2017 and December 31, 2016, respectively.

 

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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 June 30,      Six months ended June 30,  
     2017      2016      2017      2016  

Life

   $ 7,816      $ 16,766      $ 15,303      $ 13,285  

Annuity

     17,871        17,463        41,624        35,434  

Health

     3,492        4,419        5,549        3,785  

Property and Casualty

     (9,267      (4,775      (6,844      2,215  

Corporate and Other

     13,989        6,407        21,032        9,069  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 33,901      $ 40,280      $ 76,664      $ 63,788  
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Note 16 – Commitments and Contingencies

Commitments

American National had aggregate commitments at June 30, 2017, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $859,961,000 of which $455,221,000 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 June 30, 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 able to be renewed on substantially equivalent terms upon expiration.

Guarantees

American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on a bank loan, American National would be obligated to pay off the loan. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of June 30, 2017, was approximately $206,376,000, while the total cash value of the related life insurance policies was approximately $212,268,000.

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 was recognized as pension costs in proportion to the reduction of the pension plans’ total benefit obligations. The after-tax expense recognized in the second quarter of 2017 was approximately $4,673,000.

 

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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  
          Six months ended June 30,      June 30,     December 31,  

Related Party

  

Financial Statement Line Impacted

   2017      2016      2017     2016  

Gal-Tex Hotel Corporation

   Mortgage loan on real estate    $ 752      $ 700      $ 3,004     $ 3,756  

Gal-Tex Hotel Corporation

   Net investment income      125        177        18       23  

Greer, Herz & Adams, LLP

   Other operating expenses      5,624        4,627        (417     (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

In the following pages is management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three and six months ended June 30, 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 in Part II, Item IA, Risk Factors of this Form 10-Q, 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 supplemental 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 judgment relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity, persistency, expenses, interest rates, and property and casualty loss frequency, severity, claim reporting and settlement patterns. Due to the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could vary from those reported in the consolidated financial statements.

For a discussion of our critical accounting estimates, see the MD&A in our 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 June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Premiums and other revenues

            

Premiums

   $ 514,519     $ 512,699     $ 1,820     $ 986,291     $ 1,003,698     $ (17,407

Other policy revenues

     66,076       65,489       587       129,528       129,836       (308

Net investment income

     234,618       210,710       23,908       463,121       406,764       56,357  

Realized investments gains, net

     9,932       3,415       6,517       17,157       9,001       8,156  

Other income

     8,948       8,135       813       17,793       16,119       1,674  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     834,093       800,448       33,645       1,613,890       1,565,418       48,472  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

            

Policyholder benefits

     176,707       185,409       (8,702     319,477       367,427       (47,950

Claims incurred

     277,438       261,287       16,151       529,496       505,537       23,959  

Interest credited to policyholders’ account balances

     94,548       85,901       8,647       190,556       162,428       28,128  

Commissions for acquiring and servicing policies

     141,440       114,945       26,495       266,931       227,829       39,102  

Other operating expenses

     137,754       129,197       8,557       267,948       259,573       8,375  

Change in deferred policy acquisition costs (1)

     (27,695     (16,571     (11,124     (37,182     (21,164     (16,018
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     800,192       760,168       40,024       1,537,226       1,501,630       35,596  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 33,901     $ 40,280     $ (6,379   $ 76,664     $ 63,788     $ 12,876  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 decreased during the three months ended June 30, 2017 compared to 2016 primarily due to a pension settlement expense of $7.2 million relating to the completion of a one-time retirement benefit withdrawal window for the frozen defined benefit pension plans. Consolidated earnings increased during the six months ended June 30, 2017 compared to 2016 primarily due to an increase in net investment income. The increase in net investment income is attributable to increased investment income on mortgage loans and increased assets in the annuity segment, as measured by account value and reserves.

 

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Life

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

 

     Three months ended June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Premiums and other revenues

            

Premiums

   $ 79,287     $ 77,053     $ 2,234     $ 156,761     $ 152,170     $ 4,591  

Other policy revenues

     62,464       62,579       (115     122,373       124,187       (1,814

Net investment income

     60,689       56,060       4,629       122,898       110,244       12,654  

Other income

     503       477       26       1,119       1,070       49  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     202,943       196,169       6,774       403,151       387,671       15,480  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

            

Policyholder benefits

     98,909       91,754       7,155       198,017       192,525       5,492  

Interest credited to policyholders’ account balances

     19,876       17,470       2,406       35,281       33,555       1,726  

Commissions for acquiring and servicing policies

     36,773       31,189       5,584       71,583       60,983       10,600  

Other operating expenses

     50,276       50,450       (174     101,531       101,829       (298

Change in deferred policy acquisition costs (1)

     (10,707     (11,460     753       (18,564     (14,506     (4,058
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     195,127       179,403       15,724       387,848       374,386       13,462  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 7,816     $ 16,766     $ (8,950   $ 15,303     $ 13,285     $ 2,018  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 decreased during the three months ended June 30, 2017 compared to 2016 primarily due to an increase in the frequency of incurred claims. Earnings increased during the six months ended June 30, 2017 compared to 2016 primarily due to a higher return on invested assets, partially offset by an increase in policyholders’ benefits.

