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.
x
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).
x
Yes
¨
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 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
x
As of November 01, 2016, there were 26,914,516 shares of the registrants voting common stock, $1.00 par value per share, outstanding.
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.
The consolidated financial statements and notes thereto have been prepared in conformity with U.S.
generally accepted accounting principles (GAAP) and are reported in U.S. currency. American National consolidates entities that are wholly-owned and those in which American National owns less than 100% but controls, as well as variable
interest entities in which American National is the primary beneficiary. Intercompany balances and transactions with consolidated entities have been eliminated. Investments in unconsolidated affiliates are accounted for using the equity method of
accounting. Certain amounts in prior years have been reclassified to conform to current year presentation.
The interim consolidated financial statements
and notes herein are unaudited and reflect all adjustments which management considers necessary for the fair presentation of the interim consolidated statements of financial position, operations, comprehensive income, changes in stockholders
equity, and cash flows.
The interim consolidated financial statements and notes should be read in conjunction with the annual consolidated financial
statements and notes thereto included in American Nationals Annual Report on Form 10-K as of and for the year ended December 31, 2015. 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.
In February 2015, the FASB issued guidance amending the consolidation analysis. The guidance modifies the evaluation of whether limited partnerships and
similar legal entities are variable interest entities (VIEs) or voting interest entities. The guidance eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting
entities that are involved with VIEs. We adopted the standard on its required effective date of January 1, 2016. The adoption of this standard did not have a material impact to the Companys results of operations or financial position.
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 guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2017 and is to be applied retrospectively. The Company is
evaluating the impact of adoption, which is not expected to be material to the Companys results of operations or financial position.
In May 2015, the FASB issued guidance to expand the disclosures an insurance entity would provide about its
short duration contracts. The disclosure about the liability for unpaid claims and claim adjustment expenses is intended to increase the transparency of significant estimates made in the measuring of those liabilities. It is also intended to provide
insight into an insurance entitys ability to underwrite and anticipate costs associated with claims. The amended guidance is effective for annual periods beginning after December 15, 2015, and for interim periods beginning after
December 15, 2016. The guidance affects disclosures only and will not impact the Companys results of operations or financial position.
In
January 2016, the FASB issued guidance that will change certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance requires that equity investments be measured at fair value and that changes
in fair value are recognized in net income. It 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 balance sheet. The amended guidance 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
the adoption to the Companys results of operations and financial position.
In February 2016, the FASB issued guidance that will require most leases
to be recognized on the statement of financial position. The guidance defines a lease as a contract, or part of a contract, that conveys the right to control the use of the identified property, plant, or equipment for a period of time in exchange
for consideration. The accounting applied by a lessor remains largely unchanged. The amended guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2018. The Company is currently
evaluating the impact of the adoption, which is not expected to be material to the Companys results of operations or financial position.
In June
2016, the FASB issued guidance that will significantly change how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard 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 amended guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2019. The Company is currently
evaluating the impact of the adoption to the Companys results of operations and financial position.
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):
Gains and losses are determined using specific identification of the securities sold. During the nine months ended
September 30, 2016 there were no bonds transferred from held-to-maturity to available-for-sale. During the nine months ended September 30, 2015 there were bonds with a carrying value of $171,000 transferred from held-to-maturity to
available-for-sale after a significant deterioration in the issuers credit worthiness became evident. An unrealized loss of $53,000 was recorded in 2015, following the transfer at fair value.
The components of the change in net unrealized gains (losses) on securities are shown below (in thousands):
As of September 30, 2016, 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 issuers financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.
Bonds distributed by credit quality rating, using both Standard & Poors and Moodys ratings, are shown below:
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 are as follows:
For the nine months ended September 30, 2016, American National did not foreclose on any loans, and one loan was in the
process of foreclosure with a recorded investment of $1,940,000. For the year ended December 31, 2015, American National foreclosed on three loans with a recorded investment totaling $24,333,000 and one loan was in the process of foreclosure
with a recorded investment of $2,450,000. American National sold no loans for the nine months ended September 30, 2016 and one loan with a recorded investment of $2,702,000 resulting in a realized loss of $1,602,000 for the year ended
December 31, 2015.
Total mortgage loans are net of unamortized discounts of $289,000 and $452,000 and unamortized origination fees of $30,008,000
and $22,637,000 at September 30, 2016 and December 31, 2015, respectively. No unearned income is included in these amounts.
The credit quality of the mortgage loan portfolio is assessed by evaluating the credit risk of the borrowers. A loan is classified as
performing or non-performing based on whether all of the contractual terms of the loan have been met.
Loans not evaluated individually for collectability
are segregated by property-type and location, and allowance factors are applied. These factors are developed annually and reviewed quarterly 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):
At September 30, 2016 and December 31, 2015, the recorded investment for loans collectively evaluated for impairment
was $4,087,732,000 and $3,442,211,000, respectively. The recorded investment for loans individually evaluated for impairment was $38,623,000 and $53,964,000, respectively.
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 contracts):
There are no 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.
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 Nationals 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 2016 or 2015.
The assets and liabilities
relating to the VIEs included in the consolidated financial statements are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Investment real estate
|
|
$
|
187,631
|
|
|
$
|
174,264
|
|
Short-term investments
|
|
|
1
|
|
|
|
1
|
|
Cash and cash equivalents
|
|
|
5,339
|
|
|
|
3,855
|
|
Accrued investment income
|
|
|
|
|
|
|
557
|
|
Other receivables
|
|
|
5,888
|
|
|
|
8,101
|
|
Other assets
|
|
|
7,902
|
|
|
|
8,210
|
|
|
|
|
|
|
|
|
|
|
Total assets of consolidated VIEs
|
|
$
|
206,761
|
|
|
$
|
194,988
|
|
|
|
|
|
|
|
|
|
|
Notes payable
|
|
$
|
146,068
|
|
|
$
|
128,436
|
|
Other liabilities
|
|
|
11,012
|
|
|
|
19,436
|
|
|
|
|
|
|
|
|
|
|
Total liabilities of consolidated VIEs
|
|
$
|
157,080
|
|
|
$
|
147,872
|
|
|
|
|
|
|
|
|
|
|
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 $36,177,000 and $34,699,000 at September 30, 2016 and
December 31, 2015, respectively. The long-term portion of notes payable, $136,693,000, consists of five notes with the following interest rates: 4.0%, one note with adjusted LIBOR plus LIBOR margin, one note at LIBOR, one note at LIBOR plus
2.5%, and one note at the lesser of the Prime Rate or the highest rate permitted by law. Of the long-term notes payable, two notes will mature in 2018, one note will mature in 2021, and two notes will mature beyond five years. A sixth note with a
balance of $9,375,000 matured and was paid off in October, 2016.
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Amount
|
|
|
Maximum
Exposure
to Loss
|
|
|
Carrying
Amount
|
|
|
Maximum
Exposure
to Loss
|
|
Investment in unconsolidated affiliates
|
|
$
|
305,100
|
|
|
$
|
305,100
|
|
|
$
|
236,816
|
|
|
$
|
236,816
|
|
Mortgage loans
|
|
|
525,403
|
|
|
|
525,403
|
|
|
|
212,228
|
|
|
|
212,228
|
|
Accrued investment income
|
|
|
1,971
|
|
|
|
1,971
|
|
|
|
661
|
|
|
|
661
|
|
As of September 30, 2016, one real estate investment with a carrying value of $2,825,000 was classified as held for sale.
16
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated
as Hedging Instruments
|
|
Location in the Consolidated
Statements of Financial Position
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Number of
Instruments
|
|
|
Notional
Amounts
|
|
|
Estimated
Fair Value
|
|
|
Number of
Instruments
|
|
|
Notional
Amounts
|
|
|
Estimated
Fair Value
|
|
Equity-indexed options
|
|
Other invested assets
|
|
|
433
|
|
|
$
|
1,335,100
|
|
|
$
|
145,450
|
|
|
|
419
|
|
|
$
|
1,200,600
|
|
|
$
|
123,007
|
|
Equity-indexed embedded derivative
|
|
Policyholders account balances
|
|
|
56,789
|
|
|
|
1,223,700
|
|
|
|
298,499
|
|
|
|
51,815
|
|
|
|
1,067,600
|
|
|
|
242,412
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives Not Designated
as Hedging Instruments
|
|
Location in the Consolidated
Statements of Operations
|
|
Gains (Losses) Recognized in Income on Derivatives
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Equity-indexed options
|
|
Net investment income
|
|
$
|
15,040
|
|
|
$
|
(33,682
|
)
|
|
$
|
17,190
|
|
|
$
|
(34,646
|
)
|
Equity-indexed embedded derivative
|
|
Interest credited to policyholders account balances
|
|
|
(15,054
|
)
|
|
|
16,780
|
|
|
|
(21,227
|
)
|
|
|
19,997
|
|
Note 8 Net Investment Income and Realized Investment Gains (Losses)
Net investment income is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Bonds
|
|
$
|
137,322
|
|
|
$
|
138,707
|
|
|
$
|
416,301
|
|
|
$
|
421,543
|
|
Equity securities
|
|
|
9,094
|
|
|
|
9,353
|
|
|
|
28,421
|
|
|
|
27,869
|
|
Mortgage loans
|
|
|
61,277
|
|
|
|
50,681
|
|
|
|
158,593
|
|
|
|
149,682
|
|
Real estate
|
|
|
2,395
|
|
|
|
13,555
|
|
|
|
950
|
|
|
|
11,949
|
|
Options
|
|
|
15,040
|
|
|
|
(33,682
|
)
|
|
|
17,190
|
|
|
|
(34,646
|
)
|
Other invested assets
|
|
|
2,656
|
|
|
|
5,868
|
|
|
|
13,093
|
|
|
|
20,960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
227,784
|
|
|
$
|
184,482
|
|
|
$
|
634,548
|
|
|
$
|
597,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized investment gains (losses) are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Bonds
|
|
$
|
8,412
|
|
|
$
|
(34
|
)
|
|
$
|
13,005
|
|
|
$
|
10,063
|
|
Equity securities
|
|
|
17,599
|
|
|
|
7,669
|
|
|
|
28,529
|
|
|
|
44,579
|
|
Mortgage loans
|
|
|
(883
|
)
|
|
|
639
|
|
|
|
176
|
|
|
|
(94
|
)
|
Real estate
|
|
|
(2,928
|
)
|
|
|
(739
|
)
|
|
|
(2,655
|
)
|
|
|
9,094
|
|
Other invested assets
|
|
|
(19
|
)
|
|
|
(7
|
)
|
|
|
(846
|
)
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,181
|
|
|
$
|
7,528
|
|
|
$
|
38,209
|
|
|
$
|
63,598
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17
Note 8 Net Investment Income and Realized Investment Gains (Losses) (Continued)
Other-than-temporary impairment losses are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Bonds
|
|
$
|
(94
|
)
|
|
$
|
(286
|
)
|
|
$
|
(94
|
)
|
|
$
|
(286
|
)
|
Equity securities
|
|
|
(5,820
|
)
|
|
|
(19,121
|
)
|
|
|
(12,847
|
)
|
|
|
(22,618
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
(5,914
|
)
|
|
$
|
(19,407
|
)
|
|
$
|
(12,941
|
)
|
|
$
|
(22,904
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 9 Fair Value of Financial Instruments
The carrying amount and fair value of financial instruments are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
|
Carrying
Amount
|
|
|
Fair Value
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, bonds held-to-maturity
|
|
$
|
7,363,132
|
|
|
$
|
7,805,540
|
|
|
$
|
7,609,420
|
|
|
$
|
7,755,553
|
|
Fixed maturity securities, bonds available-for-sale
|
|
|
5,925,900
|
|
|
|
5,925,900
|
|
|
|
5,483,916
|
|
|
|
5,483,916
|
|
Equity securities
|
|
|
1,546,801
|
|
|
|
1,546,801
|
|
|
|
1,514,979
|
|
|
|
1,514,979
|
|
Equity-indexed options
|
|
|
145,450
|
|
|
|
145,450
|
|
|
|
123,007
|
|
|
|
123,007
|
|
Mortgage loans on real estate, net of allowance
|
|
|
4,113,637
|
|
|
|
4,279,760
|
|
|
|
3,483,280
|
|
|
|
3,621,978
|
|
Policy loans
|
|
|
384,257
|
|
|
|
384,257
|
|
|
|
407,491
|
|
|
|
407,491
|
|
Short-term investments
|
|
|
405,463
|
|
|
|
405,463
|
|
|
|
460,612
|
|
|
|
460,612
|
|
Separate account assets
|
|
|
913,667
|
|
|
|
913,667
|
|
|
|
918,446
|
|
|
|
918,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
20,798,307
|
|
|
$
|
21,406,838
|
|
|
$
|
20,001,151
|
|
|
$
|
20,285,982
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contracts
|
|
$
|
8,830,282
|
|
|
$
|
8,830,282
|
|
|
$
|
8,787,376
|
|
|
$
|
8,787,376
|
|
Embedded derivative liability for equity-indexed contracts
|
|
|
298,499
|
|
|
|
298,499
|
|
|
|
242,412
|
|
|
|
242,412
|
|
Notes payable
|
|
|
146,068
|
|
|
|
146,068
|
|
|
|
128,436
|
|
|
|
128,436
|
|
Separate account liabilities
|
|
|
913,667
|
|
|
|
913,667
|
|
|
|
918,446
|
|
|
|
918,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
10,188,516
|
|
|
$
|
10,188,516
|
|
|
$
|
10,076,670
|
|
|
$
|
10,076,670
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Nationals 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.
|
18
Note 9 Fair Value of Financial Instruments (Continued)
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.
