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Securities (Detail)
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Rating Distribution (Detail)
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Market Sector Distribution (Detail)
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Amount of Mortgage Loans by Location (Detail)
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Troubled Debt Restructuring Mortgage Loan
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Real Estate by Property-Type and Geographic
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Liabilities Related to VIEs (Detail)
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Long-term Notes Payable of Consolidated VIEs
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Amount and Maximum Exposure to Loss Related to
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Instruments Reported in Financial Position
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Disclosures Regarding Fair Value Hierarchy
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Instruments Measured at Fair Value on Recurring
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(Exact name of registrant as specified in its charter)
iTexas
i74-0484030
(State
or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
iOne Moody Plaza
iGalveston,
iTexasi77550-7999
(Address of principal executive offices) (Zip Code)
(i409)
i763-4661
(Registrant’s telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title
of Each Class
Trading Symbol
Name of Each Exchange on which Registered
iCommon Stock, par value $1.00
iANAT
iNASDAQ
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. ☒iYes☐ No
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). ☒iYes☐ No
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act:
iLarge
accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
As
of October 31, 2019, there were i26,887,200 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.
NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – iNature
of Operations
American National Insurance Company and its consolidated subsidiaries (collectively “American National” or “the Company”) offer a broad portfolio of insurance products, including individual and group life insurance, annuities, health insurance, and property and casualty insurance. Business is conducted in all i50
states, the District of Columbia and Puerto Rico.
Note 2 – iSummary of Significant Accounting Policies and Practices
i
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. iAmerican National consolidates entities that are wholly-owned and those in which American National owns less than i100%
but controls the voting rights, 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. iCertain amounts in prior years have been reclassified to conform to current year presentation.
The interim consolidated financial statements and notes herein are unaudited and reflect all adjustments which management considers necessary for
the fair presentation of the interim consolidated statements of financial position, operations, comprehensive income, changes in equity, and cash flows.
The interim consolidated financial statements and notes should be read in conjunction with the annual consolidated financial statements and notes thereto included in American National’s Annual Report on Form 10-K as of and for the year ended December 31, 2018. The consolidated results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
iThe
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 May 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from Contracts with Customers," that superseded 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 Company’s revenues include premiums, other policy revenues, net investment income, realized investment gains, net gains on equity securities, and other income. Other income includes fee income which is recognized when obligations under the terms specified within a contract with a customer are either (1) satisfied at a point in time or (2) based upon the progress of completion measured over a period of time as the obligation is performed using the input method. The Company adopted the standard on its required effective date of January 1, 2018 using the modified retrospective approach. The majority of our revenue sources are insurance related and not in the scope
of the guidance. The adoption of the standard did not have a material impact on the Company’s consolidated financial position, results of operations, equity or cash flows as of the adoption date or for the nine months ended September 30, 2019.
In January 2016, the FASB issued ("ASU") 2016-01, "Financial
Instruments," which changed certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The new guidance requires that equity investments, other than those accounted for under the equity method or those that result in consolidation of the investee, be measured at fair value with the changes in fair value recognized through earnings. When the fair value option has been elected for financial liabilities, changes in fair value due to instrument-specific credit risk will be recognized separately in other comprehensive income. The guidance also simplifies the impairment assessment of equity investments and eliminates the disclosure requirements for methods and significant assumptions used to estimate fair value of financial instruments that are measured at amortized cost on the statement of financial position. The Company adopted the standard on
its required effective date of January 1, 2018 using a modified retrospective approach. Upon adoption, cumulative unrealized gains on equity securities, net of tax, of $i667.7 million, partially offset by $i30.4
million participating policyholders’ interest in such gains, net of tax, were reclassified from accumulated other comprehensive income to retained earnings. In April 2018, an additional $i10.2 million deferred policy acquisition cost adjustment, net of tax, related to net unrealized gains and losses on equity securities, was reclassified from
accumulated other comprehensive income to retained earnings. The change in net gains on equity securities increased earnings by $i222.8 million and $i118.9
million, net of tax, for the nine months ended September 30, 2019 and 2018, respectively.
In October of 2016, the FASB issued ASU 2016-16, “Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory,” which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. Prior guidance prohibited the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset was sold to an outside party. The Company adopted the standard on its required effective date of January
1, 2018 using a modified retrospective approach. Upon adoption, a liability was released and retained earnings increased by $i59.9 million.
In
February 2016, the FASB issued ASU 2016-02, “Leases,” that required significant changes to the statement of financial position of lessees. The new standard required lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether the lease is effectively a financed purchase by the lessee. This classification is used to determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months, regardless of their classification. Lessor accounting was less affected by the standard but was updated to align with certain changes in the lessee model and the new revenue recognition standard. The Company adopted the standard
on its required effective date of January 1, 2019 using the effective date method, which required a cumulative-effect adjustment to the opening balance of retained earnings. Upon adoption, the Company recorded a right-of-use asset and liability of $i13.1 million.