Premiums and other revenues

Premiums increased during the three and six months ended June 30, 2017 compared to 2016 primarily due to continued growth in renewal premium on traditional life products. Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies.

Life insurance sales

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

 

     Three months ended June 30,            Six months ended June 30,         
     2017      2016      Change     2017      2016      Change  

Traditional Life

   $ 15,439      $ 13,774      $ 1,665     $ 29,704      $ 27,313      $ 2,391  

Universal Life

     6,165        4,807        1,358       11,490        8,965        2,525  

Indexed UL

     6,878        6,511        367       12,787        11,589        1,198  

Variable UL

     —          24        (24     —          24        (24
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total Recurring

   $ 28,482      $ 25,116      $ 3,366     $ 53,981      $ 47,891      $ 6,090  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Single and excess

   $ 821      $ 532      $ 289     $ 1,422      $ 955      $ 467  

Credit life

     1,060        1,165        (105     2,069        2,045        24  

 

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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. 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 and six months ended June 30, 2017 compared to 2016.

Benefits, losses and expenses

Policyholder benefits increased during the three and six months ended June 30, 2017 compared to 2016 primarily due to an increase in the frequency of incurred claims.

Commissions increased during the three and six months ended June 30, 2017 compared to 2016 commensurate with the increase in life sales.

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

 

     Three months ended June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Acquisition cost capitalized

   $ 31,604     $ 29,247     $ 2,357     $ 60,650     $ 54,464     $ 6,186  

Amortization of DAC

     (20,897     (17,787     (3,110     (42,086     (39,958     (2,128
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 10,707     $ 11,460     $ (753   $ 18,564     $ 14,506     $ 4,058  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Policy in-force information

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

 

     June 30,
2017
     December 31,
2016
     Change  

Life insurance in-force

        

Traditional life

   $ 70,474,059      $ 67,649,433      $ 2,824,626  

Interest-sensitive life

     28,623,748        27,971,646        652,102  
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 99,097,807      $ 95,621,079      $ 3,476,728  
  

 

 

    

 

 

    

 

 

 

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

 

     June 30,
2017
     December 31,
2016
     Change  

Number of policies in-force

        

Traditional life

     1,819,009        1,841,359        (22,350

Interest-sensitive life

     226,611        222,845        3,766  
  

 

 

    

 

 

    

 

 

 

Total number of policies

     2,045,620        2,064,204        (18,584
  

 

 

    

 

 

    

 

 

 

Total life insurance in-force increased during the six months ended June 30, 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 June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Premiums and other revenues

            

Premiums

   $ 65,389     $ 86,030     $ (20,641   $ 95,198     $ 156,238     $ (61,040

Other policy revenues

     3,612       2,910       702       7,155       5,649       1,506  

Net investment income

     131,952       123,640       8,312       271,629       240,536       31,093  

Other income

     974       802       172       1,639       1,762       (123
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     201,927       213,382       (11,455     375,621       404,185       (28,564
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

            

Policyholder benefits

     77,798       93,655       (15,857     121,460       174,902       (53,442

Interest credited to policyholders’ account balances

     74,672       68,431       6,241       155,275       128,873       26,402  

Commissions for acquiring and servicing policies

     33,407       21,363       12,044       50,691       43,271       7,420  

Other operating expenses

     12,718       15,808       (3,090     23,741       28,966       (5,225

Change in deferred policy acquisition costs (1)

     (14,539     (3,338     (11,201     (17,170     (7,261     (9,909
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     184,056       195,919       (11,863     333,997       368,751       (34,754
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 17,871     $ 17,463     $ 408     $ 41,624     $ 35,434     $ 6,190  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 six months ended June 30, 2017 compared to 2016 primarily due to increased assets, as measured by account value and reserves, leading to an increase in investment income net of interest credited to policyholders’ account balances.

When comparing the three month period ending June 30, 2017 to the prior year, earnings were relatively stable. The improvement in investment income related to increased assets was partly offset by immediate annuities having better than expected mortality experience in the second quarter of 2016.