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 participants
assumptions. American National does not adjust quotes received from the pricing service. The pricing service utilized by American National has indicated that they will only produce an estimate of fair value if there is objectively verifiable
information available.
American National holds a small amount of private placement debt and fixed maturity securities that have characteristics that make
them unsuitable for matrix pricing. For these securities, a quote from an independent broker (typically a market maker) is obtained. Due to the disclaimers on the quotes that indicate that the price is indicative only, American National includes
these fair value estimates in Level 3.
For securities priced using a quote from an independent broker, such as the equity options and certain fixed
maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received from an independent broker. Price variances above a certain threshold are analyzed further to determine if any pricing
issue exists. This analysis is performed quarterly.
Equity Securities
For publicly-traded equity securities, prices are received from a
nationally recognized pricing service that are based on observable market transactions, and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these
instances, an estimate of fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. These estimates are disclosed as Level 2 measurements. American
National tests the accuracy of the information provided by reference to other services regularly.
19
Note 9 Fair Value of Financial Instruments (Continued)
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 loans credit quality, region, property type, lien priority, payment type and current status.
Embedded Derivative
The embedded derivative liability for equity-indexed contracts is measured at fair value and is recalculated each reporting
period using equity option pricing models. To validate the assumptions used to price the embedded derivative liability, American National measures and compares embedded derivative returns against the returns of equity options held to hedge the
liability cash flows.
The significant unobservable input used to calculate the fair value of the embedded derivatives is equity option implied
volatility. An increase in implied volatility will result in an increase in the value of the equity-indexed embedded derivatives, all other things being equal. At September 30, 2016 and December 31, 2015, the one year implied volatility
used to estimate embedded derivative value was 16.0% and 17.5%, respectively.
Other Financial Instruments
Other financial instruments
classified as Level 3 measurements, as there is little or no market activity, are as follows:
Policy loansThe 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.
20
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 September 30, 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
|
|
$
|
341,719
|
|
|
$
|
|
|
|
$
|
341,719
|
|
|
$
|
|
|
Foreign governments
|
|
|
4,940
|
|
|
|
|
|
|
|
4,940
|
|
|
|
|
|
Corporate debt securities
|
|
|
7,193,120
|
|
|
|
|
|
|
|
7,143,851
|
|
|
|
49,269
|
|
Residential mortgage-backed securities
|
|
|
261,511
|
|
|
|
|
|
|
|
260,592
|
|
|
|
919
|
|
Collateralized debt securities
|
|
|
1,373
|
|
|
|
|
|
|
|
|
|
|
|
1,373
|
|
Other debt securities
|
|
|
2,877
|
|
|
|
|
|
|
|
|
|
|
|
2,877
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds held-to-maturity
|
|
|
7,805,540
|
|
|
|
|
|
|
|
7,751,102
|
|
|
|
54,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, bonds available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and government
|
|
|
24,938
|
|
|
|
|
|
|
|
24,938
|
|
|
|
|
|
U.S. states and political subdivisions
|
|
|
1,011,964
|
|
|
|
|
|
|
|
1,009,489
|
|
|
|
2,475
|
|
Foreign governments
|
|
|
6,885
|
|
|
|
|
|
|
|
6,885
|
|
|
|
|
|
Corporate debt securities
|
|
|
4,853,941
|
|
|
|
|
|
|
|
4,839,805
|
|
|
|
14,136
|
|
Residential mortgage-backed securities
|
|
|
21,550
|
|
|
|
|
|
|
|
19,004
|
|
|
|
2,546
|
|
Collateralized debt securities
|
|
|
6,622
|
|
|
|
|
|
|
|
4,491
|
|
|
|
2,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds available-for-sale
|
|
|
5,925,900
|
|
|
|
|
|
|
|
5,904,612
|
|
|
|
21,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,520,353
|
|
|
|
1,520,353
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
26,448
|
|
|
|
26,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
1,546,801
|
|
|
|
1,546,801
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
145,450
|
|
|
|
|
|
|
|
|
|
|
|
145,450
|
|
Mortgage loans on real estate
|
|
|
4,279,760
|
|
|
|
|
|
|
|
4,279,760
|
|
|
|
|
|
Policy loans
|
|
|
384,257
|
|
|
|
|
|
|
|
|
|
|
|
384,257
|
|
Short-term investments
|
|
|
405,463
|
|
|
|
|
|
|
|
405,463
|
|
|
|
|
|
Separate account assets
|
|
|
913,667
|
|
|
|
|
|
|
|
913,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
21,406,838
|
|
|
$
|
1,546,801
|
|
|
$
|
19,254,604
|
|
|
$
|
605,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contracts
|
|
$
|
8,830,282
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,830,282
|
|
Embedded derivative liability for equity-indexed contracts
|
|
|
298,499
|
|
|
|
|
|
|
|
|
|
|
|
298,499
|
|
Notes payable
|
|
|
146,068
|
|
|
|
|
|
|
|
|
|
|
|
146,068
|
|
Separate account liabilities
|
|
|
913,667
|
|
|
|
|
|
|
|
913,667
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
10,188,516
|
|
|
$
|
|
|
|
$
|
913,667
|
|
|
$
|
9,274,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Note 9 Fair Value of Financial Instruments (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement as of December 31, 2015
|
|
|
|
Total
Fair Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Financial assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, bonds held-to-maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. states and political subdivisions
|
|
$
|
346,517
|
|
|
$
|
|
|
|
$
|
346,517
|
|
|
$
|
|
|
Foreign governments
|
|
|
4,968
|
|
|
|
|
|
|
|
4,968
|
|
|
|
|
|
Corporate debt securities
|
|
|
7,091,670
|
|
|
|
|
|
|
|
7,010,165
|
|
|
|
81,505
|
|
Residential mortgage-backed securities
|
|
|
294,200
|
|
|
|
|
|
|
|
293,267
|
|
|
|
933
|
|
Collateralized debt securities
|
|
|
2,024
|
|
|
|
|
|
|
|
2,024
|
|
|
|
|
|
Other debt securities
|
|
|
16,174
|
|
|
|
|
|
|
|
12,355
|
|
|
|
3,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds held-to-maturity
|
|
|
7,755,553
|
|
|
|
|
|
|
|
7,669,296
|
|
|
|
86,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities, bonds available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury and government
|
|
|
24,692
|
|
|
|
|
|
|
|
24,692
|
|
|
|
|
|
U.S. states and political subdivisions
|
|
|
972,491
|
|
|
|
|
|
|
|
969,996
|
|
|
|
2,495
|
|
Foreign governments
|
|
|
6,733
|
|
|
|
|
|
|
|
6,733
|
|
|
|
|
|
Corporate debt securities
|
|
|
4,444,622
|
|
|
|
|
|
|
|
4,431,263
|
|
|
|
13,359
|
|
Residential mortgage-backed securities
|
|
|
27,364
|
|
|
|
|
|
|
|
24,958
|
|
|
|
2,406
|
|
Collateralized debt securities
|
|
|
8,014
|
|
|
|
|
|
|
|
6,144
|
|
|
|
1,870
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total bonds available-for-sale
|
|
|
5,483,916
|
|
|
|
|
|
|
|
5,463,786
|
|
|
|
20,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock
|
|
|
1,491,029
|
|
|
|
1,491,029
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
|
|
23,950
|
|
|
|
23,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total equity securities
|
|
|
1,514,979
|
|
|
|
1,514,979
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
123,007
|
|
|
|
|
|
|
|
|
|
|
|
123,007
|
|
Mortgage loans on real estate
|
|
|
3,621,978
|
|
|
|
|
|
|
|
3,621,978
|
|
|
|
|
|
Policy loans
|
|
|
407,491
|
|
|
|
|
|
|
|
|
|
|
|
407,491
|
|
Short-term investments
|
|
|
460,612
|
|
|
|
|
|
|
|
460,612
|
|
|
|
|
|
Separate account assets
|
|
|
918,446
|
|
|
|
|
|
|
|
918,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial assets
|
|
$
|
20,285,982
|
|
|
$
|
1,514,979
|
|
|
$
|
18,134,118
|
|
|
$
|
636,885
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment contracts
|
|
$
|
8,787,376
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,787,376
|
|
Embedded derivative liability for equity-indexed contracts
|
|
|
242,412
|
|
|
|
|
|
|
|
|
|
|
|
242,412
|
|
Notes payable
|
|
|
128,436
|
|
|
|
|
|
|
|
|
|
|
|
128,436
|
|
Separate account liabilities
|
|
|
918,446
|
|
|
|
|
|
|
|
918,446
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total financial liabilities
|
|
$
|
10,076,670
|
|
|
$
|
|
|
|
$
|
918,446
|
|
|
$
|
9,158,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
Assets
|
|
|
Liability
|
|
|
Assets
|
|
|
Liability
|
|
|
|
Investment
Securities
|
|
|
Equity-Indexed
Options
|
|
|
Embedded
Derivative
|
|
|
Investment
Securities
|
|
|
Equity-Indexed
Options
|
|
|
Embedded
Derivative
|
|
Beginning balance, 2016
|
|
$
|
21,666
|
|
|
$
|
134,575
|
|
|
$
|
278,570
|
|
|
$
|
20,130
|
|
|
$
|
123,007
|
|
|
$
|
242,412
|
|
Total realized and unrealized investment gains included in other comprehensive income
|
|
|
128
|
|
|
|
|
|
|
|
|
|
|
|
639
|
|
|
|
|
|
|
|
|
|
Net fair value change included in realized losses
|
|
|
(2
|
)
|
|
|
|
|
|
|
|
|
|
|
(1
|
)
|
|
|
|
|
|
|
|
|
Net gain for derivatives included in net investment income
|
|
|
|
|
|
|
14,716
|
|
|
|
|
|
|
|
|
|
|
|
16,866
|
|
|
|
|
|
Net change included in interest credited
|
|
|
|
|
|
|
|
|
|
|
15,054
|
|
|
|
|
|
|
|
|
|
|
|
21,227
|
|
Purchases, sales and settlements or maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
|
|
|
|
7,786
|
|
|
|
|
|
|
|
|
|
|
|
20,257
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Settlements or maturities
|
|
|
|
|
|
|
(11,627
|
)
|
|
|
|
|
|
|
(389
|
)
|
|
|
(14,680
|
)
|
|
|
|
|
Premiums less benefits
|
|
|
|
|
|
|
|
|
|
|
4,875
|
|
|
|
|
|
|
|
|
|
|
|
34,860
|
|
Gross transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,413
|
|
|
|
|
|
|
|
|
|
Gross transfers out of Level 3
|
|
|
(504
|
)
|
|
|
|
|
|
|
|
|
|
|
(504
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance September 30, 2016
|
|
$
|
21,288
|
|
|
$
|
145,450
|
|
|
$
|
298,499
|
|
|
$
|
21,288
|
|
|
$
|
145,450
|
|
|
$
|
298,499
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, 2015
|
|
$
|
67,200
|
|
|
$
|
183,963
|
|
|
$
|
208,827
|
|
|
$
|
64,433
|
|
|
$
|
189,449
|
|
|
$
|
208,187
|
|
Total realized and unrealized investment gains (losses) included in other comprehensive
income
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
Net fair value change included in realized gains (losses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net investment income
|
|
|
|
|
|
|
(34,643
|
)
|
|
|
|
|
|
|
|
|
|
|
(39,266
|
)
|
|
|
|
|
Net change included in interest credited
|
|
|
|
|
|
|
|
|
|
|
(16,780
|
)
|
|
|
|
|
|
|
|
|
|
|
(19,997
|
)
|
Purchases, sales and settlements or maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
120
|
|
|
|
5,725
|
|
|
|
|
|
|
|
|
|
|
|
15,313
|
|
|
|
|
|
Sales
|
|
|
|
|
|
|
(11,160
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
(11,160
|
)
|
|
|
|
|
Settlements or maturities
|
|
|
(1
|
)
|
|
|
(2,500
|
)
|
|
|
|
|
|
|
(343
|
)
|
|
|
(12,951
|
)
|
|
|
|
|
Premiums less benefits
|
|
|
|
|
|
|
|
|
|
|
15,255
|
|
|
|
|
|
|
|
|
|
|
|
19,112
|
|
Gross transfers into Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,398
|
|
|
|
|
|
|
|
|
|
Gross transfers out of Level 3
|
|
|
(54,478
|
)
|
|
|
|
|
|
|
|
|
|
|
(54,478
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance September 30, 2015
|
|
$
|
12,991
|
|
|
$
|
141,385
|
|
|
$
|
207,302
|
|
|
$
|
12,991
|
|
|
$
|
141,385
|
|
|
$
|
207,302
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within the net gain (loss) for derivatives included in net investment income were unrealized gains of $34,146,000 relating to
assets still held at September 30, 2016 and unrealized losses of $51,875,000 at September 30, 2015.