In
February 2018, the FASB issued ASU 2018-02, “Income Statement-Reporting Comprehensive Income: Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” which allows for a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The standard was adopted on its required effective date of January 1, 2019 and resulted in a $i0.8
million increase in retained earnings and a corresponding decrease to accumulated other comprehensive income.
Future Adoption of New Accounting Standards— The FASB issued the following accounting guidance relevant to American National:
In June 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments,” which will significantly change how entities measure credit losses for most financial assets, reinsurance recoverables and certain other instruments that are not measured at fair value through net income. The guidance will replace the current “incurred loss” approach with an “expected loss” model for instruments
measured at amortized cost. For available-for-sale debt securities, entities will be required to record allowances rather than a direct write down of the investment, as required by the current other-than-temporary impairment model. The standard also requires additional disclosures. This standard will become effective for the Company for all annual and interim periods beginning January 1, 2020. The Company is in the process of determining the impact of adopting the standard on our results of operations and financial position.
In August 2018, the FASB issued ASU 2018-12, “Insurance: Targeted Improvements to the Accounting for Long-Duration Contracts,” that impacts financial reporting for insurance companies that issue long-duration contracts. The guidance will improve the timeliness of recognizing changes in the liability for future policy benefits for traditional and limited payment long-duration contracts and will modify the rate used to discount future cash flows. The guidance
will also simplify the accounting for certain market-based options or guarantees associated with deposit (or account balance) contracts, simplify the amortization of deferred acquisition costs and add significant qualitative and quantitative disclosures. This standard will become effective for the Company for all annual and interim periods beginning January 1, 2022. This standard could have a material impact on our results of operations and financial position.
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement: Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement,” guidance that modifies the disclosure
requirements on fair value measurements. Certain disclosure requirements are removed, modified or added to improve the relevancy of the fair value measurement disclosures. The new standard will become effective for the Company for all interim and annual periods beginning January 1, 2020. The Company does not expect the adoption of this guidance to have a material impact on the results of operations or financial position.
In August 2018, the FASB issued ASU 2018-14, “Compensation-Retirement Benefits-Defined Benefit Plans-General: Disclosure Framework-Changes to the Disclosure Requirements for Defined Benefit Plans,” which modifies the disclosure requirements
for employers that sponsor defined benefit pension or other postretirement plans. The guidance removes certain defined benefit pension or other postretirement plan disclosures that are no longer cost beneficial, clarifies the specific requirements for each disclosure and adds disclosure requirements. This standard will become effective for the annual period ending December 31, 2020. The Company does not expect the adoption of this standard to have a material impact on our results of operations or financial position.
In August 2018, the FASB issued ASU 2018-15 “Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract,”
which seeks to align the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. Current GAAP does not specifically address the implementation costs of a cloud computing arrangement that is service
contract. This standard will become effective for the Company for all interim and annual periods beginning January 1, 2020. The Company is in the process of determining
the impact of adopting the standard.
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.
i
Proceeds from sales of available-for-sale securities, with the related gross realized gains and losses, are shown below (in thousands):
Proceeds from sales of fixed maturity available-for-sale securities
$
i14,921
$
i18,424
$
i15,205
$
i64,980
Gross
realized gains
i56
i—
i56
i376
Gross
realized losses
i—
(i569
)
(i23
)
(i1,156
)
/
Gains
and losses are determined using specific identification of the securities sold. During the nine months ended September 30, 2019 and 2018, bonds below investment grade with a carrying value of $i157,939,000 and $i34,850,000,
respectively, were transferred from held-to-maturity to available-for-sale after a deterioration in the issuers’ credit worthiness. Further, during 2018, a bond with a carrying value of $i38,221,000 was transferred from held-to-maturity to available-for-sale due to an isolated event that could not have been reasonably anticipated by the company. iNo
realized loss was recorded in 2019 or 2018.
i
The components of the change in net unrealized gains (losses) on debt securities are shown below (in thousands):
The gross unrealized losses and fair value of the investment securities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position, are shown below (in thousands):
As
of September 30, 2019, the securities with unrealized losses including those exceeding one year were not deemed to be other-than-temporarily impaired. American National has the ability and intent to hold those securities until a market price recovery or maturity. It is not more-likely-than-not that American National will be required to sell them prior to recovery, and recovery is expected in a reasonable period of time. It is possible an issuer’s financial circumstances may be different in the future, which may lead to a different impairment conclusion in future periods.
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. iThe
distribution based on carrying amount of mortgage loans by location is as follows:
During
the nine months ended September 30, 2019, American National foreclosed on itwo loans with a total recorded investment of $i16,008,000andino loans were in the process of foreclosure at September 30, 2019. For the year ended December 31, 2018, American National foreclosed on ifour
loans with a total recorded investment of $i22,608,000, and ione
loan with a total recorded investment of $i7,363,000 was in the process of foreclosure. American National did not sell any loans during the nine months ended September 30, 2019 or during the year ended December 31, 2018.