Premiums and other revenues

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

 

     Three months ended June 30,            Six months ended June 30,         
     2017      2016      Change     2017      2016      Change  

Fixed deferred annuity

   $ 306,954      $ 145,792      $ 161,162     $ 454,156      $ 329,948      $ 124,208  

Single premium immediate annuity

     80,724        98,552        (17,828     116,901        177,164        (60,263

Equity-indexed deferred annuity

     256,899        159,292        97,607       389,800        301,271        88,529  

Variable deferred annuity

     19,606        20,685        (1,079     39,912        40,574        (662
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premium and deposits

     664,183        424,321        239,862       1,000,769        848,957        151,812  

Less: Policy deposits

     598,794        338,291        260,503       905,571        692,719        212,852  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total earned premiums

   $ 65,389      $ 86,030      $ (20,641   $ 95,198      $ 156,238      $ (61,040
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Sales strengthened during the second quarter of 2017 led by the fixed deferred and equity indexed products. Earned premium, however, which is reflective of decreased single premium immediate annuity sales, decreased during the three and six months ended June 30, 2017 compared to 2016.

 

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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):

 

     Six months ended June 30,  
     2017      2016  

Fixed deferred and equity-indexed annuity

     

Account value, beginning of period

   $ 9,118,350      $ 8,880,448  

Net inflows

     699,473        492,357  

Surrenders

     (410,957      (439,972

Fees

     (3,742      (3,060

Interest credited

     152,332        125,050  
  

 

 

    

 

 

 

Account value, end of period

     9,555,456        9,054,823  
  

 

 

    

 

 

 

Single premium immediate annuity

     

Reserve, beginning of period

     1,566,440        1,398,481  

Net inflows

     29,405        97,199  

Interest and mortality

     27,101        21,486  
  

 

 

    

 

 

 

Reserve, end of period

     1,622,946        1,517,166  
  

 

 

    

 

 

 

Variable deferred annuity

     

Account value, beginning of period

     392,345        417,821  

Net inflows

     37,495        39,470  

Surrenders

     (78,881      (52,156

Fees

     (2,281      (2,364

Change in market value and other

     33,502        2,986  
  

 

 

    

 

 

 

Account value, end of period

     382,180        405,757  
  

 

 

    

 

 

 

Total account value, end of period

   $ 11,560,582      $ 10,977,746  
  

 

 

    

 

 

 

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 six months ended June 30, 2017 was commensurate with decreases in SPIA premium relative to the prior year.

Commissions increased during the three and six months ended June 30, 2017 compared to 2016 driven by an increase in sales of deferred annuity and equity indexed products.

Other operating expenses decreased during the three and six months ended June 30, 2017 compared to 2016 as annuity volume increased.

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 June 30,            Six months ended June 30,        
     2017     2016     Change      2017     2016     Change  

Acquisition cost capitalized

   $ 33,010     $ 22,349     $ 10,661      $ 50,856     $ 43,295     $ 7,561  

Amortization of DAC

     (18,471     (19,011     540        (33,686     (36,034     2,348  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 14,539     $ 3,338     $ 11,201      $ 17,170     $ 7,261     $ 9,909  
  

 

 

   

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

The change in DAC increased during the six months ended June 30, 2017 compared to 2016 due to a increase in capitalization which is primarily driven by the increase 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 six months ended June 30, 2017 and 2016 were 33.9% and 35.9% 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 and six months ended June 30, 2017 compared to 2016.

The S&P 500 Index increased by approximately 8.2% and 2.7% in the six months ended June 30, 2017 and 2016, respectively. This change in index performance led to an increase in the option return of $29.6 million during the six months ended June 30, 2017 compared to 2016, offset by a $32.3 million increase in the related equity-indexed embedded derivative for a net decrease in earnings of $2.7 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 June 30,            Six months ended June 30,         
     2017      2016      Change     2017      2016      Change  

Net investment income

                

Without option return

   $ 119,984      $ 118,040      $ 1,944     $ 239,485      $ 237,993      $ 1,492  

Option return

     11,968        5,600        6,368       32,144        2,543        29,601  

Interest credited to policy account balances

                

Without embedded derivatives

     58,345        59,735        (1,390     116,555        122,486        (5,931

Equity-indexed annuity embedded derivatives

     16,327        8,696        7,631       38,720        6,387        32,333  

Health

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

 

     Three months ended June 30,            Six months ended June 30,         
     2017      2016      Change     2017      2016      Change  

Premiums and other revenues

                

Premiums

   $ 36,593      $ 44,828      $ (8,235   $ 73,632      $ 87,141      $ (13,509

Net investment income

     2,505        2,519        (14     5,012        4,968        44  

Other income

     4,321        4,637        (316     8,667        8,816        (149
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total premiums and other revenues

     43,419        51,984        (8,565     87,311        100,925        (13,614
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

                

Claims incurred

     23,258        30,327        (7,069     47,786        62,619        (14,833

Commissions for acquiring and servicing policies

     6,270        5,380        890       12,160        10,258        1,902  

Other operating expenses

     9,582        11,081        (1,499     19,667        21,913        (2,246

Change in deferred policy acquisition costs (1)