There were no transfers between Level 1 and
Level 2 fair value hierarchies. The transfers into Level 3 were the result of existing securities no longer being priced by the third-party pricing service at the end of the period. American Nationals valuation of these securities involves
judgment regarding assumptions market participants would use including quotes from independent brokers. The 2016 and 2015 transfers out of Level 3 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.
23
Note 10 Deferred Policy Acquisition Costs
Deferred policy acquisition costs are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident
|
|
|
Property
|
|
|
|
|
|
|
Life
|
|
|
Annuity
|
|
|
& Health
|
|
|
& Casualty
|
|
|
Total
|
|
Beginning balance, 2016
|
|
$
|
756,023
|
|
|
$
|
411,206
|
|
|
$
|
44,390
|
|
|
$
|
113,050
|
|
|
$
|
1,324,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions
|
|
|
80,025
|
|
|
|
59,750
|
|
|
|
8,149
|
|
|
|
198,004
|
|
|
|
345,928
|
|
Amortization
|
|
|
(61,273
|
)
|
|
|
(52,096
|
)
|
|
|
(11,042
|
)
|
|
|
(194,809
|
)
|
|
|
(319,220
|
)
|
Effect of change in unrealized gains on available-for-sale securities
|
|
|
(16,976
|
)
|
|
|
(53,450
|
)
|
|
|
|
|
|
|
|
|
|
|
(70,426
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net change
|
|
|
1,776
|
|
|
|
(45,796
|
)
|
|
|
(2,893
|
)
|
|
|
3,195
|
|
|
|
(43,718
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30, 2016
|
|
$
|
757,799
|
|
|
$
|
365,410
|
|
|
$
|
41,497
|
|
|
$
|
116,245
|
|
|
$
|
1,280,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 claims that have been reported but not settled and incurred but not reported (IBNR) claims. Liability for unpaid
claims are estimated based upon American Nationals historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, offset by 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.
Information
regarding the liability for unpaid claims is shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Unpaid claims balance, beginning
|
|
$
|
1,104,302
|
|
|
$
|
1,132,394
|
|
Less reinsurance recoverables
|
|
|
217,337
|
|
|
|
245,906
|
|
|
|
|
|
|
|
|
|
|
Net beginning balance
|
|
|
886,965
|
|
|
|
886,488
|
|
|
|
|
|
|
|
|
|
|
Incurred related to
|
|
|
|
|
|
|
|
|
Current
|
|
|
804,177
|
|
|
|
705,988
|
|
Prior years
|
|
|
(26,632
|
)
|
|
|
(7,835
|
)
|
|
|
|
|
|
|
|
|
|
Total incurred claims
|
|
|
777,545
|
|
|
|
698,153
|
|
|
|
|
|
|
|
|
|
|
Paid claims related to
|
|
|
|
|
|
|
|
|
Current
|
|
|
472,413
|
|
|
|
414,287
|
|
Prior years
|
|
|
271,701
|
|
|
|
284,732
|
|
|
|
|
|
|
|
|
|
|
Total paid claims
|
|
|
744,114
|
|
|
|
699,019
|
|
|
|
|
|
|
|
|
|
|
Net balance
|
|
|
920,396
|
|
|
|
885,622
|
|
Plus reinsurance recoverables
|
|
|
247,998
|
|
|
|
215,464
|
|
|
|
|
|
|
|
|
|
|
Unpaid claims balance, ending
|
|
$
|
1,168,394
|
|
|
$
|
1,101,086
|
|
|
|
|
|
|
|
|
|
|
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. During the first nine months of 2016, estimates for ultimate incurred claims attributable to insured events of prior years decreased by
approximately $26,632,000 and $7,835,000 during the same period in 2015. This was a reflection of lower-than-anticipated losses in the multi-peril line of business in 2016 and lower-than-anticipated losses in the workers compensation, commercial
auto and personal auto liability lines of business in 2015.
24
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 September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
|
Amount
|
|
|
Rate
|
|
Income tax on pre-tax income
|
|
$
|
29,488
|
|
|
|
35.0
|
%
|
|
$
|
22,050
|
|
|
|
35.0
|
%
|
|
$
|
52,771
|
|
|
|
35.0
|
%
|
|
$
|
91,284
|
|
|
|
35.0
|
%
|
Tax-exempt investment income
|
|
|
(1,980
|
)
|
|
|
(2.4
|
)
|
|
|
(1,863
|
)
|
|
|
(3.0
|
)
|
|
|
(5,926
|
)
|
|
|
(3.9
|
)
|
|
|
(5,688
|
)
|
|
|
(2.2
|
)
|
Deferred tax adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,508
|
)
|
|
|
(7.0
|
)
|
|
|
|
|
|
|
|
|
Dividend exclusion
|
|
|
(1,917
|
)
|
|
|
(2.3
|
)
|
|
|
(1,841
|
)
|
|
|
(2.9
|
)
|
|
|
(6,143
|
)
|
|
|
(4.1
|
)
|
|
|
(5,788
|
)
|
|
|
(2.2
|
)
|
Miscellaneous tax credits, net
|
|
|
(2,430
|
)
|
|
|
(2.9
|
)
|
|
|
(2,256
|
)
|
|
|
(3.6
|
)
|
|
|
(7,546
|
)
|
|
|
(5.0
|
)
|
|
|
(6,728
|
)
|
|
|
(2.6
|
)
|
Low income housing tax credit expense
|
|
|
1,294
|
|
|
|
1.5
|
|
|
|
1,307
|
|
|
|
2.1
|
|
|
|
3,883
|
|
|
|
2.6
|
|
|
|
3,792
|
|
|
|
1.5
|
|
Other items, net
|
|
|
(1,907
|
)
|
|
|
(2.3
|
)
|
|
|
737
|
|
|
|
1.2
|
|
|
|
(765
|
)
|
|
|
(0.5
|
)
|
|
|
2,162
|
|
|
|
0.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for federal income tax before interest expense
|
|
|
22,548
|
|
|
|
26.6
|
|
|
|
18,134
|
|
|
|
28.8
|
|
|
|
25,766
|
|
|
|
17.1
|
|
|
|
79,034
|
|
|
|
30.3
|
|
Interest expense
|
|
|
42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,644
|
|
|
|
1.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
22,590
|
|
|
|
26.6
|
%
|
|
$
|
18,134
|
|
|
|
28.8
|
%
|
|
$
|
28,410
|
|
|
|
18.9
|
%
|
|
$
|
79,034
|
|
|
|
30.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
American National made income tax payments of $35,458,000 and $52,106,000 during the nine months ended September 30, 2016
and 2015, respectively. During 2016, the Company recognized a $10,508,000 tax benefit associated with the reduction of a deferred tax liability, when a determination was made that no tax would be due on the restructuring of a subsidiary ownership
interest.
Management believes that a sufficient level of 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 September 30, 2016 and 2015. There are no ordinary loss tax carryforwards that will expire by December 31, 2016.
American Nationals federal income tax returns for years 2013 to 2015 and years 2006 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 has accrued interest in the
amount of $2.6 million, net of tax, in the first quarter of 2016 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 Nationals effective tax rate.
25
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, 2016
|
|
$
|
453,434
|
|
|
$
|
(97,889
|
)
|
|
$
|
(2,925
|
)
|
|
$
|
352,620
|
|
Amounts reclassified from AOCI (net of tax benefit $7,078 and expense $3,438)
|
|
|
(13,145
|
)
|
|
|
6,384
|
|
|
|
|
|
|
|
(6,761
|
)
|
Unrealized holding gains arising during the period (net of tax expense $120,365)
|
|
|
223,535
|
|
|
|
|
|
|
|
|
|
|
|
223,535
|
|
Unrealized adjustment to DAC (net of tax benefit $24,859)
|
|
|
(45,567
|
)
|
|
|
|
|
|
|
|
|
|
|
(45,567
|
)
|
Unrealized gains on investments attributable to participating policyholders interest (net of
tax benefit $4,715)
|
|
|
(8,757
|
)
|
|
|
|
|
|
|
|
|
|
|
(8,757
|
)
|
Foreign currency adjustment (net of tax benefit $361)
|
|
|
|
|
|
|
|
|
|
|
(671
|
)
|
|
|
(671
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30, 2016
|
|
$
|
609,500
|
|
|
$
|
(91,505
|
)
|
|
$
|
(3,596
|
)
|
|
$
|
514,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning balance, 2015
|
|
|
568,151
|
|
|
|
(76,074
|
)
|
|
|
(1,295
|
)
|
|
|
490,782
|
|
Amounts reclassified from AOCI (net of tax benefit $8,221 and expense $2,449)
|
|
|
(15,268
|
)
|
|
|
4,549
|
|
|
|
|
|
|
|
(10,719
|
)
|
Unrealized holding losses arising during the period (net of tax benefit $67,787)
|
|
|
(125,888
|
)
|
|
|
|
|
|
|
|
|
|
|
(125,888
|
)
|
Unrealized adjustment to DAC (net of tax expense $11,232)
|
|
|
19,259
|
|
|
|
|
|
|
|
|
|
|
|
19,259
|
|
Unrealized losses on investments attributable to participating policyholders interest (net
of tax expense $2,528)
|
|
|
4,694
|
|
|
|
|
|
|
|
|
|
|
|
4,694
|
|
Foreign currency adjustment (net of tax benefit $1,124)
|
|
|
|
|
|
|
|
|
|
|
(2,087
|
)
|
|
|
(2,087
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending balance at September 30, 2015
|
|
$
|
450,948
|
|
|
$
|
(71,525
|
)
|
|
$
|
(3,382
|
)
|
|
$
|
376,041
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Common stock
|
|
|
|
|
|
|
|
|
Shares issued
|
|
|
30,832,449
|
|
|
|
30,832,449
|
|
Treasury shares
|
|
|
(3,917,933
|
)
|
|
|
(3,937,993
|
)
|
|
|
|
|
|
|
|
|
|
Outstanding shares
|
|
|
26,914,516
|
|
|
|
26,894,456
|
|
Restricted shares
|
|
|
(76,000
|
)
|
|
|
(76,000
|
)
|
|
|
|
|
|
|
|
|
|
Unrestricted outstanding shares
|
|
|
26,838,516
|
|
|
|
26,818,456
|
|
|
|
|
|
|
|
|
|
|
Stock-based compensation
American National has one stock-based compensation plan, which allows for grants of Non-Qualified Stock Options, Stock Appreciation Rights (SAR),
Restricted Stock (RS) Awards, Restricted Stock Units (RSU), Performance Awards, Incentive Awards or any combination thereof. This plan is administered by the American National Board Compensation Committee. Incentive awards
under this plan are made to officers meeting established performance objectives. All awards are subject to review and approval both at the time of setting applicable performance objectives and at payment of the awards. The number of shares available
for grants under the plan cannot exceed 2,900,000 shares, and no more than 200,000 shares may be granted to any one individual in any calendar year. Grants are made to certain officers and directors as compensation and to align their interests with
those of other shareholders.
26
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, 2015
|
|
|
38,092
|
|
|
$
|
115.18
|
|
|
|
76,000
|
|
|
$
|
110.73
|
|
|
|
135,725
|
|
|
$
|
103.73
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,849
|
|
|
|
103.58
|
|
Exercised
|
|
|
(7,071
|
)
|
|
|
111.24
|
|
|
|
|
|
|
|
|
|
|
|
(66,581
|
)
|
|
|
100.06
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(182
|
)
|
|
|
105.75
|
|
Expired
|
|
|
(16,564
|
)
|
|
|
116.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
14,457
|
|
|
$
|
115.15
|
|
|
|
76,000
|
|
|
$
|
110.73
|
|
|
|
105,811
|
|
|
$
|
105.98
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SAR
|
|
|
RS Shares
|
|
|
RS Units
|
|
Weighted-average contractual remaining life (in years)
|
|
|
1.20
|
|
|
|
3.04
|
|
|
|
1.76
|
|
Exercisable shares
|
|
|
14,457
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Weighted-average exercise price
|
|
$
|
115.15
|
|
|
$
|
110.73
|
|
|
$
|
105.98
|
|
Weighted-average exercise price exercisable shares
|
|
|
115.15
|
|
|
|
N/A
|
|
|
|
N/A
|
|
Compensation expense (credit)
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30, 2016
|
|
$
|
98,000
|
|
|
$
|
212,000
|
|
|
$
|
1,297,000
|
|
Three months ended September 30, 2015
|
|
|
(14,000
|
)
|
|
|
282,000
|
|
|
|
1,114,000
|
|
Nine months ended September 30, 2016
|
|
|
135,000
|
|
|
|
631,000
|
|
|
|
5,744,000
|
|
Nine months ended September 30, 2015
|
|
|
(82,000
|
)
|
|
|
935,000
|
|
|
|
5,421,000
|
|
Fair value of liability award
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
$
|
170,000
|
|
|
|
N/A
|
|
|
$
|
22,465,000
|
|
December 31, 2015
|
|
|
37,000
|
|
|
|
N/A
|
|
|
|
19,415,000
|
|
The SARs give the holder the right to cash compensation based on the difference between the stock price on the grant date and
the stock price on the exercise date. The SARs vest at a rate of 20% per year for five years and expire five years after vesting.