There
were ino unamortized purchase discounts as of September 30, 2019 or during the year ended December 31, 2018. Total mortgage loans were net of unamortized origination fees of $i28,335,000
and $i31,586,000 at September 30, 2019 and December 31, 2018, respectively. No unearned income is included in these amounts.
Allowance for Credit Losses
A loan is considered impaired when it is probable that all amounts due will not be collected according to the contractual terms
of the loan agreement. Mortgage loans with temporary difficulties are not considered impaired when the borrower has the financial capacity to fund revenue shortfalls from the properties for the foreseeable future. Individual valuation allowances are established for impaired loans to reduce the carrying value to the estimated fair value of the collateral. Loans not evaluated individually for collectability are segregated by property-type and location, and allowance factors are applied. These factors are developed based on 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.
i
The
change in allowance for credit losses in mortgage loans is shown below (in thousands, except number of loans):
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.
i
Troubled debt restructuring mortgage loan information is as follows (in thousands, except number of loans):
There
were ithree loans determined to be a troubled debt restructuring for the nine months ended September 30, 2019. There were no commitments to lend additional funds to debtors whose loans have been modified in a troubled debt restructuring during the periods presented.
Note
6 – iReal Estate and Other Investments
i
Investment real estate by property-type and geographic distribution are as follows:
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, our involvement is limited to financing. Through analysis performed by American National, some of these partnerships and joint ventures have been determined to be variable interest entities (“VIEs”). In certain instances, in addition to an economic interest in the entity, American National holds the power to direct the most significant activities of the entity and is deemed the primary beneficiary or consolidator of the entity. The assets of the consolidated VIEs are restricted and must first be used to settle their liabilities. Creditors or beneficial interest holders of these VIEs have no recourse to the general credit of American National, as American National’s obligation is limited to the amount of its committed investment. American National has not provided financial or other
support to the VIEs in the form of liquidity arrangements, guarantees, or other commitments to third parties that may affect the fair value or risk of its variable interest in the VIEs in 2019 or 2018.
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 $i6,071,000 and $i26,635,000
at September 30, 2019 and December 31, 2018, respectively.
i
The total long-term notes payable of the consolidated VIEs consists of the following (in thousands):
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 consent of all partners. iThe carrying amount and maximum exposure to loss relating to unconsolidated VIEs follows (in thousands):
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. iThe
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
The
Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by the counterparties. The Company has a policy of only dealing with counterparties it believes are creditworthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The Company holds collateral in cash and notes secured by U.S. government backed assets. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less the fair value of collateral held. The Company maintains master netting agreements with its current active
trading partners. As such, a right of offset has been applied to collateral that supports credit risk and has been recorded in the consolidated statements of financial position as an offset to “Other invested assets” with an associated payable to “Other liabilities” for excess collateral.
i
Information regarding the Company’s exposure to credit loss on the options it holds is presented below (in thousands):
Embedded
derivative liability for equity-indexed contracts
i691,766
i691,766
i596,075
i596,075
Notes
payable
i159,043
i159,043
i137,963
i137,963
Separate
account liabilities ($1,008,309 and $905,824 included in fair value hierarchy)
i1,025,370
i1,025,370
i918,369
i918,369
Total
financial liabilities
$
i12,270,695
$
i12,270,695
$
i11,656,397
$
i11,656,397
/
Fair
value is defined as the price that would be received to sell an asset or paid to transfer a liability. A fair value hierarchy is used to determine fair value based on a hypothetical transaction at the measurement date from the perspective of a market participant. American National has evaluated the types of securities in its investment portfolio to determine an appropriate hierarchy level based upon trading activity and the observability of market inputs. The classification of assets or liabilities within the fair value hierarchy is based on the lowest level of significant input to its valuation. The input levels are defined as follows:
Level 1
Unadjusted
quoted prices in active markets for identical assets or liabilities.
Level 2
Quoted prices in markets that are not active or inputs that are observable directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities other than quoted prices in Level 1; quoted prices in markets that are not active; or other inputs that are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3
Unobservable
inputs that are supported by little or no market activity and are significant to the fair value of the assets or liabilities. Unobservable inputs reflect American National’s own assumptions about the assumptions that market participants would use in pricing the asset or liability. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models and third-party evaluation, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Note 9 – Fair Value of Financial Instruments – (Continued)
Valuation
Techniques
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 participant’s assumptions. American National does not adjust quotes received from the pricing service. The pricing service utilized by American National has indicated that they will only produce an estimate of fair value if there is objectively verifiable information available.
American National holds a small amount of private placement debt and fixed maturity securities that have characteristics that make them unsuitable for matrix pricing. For these securities, a quote from an independent broker (typically a market maker) is obtained. Due to the disclaimers on the quotes that indicate that the price is indicative only, American National includes these fair value estimates in Level 3.
For
securities priced using a quote from an independent broker, such as the equity-indexed options and certain fixed maturity securities, American National uses a market-based fair value analysis to validate the reasonableness of prices received. Price variances above a certain threshold are analyzed further to determine if any pricing issue exists. This analysis is performed quarterly.