     817        777        40       2,149        2,350        (201
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total benefits and expenses

     39,927        47,565        (7,638     81,762        97,140        (15,378
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Income before other items and federal income taxes

   $ 3,492      $ 4,419      $ (927   $ 5,549      $ 3,785      $ 1,764  
  

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

(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 remained relatively constant during the three months ended June 30, 2017 compared to 2016. Earnings increased during the six months ended June 30, 2017 compared to 2016, in part 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 June 30,     Six months ended June 30,  
     2017     2016     2017     2016  

Medicare Supplement

   $ 16,400        44.7   $ 17,236        38.4   $ 32,851        44.7   $ 34,876        40.0

Credit accident and health

     4,464        12.2       3,397        7.6       9,232        12.5       6,188        7.1  

MGU

     4,385        12.0       4,846        10.8       8,898        12.1       8,265        9.5  

Supplemental insurance

     6,249        17.1       5,191        11.6       12,468        16.9       10,448        12.0  

Medical expense

     3,167        8.7       3,505        7.8       6,380        8.7       7,205        8.3  

Group health

     586        1.6       9,186        20.5       1,209        1.6       17,417        20.0  

All other

     1,342        3.7       1,467        3.3       2,594        3.5       2,742        3.1  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 36,593        100.0   $ 44,828        100.0   $ 73,632        100.0   $ 87,141        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Medicare Supplement earned premiums decreased slightly based on the continued shift in sales from comprehensive higher premium plans to the lower premium high deductible plan. Credit accident and health increased primarily due to the onboarding of new producers writing new credit monthly pay business. Supplement Insurance increased due to increased sales in group worksite health benefit programs. Medical expense and group health are closed blocks of business. Written premiums on these closed blocks declined during the three and six months ended June 30, 2017 compared to 2016 due to non-renewal of a group health plan and lapsation.

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

 

     Six months ended June 30,  
     2017     2016  

Medicare Supplement

     33,887        6.6     33,896        6.1

Credit accident and health

     183,884        35.9       193,147        34.9  

MGU

     194,851        38.1       210,353        38.0  

Supplemental insurance

     50,521        9.9       61,828        11.2  

Medical expense

     2,055        0.4       2,384        0.4  

Group health

     14,686        2.9       16,725        3.0  

All other

     31,852        6.2       35,311        6.4  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

     511,736        100.0     553,644        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

Total in-force policies decreased during the six months ended June 30, 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. Medicare Supplement in-force policies remained stable although the sale of lower premium policies caused a decrease in earned premium. Credit accident and health in-force policies do not include monthly pay business. Although Credit accident and health premiums increased, policy counts decreased due to a decrease in the traditional single premium business. Although Supplemental Insurance sales increased, the termination of a large group with low coverage amounts produced a net decrease in Supplemental Insurance policy counts. Group health in-force policies decreased due to the non-renewal of a group health plan included in 2016 health results.

Benefits, losses and expenses

Claims incurred decreased during the three and six months ended June 30, 2017 compared to 2016 due to the non-renewal of a group health plan.

Commissions increased slightly during the three and six months ended June 30, 2017 compared to 2016 primarily due to increased sales in Credit accident and health on monthly pay business 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 June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Acquisition cost capitalized

   $ 2,732     $ 935     $ 1,797     $ 5,603     $ 4,915     $ 688  

Amortization of DAC

     (3,549     (1,712     (1,837     (7,752     (7,265     (487
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC

   $ (817   $ (777   $ (40   $ (2,149   $ (2,350   $ 201  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Property and Casualty

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

 

     Three months ended June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Premiums and other revenues

            

Net premiums written

   $ 365,797     $ 332,682     $ 33,115     $ 715,909     $ 646,027     $ 69,882  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 333,250     $ 304,788     $ 28,462     $ 660,700     $ 608,149     $ 52,551  

Net investment income

     15,775       13,040       2,735       29,815       27,952       1,863  

Other income

     2,196       1,361       835       4,134       2,351       1,783  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     351,221       319,189       32,032       694,649       638,452       56,197  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

            

Claims incurred

     254,180       230,960       23,220       481,710       442,918       38,792  

Commissions for acquiring and servicing policies

     64,995       57,013       7,982       132,503       113,319       19,184  

Other operating expenses

     44,579       38,541       6,038       90,877       81,747       9,130  

Change in deferred policy acquisition costs (1)

     (3,266     (2,550     (716     (3,597     (1,747     (1,850
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     360,488       323,964       36,524       701,493       636,237       65,256  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ (9,267   $ (4,775   $ (4,492   $ (6,844   $ 2,215     $ (9,059
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss ratio