RS awards entitle
the participant to full dividend and voting rights. Each RS share awarded has the value of one share of restricted stock and vests 10 years from the grant date. Unvested shares are restricted as to disposition, and are subject to forfeiture under
certain circumstances. Compensation expense is recognized over the vesting period. The restrictions on these awards lapse after 10 years and most of these awards feature a graded vesting schedule in the case of the retirement, death or disability of
an award holder. Restricted stock awards for 350,334 shares have been granted at an exercise price of zero, of which 76,000 shares are unvested.
RSU
awards allow the recipient of the awards to settle the vested RSUs in either shares of American Nationals common stock or cash. RSUs vest after a three-year graded vesting requirement or over a shorter period as a result of death, disability
or retirement after age 65.
27
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 September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Weighted average shares outstanding
|
|
|
26,908,032
|
|
|
|
26,899,683
|
|
|
|
26,908,619
|
|
|
|
26,865,359
|
|
Incremental shares from RS awards and RSUs
|
|
|
59,299
|
|
|
|
63,952
|
|
|
|
57,768
|
|
|
|
80,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shares for diluted calculations
|
|
|
26,967,331
|
|
|
|
26,963,635
|
|
|
|
26,966,387
|
|
|
|
26,945,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to American National (in thousands)
|
|
$
|
59,289
|
|
|
$
|
42,013
|
|
|
$
|
121,230
|
|
|
$
|
180,048
|
|
Basic earnings per share
|
|
$
|
2.20
|
|
|
$
|
1.56
|
|
|
$
|
4.51
|
|
|
$
|
6.70
|
|
Diluted earnings per share
|
|
|
2.20
|
|
|
|
1.56
|
|
|
|
4.50
|
|
|
|
6.68
|
|
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
September 30, 2016 and December 31, 2015, American National Insurance Companys statutory capital and surplus was $2,905,490,000 and $2,925,935,000, respectively. American National Insurance Company and each of its insurance
subsidiaries had statutory capital and surplus at September 30, 2016 and December 31, 2015, 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 Nationals insurance subsidiaries has been granted a permitted practice from the Missouri Department of Insurance to record as the
valuation of its investment in a wholly-owned subsidiary that is the attorney-in-fact for a Texas domiciled insurer, the statutory capital and surplus of the Texas domiciled insurer. This permitted practice increases the statutory capital and
surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary by $66,683,000 and $66,042,000 at September 30, 2016 and September 30, 2015, respectively. Additionally, 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.
28
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):
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Statutory capital and surplus
|
|
|
|
|
|
|
|
|
Life insurance entities
|
|
$
|
1,867,243
|
|
|
$
|
1,900,939
|
|
Property and casualty insurance entities
|
|
|
1,047,488
|
|
|
|
1,033,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Statutory net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance entities
|
|
$
|
22,226
|
|
|
$
|
21,990
|
|
|
$
|
45,335
|
|
|
$
|
101,232
|
|
Property and casualty insurance entities
|
|
|
11,417
|
|
|
|
29,253
|
|
|
|
14,674
|
|
|
|
43,190
|
|
Dividends
American
National Insurance Companys payment of dividends to stockholders is restricted by statutory regulations. 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 years statutory net income from operations, or 10% of prior year statutory surplus. American National Insurance Company is permitted to pay total dividends of $292,593,000
during 2016, without prior approval of the Texas Department of Insurance. Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to American National Insurance Company apply to its insurance subsidiaries.
Noncontrolling interests
American National County Mutual
Insurance Company (County Mutual) is a mutual insurance company that is owned by its policyholders. American National has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included
in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling interest of $6,750,000 at September 30, 2016 and December 31, 2015.
American National Insurance Company and its subsidiaries exercise significant control or ownership of various joint ventures, resulting in their consolidation
into American Nationals consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as noncontrolling interests of $2,252,000 and $3,439,000 at September 30, 2016 and
December 31, 2015, respectively.
Note 15 Segment Information
Management organizes the business into five operating segments:
|
|
|
Lifemarkets 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.
|
|
|
|
Annuityoffers 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.
|
|
|
|
Healthprimary 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 Casualtywrites personal, agricultural and targeted commercial coverages and credit-related property insurance. These products are primarily sold through multiple-line and independent agents.
|
|
|
|
Corporate and Otherconsists of net investment income from investments not allocated to the insurance segments and revenues from non-insurance operations.
|
29
Note 15 Segment Information (Continued)
The accounting policies of the segments are the same as those described in Note 2 to American Nationals
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 September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Life
|
|
$
|
9,547
|
|
|
$
|
10,193
|
|
|
$
|
22,832
|
|
|
$
|
25,523
|
|
Annuity
|
|
|
13,567
|
|
|
|
4,433
|
|
|
|
49,001
|
|
|
|
38,668
|
|
Health
|
|
|
(6,487
|
)
|
|
|
(11,178
|
)
|
|
|
(2,702
|
)
|
|
|
1,725
|
|
Property and Casualty
|
|
|
663
|
|
|
|
33,980
|
|
|
|
2,878
|
|
|
|
42,758
|
|
Corporate and Other
|
|
|
30,432
|
|
|
|
9,232
|
|
|
|
39,501
|
|
|
|
78,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
47,722
|
|
|
$
|
46,660
|
|
|
$
|
111,510
|
|
|
$
|
187,426
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 16 Commitments and Contingencies
Commitments
American National had aggregate commitments
at September 30, 2016, to purchase, expand or improve real estate, to fund fixed interest rate mortgage loans, and to purchase other invested assets of $977,825,000 of which $393,534,000 is expected to be funded in 2016 with the remainder
funded in 2017 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 September 30, 2016 and December 31, 2015, the outstanding letters of credit were $9,501,000 and there were no borrowings on this facility. This facility expires on October 30, 2017.
30
Note 16 Commitments and Contingencies (Continued)
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 the bank loan, American National would be obligated to pay off the loans. 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 September 30, 2016, was approximately $206,376,000,
while the total cash value of the related life insurance policies was approximately $208,565,000.
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 Nationals 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.
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
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Related Party
|
|
Financial Statement Line Impacted
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Gal-Tex Hotel Corporation
|
|
Mortgage loan on real estate
|
|
$
|
1,060
|
|
|
$
|
986
|
|
|
$
|
4,122
|
|
|
$
|
5,182
|
|
Gal-Tex Hotel Corporation
|
|
Net investment income
|
|
|
256
|
|
|
|
330
|
|
|
|
25
|
|
|
|
31
|
|
Greer, Herz & Adams, LLP
|
|
Other operating expenses
|
|
|
7,610
|
|
|
|
6,011
|
|
|
|
(435
|
)
|
|
|
(274
|
)
|
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 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 Nationals General Counsel.
31
ITEM 2.
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|
Set forth on
the following pages is managements discussion and analysis (MD&A) of financial condition and results of operations for the three and nine months ended September 30, 2016 and 2015 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 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016, 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;
|
|
|
|
Catastrophic Event Risk Factors
|
|
|
|
natural or man-made catastrophes, pandemic disease, or other events resulting in increased claims activity from catastrophic loss of life or property;
|
|
|
|
the effects of unanticipated events on our disaster recovery and business continuity planning;
|
|
|
|
Marketplace Risk Factors
|
|
|
|
the highly competitive nature of the insurance and annuity business;
|
|
|
|
potential difficulty in attraction and retention of qualified employees and agents;
|
|
|
|
the introduction of alternative healthcare solutions or changes in federal healthcare policy, both of which could impact our supplement healthcare business;
|
32
|
|
|
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 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;
|
|
|
|
potentially adverse rating agency actions; and
|
|
|
|
control of our company by a small number of stockholders.
|
Overview
Chartered in 1905, we are a diversified insurance and financial services company offering a broad spectrum of insurance products in all 50 states, the District
of Columbia and Puerto Rico. Our headquarters are in Galveston, Texas.
General Trends
American National had no material changes to the general trends, as discussed in the MD&A included in our 2015 Annual Report on Form 10-K filed with the
SEC on February 29, 2016.
Critical Accounting Estimates
The unaudited interim consolidated financial statements have been prepared in conformity with GAAP. In addition to GAAP, insurance companies apply specific SEC
regulations when preparing the consolidated financial statements. The preparation of the consolidated financial statements and notes requires us to make estimates and assumptions that affect the amounts reported. Actual results could differ from
results reported using those estimates and assumptions. Our accounting policies inherently require the use of judgments relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity,
persistency, expenses, interest rates, and property and casualty loss frequency, severity, claim reporting and settlement patterns. Due to the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies
under different conditions or assumptions could vary from those reported in the consolidated financial statements.
For a discussion of our critical
accounting estimates, see the MD&A in our 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016. There have been no material changes in accounting policies since December 31, 2015.
Recently Issued Accounting Pronouncements
Refer
to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements in Item 1.
33
Consolidated Results of Operations
The following sets forth the consolidated results of operations (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Premiums and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
507,337
|
|
|
$
|
459,035
|
|
|
$
|
48,302
|
|
|
$
|
1,511,035
|
|
|
$
|
1,334,081
|
|
|
$
|
176,954
|
|
Other policy revenues
|
|
|
64,210
|
|
|
|
60,271
|
|
|
|
3,939
|
|
|
|
194,046
|
|
|
|
175,392
|
|
|
|
18,654
|
|
Net investment income
|
|
|
227,784
|
|
|
|
184,482
|
|
|
|
43,302
|
|
|
|
634,548
|
|
|
|
597,357
|
|
|
|
37,191
|
|
Realized investments gains (losses), net
|
|
|
16,267
|
|
|
|
(11,879
|
)
|
|
|
28,146
|
|
|
|
25,268
|
|
|
|
40,694
|
|
|
|
(15,426
|
)
|
Other income
|
|
|
7,544
|
|
|
|
7,950
|
|
|
|
(406
|
)
|
|
|
23,663
|
|
|
|
26,408
|
|
|
|
(2,745
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other revenues
|
|
|
823,142
|
|
|
|
699,859
|
|
|
|
123,283
|
|
|
|
2,388,560
|
|
|
|
2,173,932
|
|
|
|
214,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits
|
|
|
179,005
|
|
|
|
148,807
|
|
|
|
30,198
|
|
|
|
546,432
|
|
|
|
418,512
|
|
|
|
127,920
|
|
Claims incurred
|
|
|
272,849
|
|
|
|
225,935
|
|
|
|
46,914
|
|
|
|
778,386
|
|
|
|
694,160
|
|
|
|
84,226
|
|
Interest credited to policyholders account balances
|
|
|
87,973
|
|
|
|
57,509
|
|
|
|
30,464
|
|
|
|
250,401
|
|
|
|
202,477
|
|
|
|
47,924
|
|
Commissions for acquiring and servicing policies
|
|
|
122,382
|
|
|
|
111,618
|
|
|
|
10,764
|
|
|
|
350,211
|
|
|
|
308,290
|
|
|
|
41,921
|
|
Other operating expenses
|
|
|
118,755
|
|
|
|
121,498
|
|
|
|
(2,743
|
)
|
|
|
378,328
|
|
|
|
368,159
|
|
|
|
10,169
|
|
Change in deferred policy acquisition costs
(1)
|
|
|
(5,544
|
)
|
|
|
(12,168
|
)
|
|
|
6,624
|
|
|
|
(26,708
|
)
|
|
|
(5,092
|
)
|
|
|
(21,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
775,420
|
|
|
|
653,199
|
|
|
|
122,221
|
|
|
|
2,277,050
|
|
|
|
1,986,506
|
|
|
|
290,544
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
$
|
47,722
|
|
|
$
|
46,660
|
|
|
$
|
1,062
|
|
|
$
|
111,510
|
|
|
$
|
187,426
|
|
|
$
|
(75,916
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 amortizedand represents
an increase to expenses in the period indicated.
|
Consolidated earnings remained relatively constant during the three months ended
September 30, 2016 compared to 2015. Consolidated earnings decreased during the nine months ended September 30, 2016 compared to 2015 primarily due to a decrease in property and casualty earnings impacted by an increase in catastrophe
losses, and lower realized capital gains attributable to a decrease in sales of equity securities.