Equity Securities—For publicly-traded equity securities, prices are received from a nationally recognized pricing service that are based on observable market transactions, and these securities are classified as Level 1 measurements. For certain preferred stock, current market quotes in active markets are unavailable. In these instances, an estimate of fair value is received from the pricing service. The service utilizes similar methodologies to price preferred stocks as it does for fixed maturity securities. If applicable,
these estimates would be disclosed as Level 2 measurements. American National tests the accuracy of the information provided by reference to other services annually.
Short-term investments—Short-term investments are primarily commercial paper rated A2 or P2 or better by Standard & Poor's and Moody's, respectively. Commercial paper is carried at amortized cost which approximates fair value. These investments are classified as Level 2 measurements.
Separate account assets and liabilities—Separate account assets and liabilities are funds that are held separate from the general assets and liabilities of American National and that represent the investments of variable insurance product contract holders, who bear the investment risk of such funds.
Investment income and investment gains and losses from these separate funds accrue to the benefit of the contract holders. Separate accounts are established in conformity with insurance laws and are not chargeable with liabilities that arise from any other business of American National. American National reports separately, as assets and liabilities, investments held in separate accounts and liabilities of the separate accounts if (i) such separate accounts are legally recognized; (ii) assets supporting the contract liabilities are legally insulated from American National’s general account liabilities; (iii) investments are directed by the contract holder; and (iv) all investment performance, net of
contract fees and assessments, is passed through to the contract holder. The assets of these accounts are carried at fair value. Deposits, net investment income and realized investment gains and losses for these accounts are excluded from revenues, and related liability increases are excluded from benefits and expenses in the consolidated financial statements.
Note 9 – Fair Value of Financial Instruments – (Continued)
The
separate account assets included on the quantitative disclosures fair value hierarchy table is made up of short-term investments, equity securities, and fixed maturity securities of available-for-sale bonds. Equity securities are classified as Level 1 measurements. Short-term investments and fixed maturity securities are classified as Level 2 measurements. These classifications for separate account assets reflect the same fair value level methodologies as listed above as they are derived from the same vendors and follow the same process.
The separate account assets account also includes cash and cash equivalents, investments in unconsolidated affiliates, accrued investment income, and receivables for securities. These are not financial instruments and are not included in the quantitative disclosures of fair value hierarchy table.
Embedded Derivative— The amounts
reported within policyholder contract deposits include equity linked interest crediting rates based on the S&P 500 index within index annuities and indexed life. The following unobservable inputs are used for measuring the fair value of the embedded derivatives associated with the policyholder contract liabilities:
•
Lapse rate assumptions are determined by company experience. Lapse rates are generally assumed to be lower during a contract’s surrender charge period and then higher once the
surrender charge period has ended. Decreases to the assumed lapse rates generally increase the fair value of the liability as more policyholders persist to collect the crediting interest pertaining to the indexed product. Increases to the lapse rate assumption will have the inverse effect decreasing the fair value.
•
Mortality rate assumptions vary by age and by gender based on company and industry experience. Decreases to the assumed mortality rates increase the fair value of the liabilities as more policyholders earn crediting interest. Increases to the assumed mortality rates decrease the fair value as higher decrements reduce the potential for future interest credits.
•
Equity
volatility assumptions begin with current market volatilities and grow to long-term values. Increases to the assumed volatility will increase the fair value of liabilities, as future projections will produce higher increases in the linked index. At September 30, 2019 and December 31, 2018, the one year implied volatility used to estimate embedded derivative value was i14.7%
and i23.2%, respectively.
Fair values of indexed life and annuity liabilities are calculated using the discounted cash flow technique. iShown
below are the significant unobservable inputs used to calculate the Level 3 fair value of the embedded derivatives within policyholder contract deposits (in millions, except range percentages):
Note 9 – Fair Value of Financial Instruments – (Continued)
i
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):
Within
the net gain for derivatives included in net investment income were unrealized gains of $i79,991,000 and $i18,868,000,
relating to assets still held at September 30, 2019, and 2018, respectively.
There were ino transfers between Level 1 and Level 2 fair value hierarchies during the periods presented. Unless information is obtained from the brokers that indicate observable inputs were used in their pricing, there are not enough observable
inputs to enable American National to classify the securities priced by the brokers as other than Level 3. American National’s valuation of these securities involves judgment regarding assumptions market participants would use including quotes from independent brokers. The inputs used by the brokers include recent transactions in the security, similar bonds with same name, ratings, maturity and structure, external dealer quotes in the security, Bloomberg evaluated pricing and prior months pricing. None of them are observable to American National as of September 30, 2019.
Fair Value Information About Financial Instruments Not Measured at Fair Value
Information about fair value estimates for financial
instruments not measured at fair values is discussed below:
Mortgage Loans—The fair value of mortgage loans is estimated using discounted cash flow analyses on a loan by loan basis by applying a discount rate to expected cash flows from future installment and balloon payments. The discount rate takes into account general market trends and specific credit risk trends for the individual loan. Factors used to arrive at the discount rate include inputs from spreads based on U.S. Treasury notes and the loan’s credit quality, region, property type, lien priority, payment type and current status.