     76.3     75.8     0.5       72.9     72.8     0.1  

Underwriting expense ratio

     31.9       30.5       1.4       33.3       31.8       1.5  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     108.2     106.3     1.9       106.2     104.6     1.6  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impact of catastrophe events on combined ratio

     12.4       11.5       0.9       10.3       9.4       0.9  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio without impact of catastrophe events

     95.8     94.8     1.0       95.9     95.2     0.7  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross catastrophe losses

   $ 41,262     $ 35,024     $ 6,238     $ 68,034     $ 57,351     $ 10,683  

Net catastrophe losses

     41,213       35,020       6,193       67,988       57,163       10,825  

 

(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 declined during the three and six months ended June 30, 2017 compared to 2016 primarily due to increased catastrophe losses and other fire and wind/hail losses impacting the homeowners and personal auto lines.

Premiums and other revenues

Net premiums written and earned increased for all major lines of business during the three and six months ended June 30, 2017 compared to 2016. The largest increases were in the personal automobile and other commercial lines of business.

Benefits, losses and expenses

Claims incurred increased during the three and six months ended June 30, 2017 compared to 2016, as a result of increases in catastrophe losses as well as non-catastrophe property losses.

 

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Commissions for acquiring and servicing policies increased during the three and six months ended June 30, 2017 compared to 2016, primarily as a result of the premium growth as well as the mix of products.

Operating expenses increased during the three and six months ended June 30, 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 54.9% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 34.7% of net premiums written; and (iii) Credit-related property insurance products, marketed to and through financial institutions and retailers, representing 10.4% of net premiums written.

Personal Products

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

 

     Three months ended June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Net premiums written

            

Automobile

   $ 122,998     $ 109,029     $ 13,969     $ 245,863     $ 219,072     $ 26,791  

Homeowner

     69,507       64,961       4,546       123,963       114,840       9,123  

Other Personal

     11,851       10,887       964       23,316       21,831       1,485  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums written

   $ 204,356     $ 184,877     $ 19,479     $ 393,142     $ 355,743     $ 37,399  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

            

Automobile

   $ 118,832     $ 106,487     $ 12,345     $ 231,781     $ 210,356     $ 21,425  

Homeowner

     60,753       56,462       4,291       119,678       112,421       7,257  

Other Personal

     10,850       10,274       576       21,357       20,640       717  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 190,435     $ 173,223     $ 17,212     $ 372,816     $ 343,417     $ 29,399  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss ratio

            

Automobile

     83.1     86.3     (3.2 )%      79.2     84.1     (4.9 )% 

Homeowner

     99.7       83.2       16.5       89.1       74.3       14.8  

Other Personal

     84.9       61.1       23.8       70.3       47.6       22.7  

Personal line loss ratio

     88.5     83.8     4.7     88.5     78.7     9.8

Combined Ratio

            

Automobile

     106.5     109.9     (3.4 )%      103.2     109.4     (6.2 )% 

Homeowner

     134.1       109.8       24.3       124.6       102.5       22.1  

Other Personal

     110.4       85.3       25.1       104.6       73.7       30.9  

Personal line combined ratio

     115.5     108.4     7.1     110.2     105.0     5.2

Automobile: Net premiums written and earned increased in our personal automobile line during the three and six months ended June 30, 2017 compared to 2016 due to rate increases and an increase of policies in force. The loss and combined ratios decreased during the three and six months ended June 30, 2017 compared to 2016 primarily due to an improvement in rate adequacy somewhat offset by an increase in catastrophe losses.

Homeowners: Net premiums written and earned increased during the three and six months ended June 30, 2017 compared to 2016 primarily due to increased sales of homeowner products to renters. The loss and combined ratios increased during the three and six months ended June 30, 2017 compared to 2016 due to an increase in catastrophe claim activity as well as an increase in non-catastrophe fire and wind/hail losses compared to 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 and six months ended June 30, 2017 compared to 2016 due to catastrophe losses in the rental-owners line along with a large umbrella coverage loss.

 

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Commercial Products

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

 

     Three months ended June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Net premiums written

            

Other Commercial

   $ 60,782     $ 51,152     $ 9,630     $ 114,932     $ 96,764     $ 18,168  

Agricultural Business

     39,414       38,246       1,168       73,894       71,154       2,740  

Automobile

     29,605       28,262       1,343       59,384       56,226       3,158  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums written

   $ 129,801     $ 117,660     $ 12,141     $ 248,210     $ 224,144     $ 24,066  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

            

Other Commercial

   $ 47,095     $ 40,139     $ 6,956     $ 92,057     $ 78,848     $ 13,209  

Agricultural Business

     34,898       33,279       1,619       68,561       65,166       3,395  

Automobile

     24,814       23,440       1,374       48,793       46,136       2,657  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 106,807     $ 96,858     $ 9,949     $ 209,411     $ 190,150     $ 19,261  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss ratio