34
Life
Life
segment financial results for the periods indicated were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Premiums and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
83,521
|
|
|
$
|
78,397
|
|
|
$
|
5,124
|
|
|
$
|
235,691
|
|
|
$
|
225,550
|
|
|
$
|
10,141
|
|
Other policy revenues
|
|
|
61,445
|
|
|
|
57,127
|
|
|
|
4,318
|
|
|
|
185,632
|
|
|
|
165,727
|
|
|
|
19,905
|
|
Net investment income
|
|
|
59,055
|
|
|
|
54,904
|
|
|
|
4,151
|
|
|
|
169,299
|
|
|
|
168,890
|
|
|
|
409
|
|
Other income
|
|
|
491
|
|
|
|
189
|
|
|
|
302
|
|
|
|
1,561
|
|
|
|
1,219
|
|
|
|
342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other revenues
|
|
|
204,512
|
|
|
|
190,617
|
|
|
|
13,895
|
|
|
|
592,183
|
|
|
|
561,386
|
|
|
|
30,797
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits
|
|
|
103,873
|
|
|
|
94,087
|
|
|
|
9,786
|
|
|
|
296,398
|
|
|
|
273,275
|
|
|
|
23,123
|
|
Interest credited to policyholders account balances
|
|
|
13,822
|
|
|
|
12,851
|
|
|
|
971
|
|
|
|
47,377
|
|
|
|
42,751
|
|
|
|
4,626
|
|
Commissions for acquiring and servicing policies
|
|
|
36,154
|
|
|
|
30,297
|
|
|
|
5,857
|
|
|
|
97,137
|
|
|
|
90,145
|
|
|
|
6,992
|
|
Other operating expenses
|
|
|
45,362
|
|
|
|
48,694
|
|
|
|
(3,332
|
)
|
|
|
147,191
|
|
|
|
150,262
|
|
|
|
(3,071
|
)
|
Change in deferred policy acquisition costs
(1)
|
|
|
(4,246
|
)
|
|
|
(5,505
|
)
|
|
|
1,259
|
|
|
|
(18,752
|
)
|
|
|
(20,570
|
)
|
|
|
1,818
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
194,965
|
|
|
|
180,424
|
|
|
|
14,541
|
|
|
|
569,351
|
|
|
|
535,863
|
|
|
|
33,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
$
|
9,547
|
|
|
$
|
10,193
|
|
|
$
|
(646
|
)
|
|
$
|
22,832
|
|
|
$
|
25,523
|
|
|
$
|
(2,691
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated. A positive net change indicates less expense was deferred than amortized
and represents an increase to expenses in the period indicated.
|
35
Earnings remained relatively constant during the three months ended September 30, 2016 compared to 2015.
Earnings decreased during the nine months ended September 30, 2016 compared to 2015 primarily due to lower returns on invested assets coupled with the increase in interest credited to policyholders due to in-force policies with guaranteed
crediting rates.
Premiums and other revenues
Premiums, as shown in the table on the previous page, increased during the three and nine months ended September 30, 2016 compared to 2015 primarily due
to continued renewal growth in our term products.
Other policy revenues include mortality charges, earned policy service fees and surrender charges on
interest-sensitive life insurance policies. The increase in other policy revenues during the three and nine months ended September 30, 2016 compared to 2015 is attributable to an increase in universal life policies in-force.
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 September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Traditional Life
|
|
$
|
12,551
|
|
|
$
|
13,410
|
|
|
$
|
(859
|
)
|
|
$
|
39,864
|
|
|
$
|
41,818
|
|
|
$
|
(1,954
|
)
|
Universal Life
|
|
|
5,380
|
|
|
|
3,506
|
|
|
|
1,874
|
|
|
|
14,345
|
|
|
|
10,439
|
|
|
|
3,906
|
|
Indexed UL
|
|
|
5,721
|
|
|
|
5,191
|
|
|
|
530
|
|
|
|
17,310
|
|
|
|
16,352
|
|
|
|
958
|
|
Variable UL
|
|
|
|
|
|
|
6
|
|
|
|
(6
|
)
|
|
|
24
|
|
|
|
15
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Recurring
|
|
$
|
23,652
|
|
|
$
|
22,113
|
|
|
$
|
1,539
|
|
|
$
|
71,543
|
|
|
$
|
68,624
|
|
|
$
|
2,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Single and excess
|
|
$
|
515
|
|
|
$
|
633
|
|
|
$
|
(118
|
)
|
|
$
|
1,470
|
|
|
$
|
1,546
|
|
|
$
|
(76
|
)
|
Credit life
|
|
|
1,179
|
|
|
|
1,064
|
|
|
|
115
|
|
|
|
3,224
|
|
|
|
3,106
|
|
|
|
118
|
|
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 whereas GAAP premium revenues
are associated with policies sold in current and prior periods; therefore, a reconciliation of premium revenues and insurance sales is not meaningful.
Life insurance sales increased slightly during the three and nine months ended September 30, 2016 compared to 2015. Universal life sales were the main
driver of the increase.
Benefits, losses and expenses
Policyholder benefits increased during the three and nine months ended September 30, 2016 compared to 2015 primarily due to universal life claims with
higher face amounts on a closed block of older aged policyholders.
Commissions increased during the three and nine months ended September 30, 2016
compared to 2015 primarily due to increased sales of universal life products.
36
The following table presents the components of the change in DAC (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Acquisition cost capitalized
|
|
$
|
25,561
|
|
|
$
|
27,936
|
|
|
$
|
(2,375
|
)
|
|
$
|
80,025
|
|
|
$
|
81,568
|
|
|
$
|
(1,543
|
)
|
Amortization of DAC
|
|
|
(21,315
|
)
|
|
|
(22,431
|
)
|
|
|
1,116
|
|
|
|
(61,273
|
)
|
|
|
(60,998
|
)
|
|
|
(275
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in DAC
|
|
$
|
4,246
|
|
|
$
|
5,505
|
|
|
$
|
(1,259
|
)
|
|
$
|
18,752
|
|
|
$
|
20,570
|
|
|
$
|
(1,818
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policy in-force information
The following table summarizes changes in the Life segments in-force amounts (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Life insurance in-force
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional life
|
|
$
|
66,531,651
|
|
|
$
|
63,336,601
|
|
|
$
|
3,195,050
|
|
Interest-sensitive life
|
|
|
27,566,967
|
|
|
|
26,858,051
|
|
|
|
708,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total life insurance in-force
|
|
$
|
94,098,618
|
|
|
$
|
90,194,652
|
|
|
$
|
3,903,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes changes in the Life segments number of policies in-force:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30,
2016
|
|
|
December 31,
2015
|
|
|
Change
|
|
Number of policies in-force
|
|
|
|
|
|
|
|
|
|
|
|
|
Traditional life
|
|
|
1,843,204
|
|
|
|
1,890,600
|
|
|
|
(47,396
|
)
|
Interest-sensitive life
|
|
|
219,757
|
|
|
|
212,851
|
|
|
|
6,906
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of policies
|
|
|
2,062,961
|
|
|
|
2,103,451
|
|
|
|
(40,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total life insurance in-force increased during the nine months ended September 30, 2016 compared to December 31,
2015, while the total number of policies decreased for the same periods, reflecting the transition to fewer but higher face amount policies.
37
Annuity
Annuity segment financial results for the periods indicated were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Premiums and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
61,279
|
|
|
$
|
43,514
|
|
|
$
|
17,765
|
|
|
$
|
217,517
|
|
|
$
|
110,045
|
|
|
$
|
107,472
|
|
Other policy revenues
|
|
|
2,765
|
|
|
|
3,144
|
|
|
|
(379
|
)
|
|
|
8,414
|
|
|
|
9,665
|
|
|
|
(1,251
|
)
|
Net investment income
|
|
|
128,764
|
|
|
|
84,036
|
|
|
|
44,728
|
|
|
|
369,300
|
|
|
|
316,903
|
|
|
|
52,397
|
|
Other income
|
|
|
647
|
|
|
|
1,036
|
|
|
|
(389
|
)
|
|
|
2,409
|
|
|
|
2,918
|
|
|
|
(509
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other revenues
|
|
|
193,455
|
|
|
|
131,730
|
|
|
|
61,725
|
|
|
|
597,640
|
|
|
|
439,531
|
|
|
|
158,109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits
|
|
|
75,132
|
|
|
|
54,720
|
|
|
|
20,412
|
|
|
|
250,034
|
|
|
|
145,237
|
|
|
|
104,797
|
|
Interest credited to policyholders account balances
|
|
|
74,151
|
|
|
|
44,658
|
|
|
|
29,493
|
|
|
|
203,024
|
|
|
|
159,726
|
|
|
|
43,298
|
|
Commissions for acquiring and servicing policies
|
|
|
19,807
|
|
|
|
20,918
|
|
|
|
(1,111
|
)
|
|
|
63,078
|
|
|
|
41,372
|
|
|
|
21,706
|
|
Other operating expenses
|
|
|
11,191
|
|
|
|
13,383
|
|
|
|
(2,192
|
)
|
|
|
40,157
|
|
|
|
39,380
|
|
|
|
777
|
|
Change in deferred policy acquisition costs
(1)
|
|
|
(393
|
)
|
|
|
(6,382
|
)
|
|
|
5,989
|
|
|
|
(7,654
|
)
|
|
|
15,148
|
|
|
|
(22,802
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
179,888
|
|
|
|
127,297
|
|
|
|
52,591
|
|
|
|
548,639
|
|
|
|
400,863
|
|
|
|
147,776
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
$
|
13,567
|
|
|
$
|
4,433
|
|
|
$
|
9,134
|
|
|
$
|
49,001
|
|
|
$
|
38,668
|
|
|
$
|
10,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated. A positive net change indicates less expense was deferred than amortized
and represents an increase to expenses in the period indicated.
|
Earnings increased during the three and nine months ended
September 30, 2016 compared to 2015 primarily due to increased assets, as measured by account value and reserves, leading to increased investment income.
Premiums and other revenues
Annuity premium and
deposit amounts received are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Fixed deferred annuity
|
|
$
|
86,331
|
|
|
$
|
253,175
|
|
|
$
|
(166,844
|
)
|
|
$
|
416,279
|
|
|
$
|
358,885
|
|
|
$
|
57,394
|
|
Single premium immediate annuity
|
|
|
67,034
|
|
|
|
48,740
|
|
|
|
18,294
|
|
|
|
244,198
|
|
|
|
128,593
|
|
|
|
115,605
|
|
Equity-indexed deferred annuity
|
|
|
139,580
|
|
|
|
120,040
|
|
|
|
19,540
|
|
|
|
440,851
|
|
|
|
254,832
|
|
|
|
186,019
|
|
Variable deferred annuity
|
|
|
17,678
|
|
|
|
23,717
|
|
|
|
(6,039
|
)
|
|
|
58,252
|
|
|
|
72,544
|
|
|
|
(14,292
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium and deposits
|
|
|
310,623
|
|
|
|
445,672
|
|
|
|
(135,049
|
)
|
|
|
1,159,580
|
|
|
|
814,854
|
|
|
|
344,726
|
|
Less: Policy deposits
|
|
|
249,344
|
|
|
|
402,158
|
|
|
|
(152,814
|
)
|
|
|
942,063
|
|
|
|
704,809
|
|
|
|
237,254
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total earned premiums
|
|
$
|
61,279
|
|
|
$
|
43,514
|
|
|
$
|
17,765
|
|
|
$
|
217,517
|
|
|
$
|
110,045
|
|
|
$
|
107,472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed deferred, single premium immediate, and equity-indexed deferred annuity sales increased during the nine months ended
September 30, 2016 compared to 2015. Beginning in the third quarter of 2015, the Company enhanced crediting rates on certain annuity products resulting in increased sales through the nine months of September 30, 2016. Crediting rates were
lowered slightly in the third quarter of 2016.
38
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):
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Fixed deferred and equity-indexed annuity
|
|
|
|
|
|
|
|
|
Account value, beginning of period
|
|
$
|
8,880,448
|
|
|
$
|
8,873,397
|
|
Net inflows
|
|
|
682,363
|
|
|
|
417,608
|
|
Surrenders
|
|
|
(637,987
|
)
|
|
|
(718,819
|
)
|
Fees
|
|
|
(4,247
|
)
|
|
|
(4,982
|
)
|
Interest credited
|
|
|
198,328
|
|
|
|
153,196
|
|
|
|
|
|
|
|
|
|
|
Account value, end of period
|
|
$
|
9,118,905
|
|
|
$
|
8,720,400
|
|
|
|
|
|
|
|
|
|
|
Single premium immediate annuity
|
|
|
|
|
|
|
|
|
Reserve, beginning of period
|
|
$
|
1,398,481
|
|
|
$
|
1,274,664
|
|
Net inflows
|
|
|
123,456
|
|
|
|
16,602
|
|
Interest and mortality
|
|
|
40,432
|
|
|
|
40,224
|
|
|
|
|
|
|
|
|
|
|
Reserve, end of period
|
|
$
|
1,562,369
|
|
|
$
|
1,331,490
|
|
|
|
|
|
|
|
|
|
|
Variable deferred annuity
|
|
|
|
|
|
|
|
|
Account value, beginning of period
|
|
$
|
417,821
|
|
|
$
|
494,516
|
|
Net inflows
|
|
|
39,894
|
|
|
|
70,999
|
|
Surrenders
|
|
|
(53,584
|
)
|
|
|
(116,110
|
)
|
Fees
|
|
|
(2,527
|
)
|
|
|
(4,211
|
)
|
Change in market value and other
|
|
|
7,563
|
|
|
|
(15,195
|
)
|
|
|
|
|
|
|
|
|
|
Account value, end of period
|
|
$
|
409,167
|
|
|
$
|
429,999
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
Policyholder benefits consist of annuity payments and reserve increases for single premium immediate annuity (SPIA) contracts. Reserve increases are highly
correlated to the sales volume of SPIA contracts. The level of benefits for the nine months ended September 30, 2016 and 2015, was commensurate with increases in SPIA premium during these periods.