Note
9 – Fair Value of Financial Instruments – (Continued)
Policy loans—The carrying value of policy loans is the outstanding balance plus any accrued interest. Due to the collateralized nature of policy loans such that they cannot be separated from the policy contracts, 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.
Separately managed accounts—The amounts reported in separately managed accounts consist primarily of notes and private equity. These investments are private placements and do not have a readily determinable fair value. The carrying value of the separately managed accounts is cost or market
value if available from the separately managed account manager. Market value is provided by the separately managed account manager in subsequent quarters. American National believes that cost approximates fair value at initial recognition during the quarter of investment.
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 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.
Commissions
comprise the majority of the additions to deferred policy acquisition costs.
Note 11 – iLiability for Unpaid Claims and Claim Adjustment Expenses
The liability for unpaid claims and claim adjustment expenses (“claims”)
for health and property and casualty insurance is included in “Policy and contract claims” in the consolidated statements of financial position and is the amount estimated for incurred but not reported (“IBNR”) claims and claims that have been reported but not settled. The liability for unpaid claims is estimated based upon American National’s historical experience and actuarial assumptions that consider the effects of current developments, anticipated trends and risk management programs, less anticipated salvage and subrogation. The effects of the changes are included in the consolidated results of operations in the period in which the changes occur. The time value of money is not taken into account for the purposes of calculating the liability for unpaid claims. There have been no significant changes in methodologies or assumptions used to calculate the liability
for unpaid claims and claim adjustment expenses.
i
Information regarding the liability for unpaid claims is shown below (in thousands):
iThe
net and gross reserve calculations have shown favorable development as a result of favorable loss emergence compared to what was implied by the loss development patterns used in the original estimation of losses in prior years. Estimates for ultimate incurred claims attributable to insured events of prior years decreased by $i47,048,000 during the first nine months of 2019
and decreased by $i11,101,000 during the same period in 2018. The favorable development in 2019 was a reflection of lower-than-anticipated losses in the workers compensation and agribusiness lines of business. The decrease for the first nine months in 2018 reflects lower-than-anticipated losses in our workers compensation, other commercial, business owner and commercial package
policy line of business.
For short-duration health insurance claims, the total of IBNR plus expected development on reported claims included in the liability for unpaid claims and claim adjustment expenses at September 30, 2019 was $i21,362,000.
Income
tax expense before tax on equity in earnings of unconsolidated affiliates
$
i17,717
i13.7
%
$
i38,486
i20.0
%
$
i99,323
i17.3
%
$
i64,118
i19.8
%
Tax
on equity in earnings of unconsolidated affiliates
i9,465
i7.3
i2,736
i1.0
i21,488
i3.7
i3,970
i1.2
Total
expected income tax expense at the statutory rate
i27,182
i21.0
i41,222
i21.0
i120,811
i21.0
i68,088
i21.0
Tax-exempt
investment income
(i1,027
)
(i0.8
)
(i830
)
(i0.4
)
(i2,945
)
(i0.5
)
(i2,509
)
(i0.8
)
Deferred
tax change
i—
i—
i—
i—
i—
i—
(i909
)
(i0.3
)
Dividend
exclusion
(i817
)
(i0.6
)
(i1,064
)
(i0.5
)
(i2,598
)
(i0.4
)
(i3,050
)
(i0.9
)
Miscellaneous
tax credits, net
(i1,521
)
(i1.2
)
(i1,252
)
(i0.6
)
(i6,512
)
(i1.1
)
(i5,994
)
(i1.8
)
Low
income housing tax credit expense
i1,324
i1.0
i1,251
i0.6
i4,265
i0.7
i3,755
i1.2
Noncontrolling
interest
(i2,284
)
(i1.8
)
i—
i—
(i2,284
)
(i0.4
)
i—
i—
Change
in valuation allowance
i70
i0.1
i—
i—
i235
i—
i2,700
i0.8
Tax
accrual adjustment
i—
i—
(i2,893
)
(i1.5
)
i—
i—
(i2,893
)
(i0.9
)
Return
to provision
i—
i—
(i18,332
)
(i9.3
)
i—
i—
(i18,332
)
(i5.7
)
Other
items, net
(i452
)
(i0.3
)
i1,117
i0.8
i828
i0.1
i1,509
i0.5
Provision
for federal income taxes
$
i22,475
i17.4
%
$
i19,219
i10.1
%
$
i111,800
i19.4
%
$
i42,365
i13.1
%
/
American
National made income tax payments of $i58,940,000 and $i15,064,000 during the nine months ended September 30,
2019 and 2018, respectively.