            

Other Commercial

     58.2     64.9     (6.7 )%      56.5     67.2     (10.7 )% 

Agricultural Business

     63.6       74.1       (10.5     75.2       76.8       (1.6

Automobile

     56.2       66.2       (10.0     62.8       70.1       (7.3

Commercial line loss ratio

     59.5     68.4     (8.9 )%      64.0     71.2     (7.2 )% 

Combined ratio

            

Other Commercial

     91.5     95.9     (4.4 )%      90.2     98.8     (8.6 )% 

Agricultural Business

     101.1       111.5       (10.4     113.0       114.7       (1.7

Automobile

     79.9       90.3       (10.4     87.3       94.6       (7.3

Commercial line combined ratio

     91.9     99.9     (8.0 )%      97.0     103.2     (6.2 )% 

Other Commercial: Net premiums written and earned increased during the three and six months ended June 30, 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 and six months ended June 30, 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 and six months ended June 30, 2017 compared to 2016 primarily as a result of improved rate adequacy. The loss and combined ratios decreased during the three and six months ended June 30, 2017 compared to 2016 primarily due to a decrease in catastrophe losses.

Commercial Automobile: Net premiums written and earned increased during the six months ended June 30, 2017 compared to 2016, primarily due to increased sales as well as improved rate adequacy. The loss and combined ratios decreased during the three and six months ended June 30, 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 June 30,           Six months ended June 30,        
     2017     2016     Change     2017     2016     Change  

Net premiums written

   $ 31,640     $ 30,145     $ 1,495     $ 74,557     $ 66,140     $ 8,417  

Net premiums earned

     36,008       34,707       1,301       78,473       74,581       3,892  

Loss ratio

     61.4     56.4     5.0     53.9     50.2     3.7

Combined ratio

     117.1     113.6     3.5     111.5     107.7     3.8

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 and six months ended June 30, 2017 compared to 2016 primarily due to increases in our Collateral Protection and debt cancellation business. The loss and combined ratios increased during the three and six months ended June 30, 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 June 30,            Six months ended June 30,        
     2017     2016      Change     2017     2016     Change  

Other revenues

             

Net investment income

   $ 23,697     $ 15,451      $ 8,246     $ 33,767     $ 23,064     $ 10,703  

Realized investment gains, net

     9,932       3,415        6,517       17,157       9,001       8,156  

Other Income

     954       858        96       2,234       2,120       114  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total other revenues

     34,583       19,724        14,859       53,158       34,185       18,973  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

             

Commissions

     (5     —          (5     (6     (2     (4

Other operating expenses

     20,599       13,317        7,282       32,132       25,118       7,014  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     20,594       13,317        7,277       32,126       25,116       7,010  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 13,989     $ 6,407      $ 7,582     $ 21,032     $ 9,069     $ 11,963  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Earnings increased during the three and six months ended June 30, 2017 compared to 2016 primarily due to an increase in net investment income primarily attributable to increased prepayment fees on mortgage loans and realized investment gains reflecting increased sales of certain real estate investments. These increases were partially offset by an increase in other operating expenses which includes a pension cost of $7.2 million relating to the completion of the one-time pension payment window.

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.

 

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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. 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):

 

     June 30, 2017     December 31, 2016  

Bonds held-to-maturity, at amortized cost

   $ 7,149,494        34.3   $ 7,251,385        35.8

Bonds available-for-sale, at fair value

     5,918,462        28.2       5,803,276        28.7  

Equity securities, at fair value

     1,641,900        7.8       1,541,676        7.6  

Mortgage loans, net of allowance

     4,647,426        22.1       4,348,046        21.5  

Policy loans

     383,928        1.8       384,376        1.9  

Investment real estate, net of accumulated depreciation

     555,797        2.6       593,417        2.9  

Short-term investments

     576,878        2.7       192,226        1.0  

Other invested assets

     108,985        0.5       113,550        0.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 20,982,870        100.0   $ 20,227,952        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The increase in our total investments at June 30, 2017 compared to 2016 was primarily a result of an increase in mortgage loans, and short-term investments.

Bonds—We allocate most of our fixed maturity securities to support our insurance business. At June 30, 2017, our fixed maturity securities had an estimated fair value of $13.3 billion, which was $0.5 billion, or 3.8%, 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 remained constant at $0.7 billion at June 30, 2017 and December 31, 2016. 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 June 30, 2017 and December 31, 2016.