Commissions increased during the nine months ended September 30, 2016 compared to 2015 driven by the increase in fixed deferred, equity-indexed, and
single premium immediate annuity sales.
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 September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Acquisition cost capitalized
|
|
$
|
16,455
|
|
|
$
|
22,031
|
|
|
$
|
(5,576
|
)
|
|
$
|
59,750
|
|
|
$
|
42,264
|
|
|
$
|
17,486
|
|
Amortization of DAC
|
|
|
(16,062
|
)
|
|
|
(15,649
|
)
|
|
|
(413
|
)
|
|
|
(52,096
|
)
|
|
|
(57,412
|
)
|
|
|
5,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in DAC
|
|
$
|
393
|
|
|
$
|
6,382
|
|
|
$
|
(5,989
|
)
|
|
$
|
7,654
|
|
|
$
|
(15,148
|
)
|
|
$
|
22,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 nine months ended September 30, 2016 and 2015 were 36.0% and 42.7%, respectively. The favorable decrease in the 2016 ratio was directly related to lower surrenders.
39
Options and Derivatives
Net investment income without option return increased during the three and nine months ended September 30, 2016 compared to 2015, primarily due to higher
account values and reserves as a result of increased sales over the past year.
The S&P 500 Index return increased by approximately 6.1% and decreased
by 6.7% in the nine months ended September 30, 2016 and 2015, respectively. This change led to an increase in the option return of $47.1 million during the nine months ended September 30, 2016 compared to 2015 partially offset by a $38.3
million increase in equity-indexed embedded derivative for a net increase in earnings of $8.8 million.
The following table summarizes the incremental
impact of the investment performance of equity-indexed options or option return on net investment income, and the impact of the equity-indexed annuity embedded derivatives to interest credited to policyholders account balances (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Net investment income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without option return
|
|
$
|
116,291
|
|
|
$
|
115,312
|
|
|
$
|
979
|
|
|
$
|
354,284
|
|
|
$
|
349,009
|
|
|
$
|
5,275
|
|
Option return
|
|
|
12,473
|
|
|
|
(31,276
|
)
|
|
|
43,749
|
|
|
|
15,016
|
|
|
|
(32,106
|
)
|
|
|
47,122
|
|
Interest credited to policy account balances
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Without embedded derivatives
|
|
|
60,513
|
|
|
|
60,264
|
|
|
|
249
|
|
|
|
182,999
|
|
|
|
178,025
|
|
|
|
4,974
|
|
Equity-indexed annuity embedded derivatives
|
|
|
13,638
|
|
|
|
(15,606
|
)
|
|
|
29,244
|
|
|
|
20,025
|
|
|
|
(18,299
|
)
|
|
|
38,324
|
|
Health
Health segment
results for the periods indicated were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Premiums and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
43,879
|
|
|
$
|
45,638
|
|
|
$
|
(1,759
|
)
|
|
$
|
131,020
|
|
|
$
|
148,610
|
|
|
$
|
(17,590
|
)
|
Net investment income
|
|
|
2,474
|
|
|
|
2,515
|
|
|
|
(41
|
)
|
|
|
7,442
|
|
|
|
7,760
|
|
|
|
(318
|
)
|
Other income
|
|
|
4,392
|
|
|
|
3,554
|
|
|
|
838
|
|
|
|
13,208
|
|
|
|
13,479
|
|
|
|
(271
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other revenues
|
|
|
50,745
|
|
|
|
51,707
|
|
|
|
(962
|
)
|
|
|
151,670
|
|
|
|
169,849
|
|
|
|
(18,179
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims incurred
|
|
|
39,375
|
|
|
|
46,236
|
|
|
|
(6,861
|
)
|
|
|
101,994
|
|
|
|
110,289
|
|
|
|
(8,295
|
)
|
Commissions for acquiring and servicing policies
|
|
|
6,592
|
|
|
|
6,049
|
|
|
|
543
|
|
|
|
16,850
|
|
|
|
21,195
|
|
|
|
(4,345
|
)
|
Other operating expenses
|
|
|
10,722
|
|
|
|
10,011
|
|
|
|
711
|
|
|
|
32,635
|
|
|
|
34,314
|
|
|
|
(1,679
|
)
|
Change in deferred policy acquisition costs
(1)
|
|
|
543
|
|
|
|
589
|
|
|
|
(46
|
)
|
|
|
2,893
|
|
|
|
2,326
|
|
|
|
567
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
57,232
|
|
|
|
62,885
|
|
|
|
(5,653
|
)
|
|
|
154,372
|
|
|
|
168,124
|
|
|
|
(13,752
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
$
|
(6,487
|
)
|
|
$
|
(11,178
|
)
|
|
$
|
4,691
|
|
|
$
|
(2,702
|
)
|
|
$
|
1,725
|
|
|
$
|
(4,427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
A negative amount of net change indicates more expense was deferred than amortized and represents a decrease to expenses in the period indicated. A positive net change indicates less expense was deferred than amortized
and represents an increase to expenses in the period indicated.
|
Earnings increased during the three months ended September 30, 2016
compared to 2015, primarily due to the non-recurrence of a third quarter 2015 receivable write-off associated with an insolvent reinsurer, such non-recurrence was partially offset by a $7.2 million change in estimate, decreasing the amount of ceded
claim reserves during the third quarter of 2016. Earnings decreased during the nine months ended September 30, 2016 compared to 2015, primarily due to decreasing policies in-force, compounded by a decrease in premiums that outpaced the decrease
in claims.
40
Premiums and other revenues
Health earned premiums for the periods indicated were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
September 30,
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Medicare Supplement
|
|
$
|
16,879
|
|
|
|
38.5
|
%
|
|
$
|
18,610
|
|
|
|
40.7
|
%
|
|
$
|
51,755
|
|
|
|
39.5
|
%
|
|
$
|
57,620
|
|
|
|
38.8
|
%
|
Medical expense
|
|
|
3,416
|
|
|
|
7.8
|
|
|
|
4,142
|
|
|
|
9.1
|
|
|
|
10,621
|
|
|
|
8.1
|
|
|
|
12,927
|
|
|
|
8.7
|
|
Group health
|
|
|
6,152
|
|
|
|
14.0
|
|
|
|
8,436
|
|
|
|
18.5
|
|
|
|
23,569
|
|
|
|
18.0
|
|
|
|
25,843
|
|
|
|
17.4
|
|
Credit accident and health
|
|
|
4,363
|
|
|
|
9.9
|
|
|
|
3,244
|
|
|
|
7.1
|
|
|
|
10,551
|
|
|
|
8.1
|
|
|
|
9,709
|
|
|
|
6.5
|
|
MGU
|
|
|
4,870
|
|
|
|
11.1
|
|
|
|
3,813
|
|
|
|
8.4
|
|
|
|
13,135
|
|
|
|
10.0
|
|
|
|
17,328
|
|
|
|
11.7
|
|
Supplemental insurance
|
|
|
6,845
|
|
|
|
15.6
|
|
|
|
6,579
|
|
|
|
14.4
|
|
|
|
17,293
|
|
|
|
13.2
|
|
|
|
21,281
|
|
|
|
14.3
|
|
All other
|
|
|
1,354
|
|
|
|
3.1
|
|
|
|
814
|
|
|
|
1.8
|
|
|
|
4,096
|
|
|
|
3.1
|
|
|
|
3,902
|
|
|
|
2.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
43,879
|
|
|
|
100.0
|
%
|
|
$
|
45,638
|
|
|
|
100.0
|
%
|
|
$
|
131,020
|
|
|
|
100.0
|
%
|
|
$
|
148,610
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premiums decreased during the nine months ended September 30, 2016 compared to 2015, primarily due to a decline in
MGU premiums as lesser performing groups were removed. Medicare Supplement earned premiums decreased during the periods due to lapses that were greater than new sales, compounded by the continuing shift in sales from comprehensive higher premium
plans to the lower premium high deductible plan. Medical expense premiums continued to decline due to lapsation of this closed block of business. Supplemental insurance declined during the nine months ended September 30, 2016 compared to 2015,
due to greater than expected lapsation of the in-force block, which more than offset the increase in sales relative to 2015.
Our in-force certificates or
policies as of the dates indicated are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
Medicare Supplement
|
|
|
33,579
|
|
|
|
6.2
|
%
|
|
|
35,716
|
|
|
|
6.5
|
%
|
Medical expense
|
|
|
2,338
|
|
|
|
0.4
|
|
|
|
2,838
|
|
|
|
0.5
|
|
Group
|
|
|
17,219
|
|
|
|
3.2
|
|
|
|
16,112
|
|
|
|
2.9
|
|
Credit accident and health
|
|
|
194,575
|
|
|
|
36.1
|
|
|
|
207,424
|
|
|
|
37.6
|
|
MGU
|
|
|
193,281
|
|
|
|
35.9
|
|
|
|
187,831
|
|
|
|
34.1
|
|
Supplemental insurance
|
|
|
63,568
|
|
|
|
11.8
|
|
|
|
63,558
|
|
|
|
11.5
|
|
All other
|
|
|
34,488
|
|
|
|
6.4
|
|
|
|
38,187
|
|
|
|
6.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
539,048
|
|
|
|
100.0
|
%
|
|
|
551,666
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total in-force policies decreased during the nine months ended September 30, 2016 compared to 2015, primarily due to
levels of lapsation that were greater than new sales, and the continued shrinkage of the closed Medical Expense and All Other blocks.
Benefits,
losses and expenses
Claims incurred decreased during the three and nine months ended September 30, 2016 compared to 2015 primarily due to the
non-recurrence of a third quarter 2015 receivable write-off associated with an insolvent reinsurer.
Commissions decreased during the nine months ended
September 30, 2016 compared to the same period in 2015 primarily due to the decrease in premiums.
The decrease in other operating expenses for the
nine months ended September 30, 2016 compared to 2015 is associated with the decline in the number of policies.
41
Change in Deferred Policy Acquisition Costs
The following table presents the components of the change in DAC (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Acquisition cost capitalized
|
|
$
|
3,234
|
|
|
$
|
8,828
|
|
|
$
|
(5,594
|
)
|
|
$
|
8,149
|
|
|
$
|
15,869
|
|
|
$
|
(7,720
|
)
|
Amortization of DAC
|
|
|
(3,777
|
)
|
|
|
(9,417
|
)
|
|
|
5,640
|
|
|
|
(11,042
|
)
|
|
|
(18,195
|
)
|
|
|
7,153
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in DAC
|
|
$
|
(543
|
)
|
|
$
|
(589
|
)
|
|
$
|
46
|
|
|
$
|
(2,893
|
)
|
|
$
|
(2,326
|
)
|
|
$
|
(567
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The change in DAC had a slightly larger impact on expenses during the nine months ended September 30, 2016 compared to
2015 due to declining commission expense deferral.