As of September 30, 2019, American National had a capital loss carryforward of $i575,000. Alternative minimum tax and general business credit carryforwards have been fully
utilized. The capital loss carryforward will expire in 2022, if not utilized.
iAmerican National’s federal income tax returns for years 2016 to 2018 are subject to examination by the Internal Revenue Service. Tax returns for 2013 to 2015 are subject to examination with certain limitations. In April 2019, American National received notice from the Internal Revenue Service of its intent to audit tax years 2013 to 2016. The audit is ongoing. 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. As of September 30, 2019, American National had no provision for uncertain tax positions and no provision for penalties or interest were established. In addition, management does not believe there are any uncertain tax benefits that could be recognized within the next twelve months that would impact American National’s effective tax rate.
Note
14 – iStockholders’ Equity and Noncontrolling Interests
American National has one class of common stock with a par value of $i1.00
per share and i50,000,000 authorized shares. iThe amounts outstanding at the dates indicated are shown below:
American National has a stock-based compensation plan, which allows for grants of Non-Qualified Stock Options, Stock Appreciation Rights (“SAR”), Restricted Stock (“RS”) Awards, Restricted Stock Units (“RSU”), Performance Awards, Incentive Awards or any combination thereof. This plan is administered by the American National Board Compensation Committee. To date, only SAR, RS and RSU awards have been made. All awards are subject to review and approval by the Board Compensation Committee both at the time of setting applicable performance objectives and at payment of the awards. The number of shares available for grants under the plan cannot exceed i2,900,000
shares, and no more than i200,000 shares may be granted to any one individual in any calendar year. Grants were made to certain officers meeting established performance objectives, and grants are made to directors as compensation and to align their interests with those of other shareholders.
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 i20% per year for ifive
years and expire ifive 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 i10
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 i10 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 i350,334
shares have been granted at an exercise price of izero, of which i10,000
shares are unvested.
RSU awards to our directors and advisory directors vest after one-year or upon earlier death, disability or retirement from service after age 65. Upon vesting, RSU awards are settled in cash based upon the market price of our common stock on the date of vesting.
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.
Note 14 – Stockholders’ Equity and Noncontrolling Interests - (Continued)
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 i200%
of the authorized control level RBC are required to take certain actions. At September 30, 2019 and December 31, 2018, American National Insurance Company’s statutory capital and surplus was $i3,552,712,000 and $i3,162,808,000,
respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at September 30, 2019 and December 31, 2018, substantially above i200% of the authorized
control level.
American National and its insurance subsidiaries prepare statutory-basis financial statements in accordance with statutory accounting practices prescribed or permitted by the insurance department of the state of domicile, which include certain components of the National Association of Insurance Commissioners’ Codification of Statutory Accounting Principles (“NAIC Codification”). NAIC Codification is intended to standardize regulatory accounting and reporting to state insurance departments. However, statutory accounting practices continue to be established by individual state laws and permitted practices. Modifications by the various state insurance departments may impact the statutory capital and surplus of American National Insurance Company and its insurance subsidiaries.
Statutory
accounting differs from GAAP primarily by charging policy acquisition costs to expense as incurred, establishing future policy benefit liabilities using different actuarial assumptions, and valuing securities on a different basis. In addition, certain assets are not admitted under statutory accounting principles and are charged directly to surplus.
One of American National’s insurance subsidiaries has been granted a permitted practice from the Missouri Department of Insurance to record as the valuation of its investment in a wholly-owned subsidiary that is the attorney-in-fact for a Texas domiciled insurer, the statutory capital and surplus of the Texas domiciled insurer. This permitted practice increases the statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary by $i68,527,000
and $i69,787,000 at September 30, 2019 and December 31, 2018, respectively. The statutory capital and surplus of both American National Insurance Company and the Missouri domiciled insurance subsidiary would have remained
substantially above the Company action level RBC had it not used the permitted practice.
Note 14 – Stockholders’ Equity and Noncontrolling Interests - (Continued)
i
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):
We
paid a dividend of $i0.82 for the three months ended September 30, 2019 and December 31, 2018. We expect to continue to pay regular cash dividends, although there is no assurance as to future dividends because they depend on future earnings, capital requirements and financial conditions.
iAmerican
National Insurance Company’s payment of dividends to stockholders is restricted by insurance law. The restrictions require life insurance companies to maintain minimum amounts of capital and surplus, and in the absence of special approval, limit the payment of dividends to the greater of the prior year’s statutory net income from operations, or 10% of prior year statutory surplus. American National Insurance Company is permitted without prior approval of the Texas Department of Insurance to pay total dividends of $i316,281,000
during 2019. Similar restrictions on amounts that can transfer in the form of dividends, loans, or advances to American National Insurance Company apply to its insurance subsidiaries.
Noncontrolling interests
American National County Mutual Insurance Company (“County Mutual”) is a mutual insurance company owned by its policyholders. American National has a management agreement that effectively gives it control of County Mutual. As a result, County Mutual is included in the consolidated financial statements of American National. Policyholder interests in the financial position of County Mutual are reflected as noncontrolling equity of $i6,750,000
at September 30, 2019 and December 31, 2018.