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 June 30, 2017, we had $383.9 million in policy loans with a loan to surrender value of 65.6%, 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 $56.4 million during the six months ended June 30, 2017 compared to 2016 primarily due to an increase in realized and unrealized gain of equity-indexed options as a result of increases in the S&P 500 and an increase in mortgage loan income. 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 $9.4 million during the six months ended June 30, 2017 compared to 2016 primarily due to an increase in investment gain on securities. Other-than-temporary impairment on investment securities increased $1.2 million during the six months ended June 30, 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):

 

     June 30,
2017
     December 31,
2016
     Change  

Held-to-Maturity

        

Gains

   $ 300,368      $ 285,315      $ 15,053  

Losses

     (23,086      (40,008      16,922  
  

 

 

    

 

 

    

 

 

 

Net Gain

     277,282        245,307        31,975  
  

 

 

    

 

 

    

 

 

 

Available-for-Sale (1)

        

Gains

     1,142,242        986,635        155,607  

Losses

     (33,561      (43,100      9,539  
  

 

 

    

 

 

    

 

 

 

Net Gain

     1,108,681        943,535        165,146  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,385,963      $ 1,188,842      $ 197,121  
  

 

 

    

 

 

    

 

 

 

 

(1)  Includes bonds and equity securities

The net change in the unrealized gains on fixed maturity securities between December 31, 2016 and June 30, 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 $901.3 million and $809.2 million at June 30, 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 $1.0 billion at June 30, 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):

 

     June 30,      December 31,  
     2017      2016  

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

   $ 4,230,447      $ 4,196,279  

AOCI

     560,511        455,899  
  

 

 

    

 

 

 

Total American National stockholders’ equity

   $ 4,790,958      $ 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 $30.5 million and $31.8 million at June 30, 2017 and December 31, 2016, respectively.

 

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

 

     Six months ended June 30, 2017  
     Capital and
Retained
Earnings
     AOCI      Total  

Net income attributable to American National

   $ 75,799      $ —        $ 75,799  

Dividends to shareholders

     (44,168      —          (44,168

Change in net unrealized gains on securities

     —          96,588        96,588  

Defined benefit pension plan adjustment

     —          7,741        7,741  

Foreign currency transaction and translation adjustment

     —          283        283  

Other

     2,537        —          2,537  
  

 

 

    

 

 

    

 

 

 

Total

   $ 34,168      $ 104,612      $ 138,780  
  

 

 

    

 

 

    

 

 

 

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 June 30, 2017 and December 31, 2016, American National Insurance Company’s statutory capital and surplus was $3,028,989,000 and $2,985,909,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at June 30, 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 was recognized as pension costs in proportion to the reduction of the pension plans’ total benefit obligations. The after-tax expense recognized in the second quarter of 2017 was approximately $4,673,000.

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 June 30, 2017. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 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 six months ended June 30, 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 June 30, 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, except as set forth below.

We are subject to extensive regulation, and potential further regulation may increase our operating costs and limit our growth. We are subject to extensive insurance laws and regulations that affect nearly every aspect of our business. We are also subject to additional laws and regulations administered and enforced by a number of different governmental authorities, such as state securities and workforce regulators, the SEC, the Internal Revenue Service (“IRS”), FINRA, the U.S. Department of Justice, the U.S. Department of Labor (“DOL”), the U.S. Department of Housing and Urban Development (“HUD”), HHS, the Federal Trade Commission and state attorneys general, each of which exercises a degree of interpretive latitude. We face the risks that any particular regulator’s or enforcement authority’s interpretation of a legal issue may conflict with that of another regulator or enforcement authority or may change over time to our detriment. Regulatory investigations, which can be broad and unpredictable, may raise issues not identified previously and could result in new legal actions against us and industry-wide regulations that could adversely affect us. Further, we are experiencing increasing information requests from regulators without corresponding direct regulation being applicable to us, on issues such as climate change and our investments in certain companies or industries. Responding to such requests adds to our compliance burden.

The laws and regulations applicable to us are complex and subject to change, and compliance is time consuming and personnel-intensive. Changes in these laws and regulations, or interpretations by courts or regulators, may materially increase our costs of doing business and may result in changes to our practices that may limit our ability to grow and improve our profitability. Regulatory developments or actions against us could have material adverse financial effects and could cause harm to our reputation. Among other things, we could be fined, prohibited from engaging in some or all of our business activities, or made subject to limitations or conditions on our business activities.