Property and Casualty
Property and Casualty results for the periods indicated were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Premiums and other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
328,620
|
|
|
$
|
302,294
|
|
|
$
|
26,326
|
|
|
$
|
974,467
|
|
|
$
|
900,614
|
|
|
$
|
73,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
318,658
|
|
|
$
|
291,486
|
|
|
$
|
27,172
|
|
|
$
|
926,807
|
|
|
$
|
849,876
|
|
|
$
|
76,931
|
|
Net investment income
|
|
|
13,679
|
|
|
|
13,316
|
|
|
|
363
|
|
|
|
41,631
|
|
|
|
41,948
|
|
|
|
(317
|
)
|
Other income
|
|
|
1,332
|
|
|
|
1,538
|
|
|
|
(206
|
)
|
|
|
3,683
|
|
|
|
4,110
|
|
|
|
(427
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premiums and other revenues
|
|
|
333,669
|
|
|
|
306,340
|
|
|
|
27,329
|
|
|
|
972,121
|
|
|
|
895,934
|
|
|
|
76,187
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims incurred
|
|
|
233,474
|
|
|
|
179,699
|
|
|
|
53,775
|
|
|
|
676,392
|
|
|
|
583,871
|
|
|
|
92,521
|
|
Commissions for acquiring and servicing policies
|
|
|
59,830
|
|
|
|
54,229
|
|
|
|
5,601
|
|
|
|
173,149
|
|
|
|
155,454
|
|
|
|
17,695
|
|
Other operating expenses
|
|
|
41,150
|
|
|
|
39,302
|
|
|
|
1,848
|
|
|
|
122,897
|
|
|
|
115,847
|
|
|
|
7,050
|
|
Change in deferred policy acquisition costs
(1)
|
|
|
(1,448
|
)
|
|
|
(870
|
)
|
|
|
(578
|
)
|
|
|
(3,195
|
)
|
|
|
(1,996
|
)
|
|
|
(1,199
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
333,006
|
|
|
|
272,360
|
|
|
|
60,646
|
|
|
|
969,243
|
|
|
|
853,176
|
|
|
|
116,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
$
|
663
|
|
|
$
|
33,980
|
|
|
$
|
(33,317
|
)
|
|
$
|
2,878
|
|
|
$
|
42,758
|
|
|
$
|
(39,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
73.3
|
%
|
|
|
61.6
|
%
|
|
|
11.7
|
|
|
|
73.0
|
%
|
|
|
68.7
|
%
|
|
|
4.3
|
|
Underwriting expense ratio
|
|
|
31.2
|
|
|
|
31.8
|
|
|
|
(0.6
|
)
|
|
|
31.6
|
|
|
|
31.7
|
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio
|
|
|
104.5
|
%
|
|
|
93.4
|
%
|
|
|
11.1
|
|
|
|
104.6
|
%
|
|
|
100.4
|
%
|
|
|
4.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact of catastrophe events on combined ratio
|
|
|
8.3
|
|
|
|
1.5
|
|
|
|
6.8
|
|
|
|
9.1
|
|
|
|
6.1
|
|
|
|
3.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio without impact of catastrophe events
|
|
|
96.2
|
%
|
|
|
91.9
|
%
|
|
|
4.3
|
|
|
|
95.5
|
%
|
|
|
94.3
|
%
|
|
|
1.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross catastrophe losses
|
|
$
|
26,542
|
|
|
$
|
4,346
|
|
|
$
|
22,196
|
|
|
$
|
83,893
|
|
|
$
|
51,985
|
|
|
$
|
31,908
|
|
Net catastrophe losses
|
|
|
26,499
|
|
|
|
4,151
|
|
|
|
22,348
|
|
|
|
83,662
|
|
|
|
51,441
|
|
|
|
32,221
|
|
(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 earnings decreased during the three and nine months
ended September 30, 2016 compared to 2015, primarily due to the increase in losses attributable to higher auto claims and higher catastrophe losses.
Premiums and other revenues
Net premiums written
and earned increased during the three and nine months ended September 30, 2016 compared to 2015 for all major lines of business. The largest increases were in the collateral protection and personal automobile lines of business.
42
Benefits, losses and expenses
Claims incurred increased during the three and nine months ended September 30, 2016 compared to 2015 as a result of increases in catastrophe losses as
well as an increase in frequency and severity of claims related to the automobile lines of business.
Commissions for acquiring and servicing policies
increased during the three and nine months ended September 30, 2016 compared to 2015, primarily as a result of the growth of the collateral protection and mortgage security insurance lines of business.
Operating expenses increased during the three and nine months ended September 30, 2016 compared to 2015 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 56.4% of net premiums written; (ii) Commercial products, which focus primarily on agricultural and other markets, representing 32.9% of
net premiums written; and (iii) Credit-related property insurance products, which are marketed to and through financial institutions and retailers, representing 10.7% of net premiums written.
Personal Products
Personal Products results for
the periods indicated were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Net premiums written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
115,122
|
|
|
$
|
106,295
|
|
|
$
|
8,827
|
|
|
$
|
334,194
|
|
|
$
|
312,070
|
|
|
$
|
22,124
|
|
Homeowner
|
|
|
67,683
|
|
|
|
64,217
|
|
|
|
3,466
|
|
|
|
182,523
|
|
|
|
172,667
|
|
|
|
9,856
|
|
Other Personal
|
|
|
11,353
|
|
|
|
11,055
|
|
|
|
298
|
|
|
|
33,184
|
|
|
|
32,512
|
|
|
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums written
|
|
$
|
194,158
|
|
|
$
|
181,567
|
|
|
$
|
12,591
|
|
|
$
|
549,901
|
|
|
$
|
517,249
|
|
|
$
|
32,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
$
|
109,574
|
|
|
$
|
102,621
|
|
|
$
|
6,953
|
|
|
$
|
319,930
|
|
|
$
|
302,769
|
|
|
$
|
17,161
|
|
Homeowner
|
|
|
58,691
|
|
|
|
56,364
|
|
|
|
2,327
|
|
|
|
171,112
|
|
|
|
165,705
|
|
|
|
5,407
|
|
Other Personal
|
|
|
10,627
|
|
|
|
10,354
|
|
|
|
273
|
|
|
|
31,267
|
|
|
|
30,375
|
|
|
|
892
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned
|
|
$
|
178,892
|
|
|
$
|
169,339
|
|
|
$
|
9,553
|
|
|
$
|
522,309
|
|
|
$
|
498,849
|
|
|
$
|
23,460
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
89.4
|
%
|
|
|
77.0
|
%
|
|
|
12.4
|
|
|
|
85.9
|
%
|
|
|
78.4
|
%
|
|
|
7.5
|
|
Homeowner
|
|
|
86.9
|
|
|
|
42.7
|
|
|
|
44.2
|
|
|
|
78.6
|
|
|
|
64.7
|
|
|
|
13.9
|
|
Other Personal
|
|
|
60.9
|
|
|
|
60.2
|
|
|
|
0.7
|
|
|
|
52.2
|
|
|
|
61.7
|
|
|
|
(9.5
|
)
|
Personal line loss ratio
|
|
|
86.9
|
%
|
|
|
64.6
|
%
|
|
|
22.3
|
|
|
|
81.5
|
%
|
|
|
72.8
|
%
|
|
|
8.7
|
|
Combined Ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile
|
|
|
114.2
|
%
|
|
|
102.2
|
%
|
|
|
12.0
|
|
|
|
111.1
|
%
|
|
|
103.5
|
%
|
|
|
7.6
|
|
Homeowner
|
|
|
114.7
|
|
|
|
70.2
|
|
|
|
44.5
|
|
|
|
106.7
|
|
|
|
91.9
|
|
|
|
14.8
|
|
Other Personal
|
|
|
82.2
|
|
|
|
83.6
|
|
|
|
(1.4
|
)
|
|
|
76.7
|
|
|
|
86.0
|
|
|
|
(9.3
|
)
|
Personal line combined ratio
|
|
|
112.5
|
%
|
|
|
90.4
|
%
|
|
|
22.1
|
|
|
|
107.6
|
%
|
|
|
98.6
|
%
|
|
|
9.0
|
|
Automobile
: Net premiums written and earned increased in the personal automobile line during the three and nine months
ended September 30, 2016 compared to 2015, due to an increase of policies in force and rate increases. The loss and combined ratio increased during the three and nine months ended September 30, 2016 compared to 2015, primarily due to an
increase in the frequency and severity of claims and catastrophe losses compared to the prior year.
43
Homeowner
: Net premiums written and earned increased during the three and nine months ended September 30,
2016 compared to 2015, primarily due to increases in sales of homeowner products to renters. The loss and combined ratio increased during the three and nine months ended September 30, 2016 compared to 2015, due to increases in catastrophe claim
activity compared to the prior year.
Other Personal:
These products include watercraft, rental-owner and umbrella
coverages for individuals seeking to protect their personal property and liability not covered within their home and auto policies. The loss ratio decreased during the nine months ended September 30, 2016 compared to 2015 primarily due to an
umbrella claim re-designation from personal lines to commercial lines.
Commercial Products
Commercial Products results for the periods indicated were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Net premiums written
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
$
|
38,665
|
|
|
$
|
33,840
|
|
|
$
|
4,825
|
|
|
$
|
135,429
|
|
|
$
|
127,194
|
|
|
$
|
8,235
|
|
Agricultural Business
|
|
|
35,844
|
|
|
|
30,388
|
|
|
|
5,456
|
|
|
|
106,998
|
|
|
|
96,161
|
|
|
|
10,837
|
|
Automobile
|
|
|
21,495
|
|
|
|
19,469
|
|
|
|
2,026
|
|
|
|
77,721
|
|
|
|
72,038
|
|
|
|
5,683
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums written
|
|
$
|
96,004
|
|
|
$
|
83,697
|
|
|
$
|
12,307
|
|
|
$
|
320,148
|
|
|
$
|
295,393
|
|
|
$
|
24,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
$
|
43,170
|
|
|
$
|
38,946
|
|
|
$
|
4,224
|
|
|
$
|
122,018
|
|
|
$
|
113,578
|
|
|
$
|
8,440
|
|
Agricultural Business
|
|
|
34,110
|
|
|
|
30,561
|
|
|
|
3,549
|
|
|
|
99,276
|
|
|
|
89,725
|
|
|
|
9,551
|
|
Automobile
|
|
|
23,941
|
|
|
|
22,391
|
|
|
|
1,550
|
|
|
|
70,077
|
|
|
|
65,242
|
|
|
|
4,835
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net premiums earned
|
|
$
|
101,221
|
|
|
$
|
91,898
|
|
|
$
|
9,323
|
|
|
$
|
291,371
|
|
|
$
|
268,545
|
|
|
$
|
22,826
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
|
64.9
|
%
|
|
|
52.2
|
%
|
|
|
12.7
|
|
|
|
66.4
|
%
|
|
|
61.6
|
%
|
|
|
4.8
|
|
Agricultural Business
|
|
|
41.9
|
|
|
|
58.8
|
|
|
|
(16.9
|
)
|
|
|
64.8
|
|
|
|
76.6
|
|
|
|
(11.8
|
)
|
Automobile
|
|
|
69.7
|
|
|
|
82.1
|
|
|
|
(12.4
|
)
|
|
|
69.9
|
|
|
|
75.5
|
|
|
|
(5.6
|
)
|
Commercial line loss ratio
|
|
|
58.3
|
%
|
|
|
61.7
|
%
|
|
|
(3.4
|
)
|
|
|
66.7
|
%
|
|
|
70.0
|
%
|
|
|
(3.3
|
)
|
Combined ratio
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Commercial
|
|
|
97.5
|
%
|
|
|
79.1
|
%
|
|
|
18.4
|
|
|
|
98.4
|
%
|
|
|
89.8
|
%
|
|
|
8.6
|
|
Agricultural Business
|
|
|
78.4
|
|
|
|
101.3
|
|
|
|
(22.9
|
)
|
|
|
102.2
|
|
|
|
117.2
|
|
|
|
(15.0
|
)
|
Automobile
|
|
|
94.0
|
|
|
|
105.3
|
|
|
|
(11.3
|
)
|
|
|
94.3
|
|
|
|
100.2
|
|
|
|
(5.9
|
)
|
Commercial line combined ratio
|
|
|
90.2
|
%
|
|
|
92.9
|
%
|
|
|
(2.7
|
)
|
|
|
98.7
|
%
|
|
|
101.5
|
%
|
|
|
(2.8
|
)
|
Other Commercial
: Net premiums written and earned increased during the three and nine months ended September 30,
2016 compared to 2015 primarily due to increased sales of mortgage security insurance. This increase was partially offset by an increase in reinsurance premium ceded for the workers compensation and umbrella lines of business. The increase in the
combined ratios for the three and nine months ended September 30, 2016 compared to 2015 is primarily due to the increase of reinsurance premium.
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 nine months ended
September 30, 2016 compared to 2015, primarily as a result of improved rate adequacy. The loss and combined ratio decreased during the three and nine months ended September 30, 2016 compared to 2015 primarily due to a decrease in
catastrophe losses.
Automobile
: Net premiums written and earned increased during the three and nine months ended September 30, 2016 compared
to 2015, primarily due to improved rate adequacy. The loss ratio decreased during the three and nine months ended September 30, 2016 compared to 2015, primarily due to a decrease in average severity of losses.
44
Credit Products
Credit-related property product results for the periods indicated were as follows (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Net premiums written
|
|
$
|
38,458
|
|
|
$
|
37,030
|
|
|
$
|
1,428
|
|
|
$
|
104,598
|
|
|
$
|
87,972
|
|
|
$
|
16,626
|
|
Net premiums earned
|
|
|
38,546
|
|
|
|
30,249
|
|
|
|
8,297
|
|
|
|
113,127
|
|
|
|
82,482
|
|
|
|
30,645
|
|
Loss ratio
|
|
|
49.5
|
%
|
|
|
45.1
|
%
|
|
|
4.4
|
%
|
|
|
49.9
|
%
|
|
|
39.5
|
%
|
|
|
10.4
|
%
|
Combined ratio
|
|
|
106.2
|
%
|
|
|
113.8
|
%
|
|
|
(7.6
|
)%
|
|
|
107.2
|
%
|
|
|
108.7
|
%
|
|
|
(1.5
|
)%
|
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 consumers ability to pay the debt.
Net written and earned premiums increased during the three and nine months ended September 30, 2016 compared to 2015, primarily due to increases in our
collateral protection business. The loss ratio increased during the three and nine months ended September 30, 2016 compared to 2015, primarily due to an increase in claims in our collateral protection and guaranteed auto protection business
lines.