American National Insurance Company and its subsidiaries exercise control or ownership of various joint ventures, resulting in their consolidation into American National’s consolidated financial statements. The interests of the other partners in the consolidated joint ventures are shown as a noncontrolling deficit of $i1,623,000
and noncontrolling equity of $i7,517,000 at September 30, 2019 and December 31, 2018, respectively.
Management organizes the business into ifive
operating segments:
•
Life—consists of whole, term, universal, indexed and variable life insurance. Products are primarily sold through career, multiple-line, and independent agents as well as direct marketing channels.
•
Annuity—consists of fixed, indexed, and variable annuity products. Products are primarily sold through independent agents, brokers, and financial institutions, along with multiple-line and career agents.
•
Health—consists
of Medicare Supplement, stop loss, other supplemental health products and credit disability insurance. Products are typically distributed through independent agents and managing general underwriters.
•
Property and Casualty—consists of personal, agricultural and targeted commercial coverages and credit-related property insurance. Products are primarily sold through multiple-line and independent agents or managing general agents.
•
Corporate and Other—consists of net investment income from investments and certain expenses
not allocated to the insurance segments and revenues and related expenses from non-insurance operations.
The accounting policies of the segments are the same as those described in Note 2 of American National’s 2018 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 segment.
•
Expenses are charged to segments through direct identification and allocations based upon various factors.
American National and its subsidiaries lease insurance
sales office space, technological equipment, and automobiles. The remaining long-term lease commitments at September 30, 2019 were approximately $i18,941,000.
American National had aggregate commitments at September 30, 2019, to purchase, expand or improve real estate, to fund fixed
interest rate mortgage loans, and to purchase other invested assets of $i1,305,631,000 of which $i469,098,000
is expected to be funded in 2019 with the remainder funded in 2020 and beyond.
American National has a $i100,000,000 short-term variable rate borrowing facility containing a $i55,000,000
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 $i100,000,000 at any time. As of September 30, 2019 and December 31, 2018,
the outstanding letters of credit were $i3,649,000 and $i2,995,000, respectively, and there were
no borrowings on this facility. This facility expires on iOctober 31, 2020.
Federal Home Loan Bank (FHLB) Agreements
In May 2018, the Company became a member of the Federal Home Loan Bank of Dallas (“FHLB”) to augment its liquidity resources.
As membership requires the ownership of member stock, the Company purchased $i7.0 million of stock to meet the FHLB’s membership requirement. The FHLB member stock is recorded in other invested assets on the Company’s consolidated statements of financial position. Through its membership, the
Company has access to the FHLB’s financial services including advances that provide an attractive funding source for short-term borrowing and for access to other funding agreements. As of September 30, 2019, certain collateralized mortgage obligations (CMO’s) with a fair value of approximately $i127.7
million and commercial mortgage loans of approximately $i361.8 million were on deposit with the FHLB as collateral for amounts subject to funding agreements. The deposited securities and commercial mortgage loans are included in the Company’s consolidated
statements of financial position within bonds held-to-maturity and mortgage loans on real estate, net of allowance, respectively.
Guarantees
American National has guaranteed bank loans for customers of a third-party marketing operation. The bank loans are used to fund premium payments on life insurance policies issued by American National. The loans are secured by the cash values of the life insurance policies. If the customer were to default on a bank loan, American National would be obligated to pay off the loan. As the cash values of the life insurance policies always equal or exceed the balance of the loans, management does not foresee any loss on these guarantees. The total amount of the guarantees outstanding as of September 30,
2019, was approximately $i123,574,000, while the total cash value of the related life insurance policies was approximately $i141,759,000.
Litigation
American
National and certain subsidiaries, in common with the insurance industry in general, are defendants in various lawsuits concerning alleged breaches of contracts, various employment matters, allegedly deceptive insurance sales and marketing practices, and miscellaneous other causes of action arising in the ordinary course of operations. Certain of these lawsuits include claims for compensatory and punitive damages. We provide accruals for these items to the extent we deem the losses probable and reasonably estimable. After reviewing these matters with legal counsel, based upon information presently available, management is of the opinion that the ultimate resultant liability, if any, would not have a material adverse effect on American National’s consolidated financial position, liquidity
or results of operations; however, assessing the eventual outcome of litigation necessarily involves forward-looking speculation as to judgments to be made by judges, juries and appellate courts in the future.
Such speculation warrants caution, as the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs in some jurisdictions, continues to create the potential for an unpredictable judgment in any given lawsuit. These lawsuits are in various stages of development, and future facts and circumstances could result in management changing its conclusions. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than management can anticipate, the resulting liability could have a material impact on our consolidated financial position, liquidity or results of operations. With
respect to the existing litigation, management currently believes that the possibility of a material judgment adverse to American National is remote and no estimate of range can be made for loss contingencies that are at least reasonably possible but not accrued.