As insurance industry practices and legal, judicial, social, and other conditions outside of our control change, unexpected issues related to claims and coverage may emerge. These changes may include modifications to long established business practices or policy interpretations, which may adversely affect us by extending coverage beyond our underwriting intent or by increasing the type, number, or size of claims. For example, a growing number of states have adopted legislation that is similar to the Model Unclaimed Life Insurance Benefits Act. Such legislation imposes new requirements on insurers to periodically compare their life insurance and annuity contracts and retained asset accounts against the U.S. Social Security Administration’s Death Master File, investigate any potential matches, determine whether benefits are payable, and attempt to locate beneficiaries. Some states are attempting to apply these laws retroactively to existing policies. A number of states have aggressively audited life insurance companies, including us and some of our subsidiaries, for compliance with such laws, and more states could do so. Such audits have sought to identify unreported insured deaths and to determine whether any unpaid benefits, proceeds or other payments under life insurance or annuity contracts should be treated as unclaimed property to be escheated to the state. We have modified our claims process to stay current with emerging trends. It is possible that such audits or additional enactment of similar legislation may result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, regulatory actions, litigation, administrative fines and penalties, interest, and additional changes to our procedures.

 

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Federal regulatory changes and initiatives have a growing impact on us. For example, Dodd-Frank provides for enhanced federal oversight of the financial services industry through multiple initiatives. Provisions of Dodd-Frank are or may become applicable to us, our competitors, or certain entities with which we do business. For example, it is possible that regulations issued by the Consumer Financial Protection Bureau (“CFPB”) may extend, or be interpreted to extend, to the sale of certain insurance products by covered financial institutions, which could adversely affect sales of such products. The Federal Insurance Office, as a result of various studies it conducts, may also recommend changes in laws or regulations that affect our business.

We are subject to various conditions and requirements of the Patient Protection and Affordable Care Act of 2010 (“the Healthcare Act”). The Healthcare Act may affect the small blocks of business we have offered or acquired over the years that are, or deemed to be, health insurance. The Healthcare Act also influences the design of products sold by our Health segment, which may influence consumer acceptance of such products and the cost of monitoring compliance with the Healthcare Act. Moreover, the Healthcare Act affects the benefit plans we sponsor for employees or retirees and their dependents, our expense to provide such benefits, our tax liabilities in connection with the provision of such benefits, and our ability to attract or retain employees. Any repeal, replacement or amendment of the Healthcare Act could have similar effects on us.

Certain federal regulation may impact our property and casualty operations. In 2013, HUD finalized a “disparate impact” regulation that may adversely impact our ability to differentiate pricing for homeowners policies using traditional risk selection analysis. Various legal challenges to this regulation are being pursued by the industry. If this regulation is implemented, whether or not modified by HUD, it is uncertain to what extent it may impact the property and casualty industry underwriting practices. Such regulation could increase litigation costs, force changes in underwriting practices, and impair our ability to write homeowners business profitably. In addition, Congress or states may enact legislation affecting insurers’ ability to use credit-based insurance scores as part of the property and casualty underwriting or rating process, which could force changes in underwriting practices and impair our property and casualty operations’ ability to write homeowners business profitably.

There have been federal efforts to change the standards of care applicable to broker-dealers and investment advisers. In April 2016, the U.S. Department of Labor (“DOL”) issued a regulation that will significantly expand the range of activities considered to be fiduciary investment advice under the Employee Retirement and Income Security Act of 1974 and the Internal Revenue Code of 1986. This regulation impacts individuals and entities that offer investment advice to purchasers of qualified retirement products, such as IRA’s and qualified retirement plans. It applies ERISA’s fiduciary standard to many insurance agents, broker-dealers, advisers and others not currently subject to the standard, when they sell annuities to IRA’s and qualified retirement plans. Further, it prohibits such individuals from receiving commission-based compensation from such sales unless they comply with a prohibited transaction exemption under the rule. In April 2017, the DOL delayed the beginning of the rule’s implementation until June 9, 2017, with full implementation delayed until January 1, 2018, and subsequently asked for additional public comment regarding the rule and the advisability of possible further delay. In addition, pursuant to direction from the Trump administration, the DOL is further studying the economic impact of the rule. Given these developments, as well as current pending litigation challenging the rule, there is still some uncertainty about the form and timing of the rule’s final implementation. Compliance with the rule may result in decreased premium on certain life and annuity products as a result of more limited sales opportunities through our current distribution arrangements. We may also experience a loss of some in-force business, as well as increased regulatory burdens and litigation risk. In addition, following a study required by Dodd-Frank, the staff of the SEC recommended a uniform fiduciary duty standard applicable to both broker-dealers and investment advisers when providing personalized investment advice to retail customers. It is not clear at the present time whether or when the SEC will ultimately implement this change. However, if implemented, it would apply a different standard of care than is currently applicable to broker-dealers and would affect how our variable insurance products are designed and sold.

International standards continue to emerge in response to the globalization of the insurance industry and evolving standards of regulation, solvency measurement and risk management. Any international conventions or mandates that directly or indirectly impact or influence the nature of U.S. regulation or industry operations could negatively affect us.

 

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For further discussions of the kinds of regulation applicable to us, see Item 1, Business, Regulation Applicable to Our Business, 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 six months ended June 30, 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: August 7, 2017

 

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