Corporate and Other
Corporate and Other
segment financial results for the periods indicated were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended September 30,
|
|
|
|
|
|
Nine months ended September 30,
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
|
2016
|
|
|
2015
|
|
|
Change
|
|
Other revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
$
|
23,812
|
|
|
$
|
29,711
|
|
|
$
|
(5,899
|
)
|
|
$
|
46,876
|
|
|
$
|
61,856
|
|
|
$
|
(14,980
|
)
|
Realized investment gains (losses), net
|
|
|
16,267
|
|
|
|
(11,879
|
)
|
|
|
28,146
|
|
|
|
25,268
|
|
|
|
40,694
|
|
|
|
(15,426
|
)
|
Other income
|
|
|
682
|
|
|
|
1,633
|
|
|
|
(951
|
)
|
|
|
2,802
|
|
|
|
4,682
|
|
|
|
(1,880
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other revenues
|
|
|
40,761
|
|
|
|
19,465
|
|
|
|
21,296
|
|
|
|
74,946
|
|
|
|
107,232
|
|
|
|
(32,286
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, losses and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commissions
|
|
|
(1
|
)
|
|
|
125
|
|
|
|
(126
|
)
|
|
|
(3
|
)
|
|
|
124
|
|
|
|
(127
|
)
|
Other operating expenses
|
|
|
10,330
|
|
|
|
10,108
|
|
|
|
222
|
|
|
|
35,448
|
|
|
|
28,356
|
|
|
|
7,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, losses and expenses
|
|
|
10,329
|
|
|
|
10,233
|
|
|
|
96
|
|
|
|
35,445
|
|
|
|
28,480
|
|
|
|
6,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before other items and federal income taxes
|
|
$
|
30,432
|
|
|
$
|
9,232
|
|
|
$
|
21,200
|
|
|
$
|
39,501
|
|
|
$
|
78,752
|
|
|
$
|
(39,251
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings increased during the three months ended September 30, 2016 compared to 2015 primarily due to an increase in
realized investment gains. The increase in realized investment gains is attributable to an increase in the sale of equity securities. Earnings decreased during the nine months ended September 30, 2016 compared to 2015 primarily due to a
decrease in net investment income and realized investment gains. The decrease in realized investment gains is attributable to a decrease in the sale of certain real estate holdings compared to 2015, and higher other-than-temporary impairments
recognized in 2016.
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 the
insurance subsidiaries 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 primarily supported by investment-grade bonds, and to a lesser extent collateralized mortgage
obligations and commercial mortgage loans. We purchase fixed maturity securities and designate them as either held-to-maturity or available-for-sale considering our estimated future cash flow needs.
45
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
Bonds held-to-maturity, at amortized cost
|
|
$
|
7,363,132
|
|
|
|
35.8
|
%
|
|
$
|
7,609,420
|
|
|
|
38.6
|
%
|
Bonds available-for-sale, at fair value
|
|
|
5,925,900
|
|
|
|
28.8
|
|
|
|
5,483,916
|
|
|
|
27.8
|
|
Equity securities, at fair value
|
|
|
1,546,801
|
|
|
|
7.5
|
|
|
|
1,514,979
|
|
|
|
7.7
|
|
Mortgage loans, net of allowance
|
|
|
4,113,637
|
|
|
|
20.0
|
|
|
|
3,483,280
|
|
|
|
17.7
|
|
Policy loans
|
|
|
384,257
|
|
|
|
1.9
|
|
|
|
407,491
|
|
|
|
2.1
|
|
Investment real estate, net of accumulated depreciation
|
|
|
592,815
|
|
|
|
2.9
|
|
|
|
581,255
|
|
|
|
2.9
|
|
Short-term investments
|
|
|
405,463
|
|
|
|
2.0
|
|
|
|
460,612
|
|
|
|
2.3
|
|
Other invested assets
|
|
|
217,781
|
|
|
|
1.1
|
|
|
|
173,042
|
|
|
|
0.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
20,549,786
|
|
|
|
100.0
|
%
|
|
$
|
19,713,995
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The increase in our total investments at September 30, 2016 compared to December 31, 2015 was primarily a result of
the purchase of bonds available-for-sale and increased mortgage loan activity.
Bonds
We allocate most of our fixed maturity securities
to support our insurance business. At September 30, 2016, our fixed maturity securities had an estimated fair value of $13.7 billion, which was $0.8 billion, or 5.9%, above amortized cost. At December 31, 2015, our fixed maturity
securities had an estimated fair value of $13.2 billion, which was $0.2 billion, or 1.6%, above amortized cost. The estimated fair value for securities, due in one year or less, increased from $0.5 billion as of December 31, 2015 to $0.6
billion as of September 30, 2016.
The following table identifies the total bonds by credit quality rating, using both Standard &
Poors and Moodys ratings (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
|
Amortized
|
|
|
Estimated
|
|
|
% of Fair
|
|
|
Amortized
|
|
|
Estimated
|
|
|
% of Fair
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Value
|
|
|
Cost
|
|
|
Fair Value
|
|
|
Value
|
|
AAA
|
|
$
|
681,239
|
|
|
$
|
730,450
|
|
|
|
5.3
|
|
|
$
|
681,918
|
|
|
$
|
720,175
|
|
|
|
5.4
|
|
AA
|
|
|
1,403,349
|
|
|
|
1,502,440
|
|
|
|
10.9
|
|
|
|
1,522,300
|
|
|
|
1,591,496
|
|
|
|
12.0
|
|
A
|
|
|
4,531,470
|
|
|
|
4,847,459
|
|
|
|
35.3
|
|
|
|
4,672,994
|
|
|
|
4,828,340
|
|
|
|
36.5
|
|
BBB
|
|
|
5,794,161
|
|
|
|
6,124,824
|
|
|
|
44.6
|
|
|
|
5,731,158
|
|
|
|
5,732,961
|
|
|
|
43.3
|
|
BB and below
|
|
|
554,581
|
|
|
|
526,267
|
|
|
|
3.9
|
|
|
|
428,881
|
|
|
|
366,497
|
|
|
|
2.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,964,800
|
|
|
$
|
13,731,440
|
|
|
|
100.0
|
|
|
$
|
13,037,251
|
|
|
$
|
13,239,469
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 4.8% and 4.4% at September 30, 2016 and December 31, 2015, respectively. It is likely that the weighted average yield
on funded mortgage loans will decline as loans mature and new loans are originated with lower rates in the current interest rate environment.
46
Equity Securities
We invest in companies publicly traded on national U.S. stock exchanges; the
cost and estimated fair value of the equity securities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
% of Fair
|
|
|
|
Cost
|
|
|
Gains
|
|
|
(Losses)
|
|
|
Fair Value
|
|
|
Value
|
|
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$
|
767,488
|
|
|
$
|
765,187
|
|
|
$
|
(12,322
|
)
|
|
$
|
1,520,353
|
|
|
|
98.3
|
|
Preferred Stock
|
|
|
19,631
|
|
|
|
6,817
|
|
|
|
|
|
|
|
26,448
|
|
|
|
1.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
787,119
|
|
|
$
|
772,004
|
|
|
$
|
(12,322
|
)
|
|
$
|
1,546,801
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
$
|
794,839
|
|
|
$
|
718,225
|
|
|
$
|
(22,035
|
)
|
|
$
|
1,491,029
|
|
|
|
98.4
|
|
Preferred Stock
|
|
|
15,987
|
|
|
|
7,964
|
|
|
|
(1
|
)
|
|
|
23,950
|
|
|
|
1.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
810,826
|
|
|
$
|
726,189
|
|
|
$
|
(22,036
|
)
|
|
$
|
1,514,979
|
|
|
|
100.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
Short-Term Investments
Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poors
and Moodys, 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.
Policy Loans
For certain life insurance products, policyholders may borrow funds using the policys cash value as collateral. The
maximum amount of the policy loan depends upon the policys surrender value. As of September 30, 2016, we had $384.3 million in policy loans with a loan to surrender value of 65.0%, and at December 31, 2015, we had $407.5 million in
policy loans with a loan to surrender value of 61.3%. 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 over any claims on the policy. If
the policyholder fails to repay the policy loan, funds are withdrawn from the policys benefits.
Net Investment Income and Net Realized Gains
(Losses)
Net investment income increased $37.2 million during the nine months ended September 30, 2016 compared to September 30, 2015,
primarily due to an increase in the unrealized gains of equity-indexed options which 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 decreased $25.4 million during the nine months ended September 30, 2016 compared to September 30, 2015 primarily due to a
decrease in the sale of certain real estate holdings. Other-than-temporary impairment on investment securities decreased $10.0 million during the nine months ended September 30, 2016 compared to September 30, 2015.
47
Net Unrealized Gains and Losses
The unrealized gains and losses of our fixed maturity investment portfolio are shown below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2016
|
|
|
December 31, 2015
|
|
|
Change
|
|
Held-to-Maturity
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
$
|
478,500
|
|
|
$
|
305,964
|
|
|
$
|
172,536
|
|
Losses
|
|
|
(36,092
|
)
|
|
|
(159,831
|
)
|
|
|
123,739
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain
|
|
|
442,408
|
|
|
|
146,133
|
|
|
|
296,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-Sale
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
1,113,536
|
|
|
|
891,687
|
|
|
|
221,849
|
|
Losses
|
|
|
(29,622
|
)
|
|
|
(131,449
|
)
|
|
|
101,827
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Gain
|
|
|
1,083,914
|
|
|
|
760,238
|
|
|
|
323,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,526,322
|
|
|
$
|
906,371
|
|
|
$
|
619,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Includes bonds and equity securities
|
The net change in the unrealized gains on fixed maturity securities
between December 31, 2015 and September 30, 2016 is primarily attributable to the decrease in benchmark ten-year interest rates which were 2.27% and 1.60%, respectively. As interest rates fall, the value of fixed maturity securities
increase and when interest rates rise, the value of bonds will fall and result in unrealized losses unless the bonds are sold. We currently have the ability and intent to hold those securities in unrealized loss positions until a market price
recovery or maturity. Further, it is unlikely that we will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time.
The net unrealized gains of our equity securities were $759.7 million and $704.2 million at September 30, 2016 and December 31, 2015, respectively.
The increase is attributable to net market increases in the value of equity securities we owned across the two points in time.
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 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.
48
Changes in interest rates during 2016 and market expectations for potentially higher rates through 2017, although
recently tempered due to economic uncertainty, 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,
continued low interest rates and increased 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. No unusually large capital expenditures are expected in the next 12-24 months. We have paid dividends to stockholders for over 100 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 would 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.
Our cash and cash equivalents and
short-term investment position decreased from $650.8 million at December 31, 2015 to $512.5 million at September 30, 2016. The decrease relates primarily to a reduction in short-term investments used to fund additional investments in
mortgage loans and construction loans.
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):
|
|
|
|
|
|
|
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
American National stockholders equity, excluding accumulated other comprehensive income
(AOCI), net of tax
|
|
$
|
4,157,998
|
|
|
$
|
4,099,662
|
|
AOCI
|
|
|
514,399
|
|
|
|
352,620
|
|
|
|
|
|
|
|
|
|
|
Total American National stockholders equity
|
|
$
|
4,672,397
|
|
|
$
|
4,452,282
|
|
|
|
|
|
|
|
|
|
|
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 $36.1 million and $34.7 million at September 30, 2016 and December 31, 2015, respectively.
49
The changes in our capital resources are summarized below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2016
|
|
|
|
Capital and
Retained
Earnings
|
|
|
AOCI
|
|
|
Total
|
|
Net income attributable to American National
|
|
$
|
121,230
|
|
|
$
|
|
|
|
$
|
121,230
|
|
Dividends to shareholders
|
|
|
(65,665
|
)
|
|
|
|
|
|
|
(65,665
|
)
|
Change in net unrealized gains
|
|
|
|
|
|
|
156,066
|
|
|
|
156,066
|
|
Defined benefit pension plan adjustment
|
|
|
|
|
|
|
6,384
|
|
|
|
6,384
|
|
Foreign currency transaction and translation adjustment
|
|
|
|
|
|
|
(671
|
)
|
|
|
(671
|
)
|
Other
|
|
|
2,771
|
|
|
|
|
|
|
|
2,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
58,336
|
|
|
$
|
161,779
|
|
|
$
|
220,115
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 September 30, 2016 and December 31, 2015, American National Insurance Companys statutory capital and surplus was $2,905,490,000 and $2,925,935,000, respectively. American National Insurance Company and each of its
insurance subsidiaries had statutory capital and surplus at September 30, 2016 and December 31, 2015, substantially above 200% of the authorized control level.
The achievement of long-term growth will require growth in American National Insurance Companys 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, 2015. We expect to have the capacity to pay our obligations as they come due.
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.
50
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 2015 Annual Report on Form 10-K filed with the SEC on February 29, 2016.
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 (Exchange Act)) that are designed to provide reasonable assurance that information required to be disclosed in the Companys reports under the Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and forms, and that such information is accumulated and communicated to the Companys management, including its Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosures.
The Companys management, with the participation of the Companys Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Companys disclosure controls and procedures as of September 30, 2016. Based upon that evaluation and subject to the
foregoing, the Companys Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2016, the design and operation of the Companys disclosure controls and procedures were effective to accomplish their
objectives at the reasonable assurance level.
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 Companys 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 nine
months ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
51