American National has entered into recurring transactions and agreements with certain related parties. These include mortgage loans, management contracts, agency commission contracts, marketing agreements, health insurance contracts, and legal services. iThe
impact on the consolidated financial statements of significant related party transactions is shown below (in thousands):
Mortgage
Loans to Gal-Tex Hotel Corporation (“Gal-Tex”): American National held a first mortgage loan which originated in 1999, with an interest rate of i7.25% and final maturity date of iApril
1, 2019 issued to a subsidiary of Gal-Tex, which was collateralized by a hotel property in San Antonio, Texas. This loan has been paid in full. The Moody Foundation owns i34.0% of Gal-Tex and i22.75%
of American National, and the Libbie Shearn Moody Trust owns i50.2% of Gal-Tex and i37.0%
of American National.
Transactions with Greer, Herz & Adams, LLP: Irwin M. Herz, Jr. is a director on the American National Board of Directors and a Partner with Greer, Herz & Adams, LLP, which serves as American National’s General Counsel.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following pages provide management’s discussion and analysis (“MD&A”) of financial condition and results of operations for the three and nine months ended September 30,
2019 and 2018 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 2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019 and they include among others:
•
Economic &
Investment Risk Factors
•
the potential for 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;
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, information 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;
•
potential ineffectiveness of our internal controls over financial reporting;
•
Catastrophic
Event Risk Factors
•
natural or man-made catastrophes, pandemic disease, or other events resulting in increased claims activity from catastrophic loss of life or property;
•
the effects of unanticipated events on our disaster recovery and business continuity planning;
•
Marketplace Risk Factors
•
the
highly competitive nature of the insurance and annuity business;
•
potential difficulty in attraction and retention of qualified employees and agents;
•
the introduction of alternative healthcare solutions or changes in federal healthcare policy, both of which could impact our supplemental healthcare business;
•
Litigation
and Regulation Risk Factors
•
adverse determinations in litigation or regulatory proceedings which may result in significant financial losses and harm our reputation;
•
significant changes in government regulation;
•
changes in tax law;
•
changes
in statutory or U.S. generally accepted accounting principles (“GAAP”), practices or policies;
•
Reinsurance and Counterparty Risk Factors
•
potential changes in the availability, affordability, adequacy and collectability of reinsurance protection;
•
potential default or failure to perform
by the counterparties to our reinsurance arrangements and derivative instruments;
•
Other Risk Factors
•
potentially adverse rating agency actions;
•
control of our company by a small number of stockholders;
and
•
advances in medical technology and testing, which may increase our adverse selection risk.
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 discussed in the MD&A included in our 2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019.
Critical Accounting Estimates
The unaudited interim consolidated financial statements have been prepared in conformity with GAAP. In addition to GAAP, insurance companies apply specific SEC regulations when preparing the consolidated financial statements. The preparation of
the consolidated financial statements and notes requires us to make estimates and assumptions that affect the amounts reported. Actual results could differ from results reported using those estimates and assumptions. Our accounting policies inherently require the use of judgment relating to a variety of assumptions and estimates, particularly expectations of current and future mortality, morbidity, persistency, expenses, interest rates, and property and casualty loss frequency, severity, claim reporting and settlement patterns. Due to the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could vary from those reported in the consolidated financial statements.
For a discussion of our critical accounting estimates, see the MD&A in our 2018 Annual Report on Form 10-K filed with the SEC on February 28,
2019. There have been no material changes in accounting policies since December 31, 2018.
Recently Issued Accounting Pronouncements
Refer to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Unaudited Consolidated Financial Statements in Item 1.
Interest
credited to policyholders’ account balances
106,782
133,418
(26,636
)
371,703
309,694
62,009
Commissions
for acquiring and servicing policies
128,689
138,979
(10,290
)
408,629
433,412
(24,783
)
Other
operating expenses
128,502
118,761
9,741
391,645
373,102
18,543
Change
in deferred policy acquisition costs (1)
1,548
(8,794
)
10,342
(22,391
)
(45,876
)
23,485
Total
benefits, losses and expenses
848,134
868,969
(20,835
)
2,539,902
2,502,356
37,546
Income
before federal income taxes other items
$
84,366
$
183,267
$
(98,901
)
$
472,968
$
305,326
$
167,642
(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 amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.
Income before other items and federal income taxes (“Earnings”)
Earnings decreased during the three months ended September 30, 2019 compared to 2018 primarily due to a decrease in net gains on equity securities partially offset by an increase in realized investment gains. Earnings increased during the nine months ended September 30, 2019
compared to 2018 primarily due to an increase in net gains on equity securities, as well as improvements in the earnings generated from our Property and Casualty and Life Segments.
Interest
credited to policyholders’ account balances
22,045
19,537
2,508
57,561
56,848
713
Commissions
for acquiring and servicing policies
42,023
39,813
2,210
120,646
118,724
1,922
Other
operating expenses
46,873
45,467
1,406
142,520
144,606
(2,086
)
Change
in deferred policy acquisition costs (1)
(5,080
)
(4,458
)
(622
)
(19,120
)
(18,150
)
(970
)
Total
benefits, losses and expenses
219,513
220,175
(662
)
629,186
617,348
11,838
Income
before federal income taxes and other items
$
8,414
$
4,628
$
3,786
$
45,967
$
28,505
$
17,462
(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 amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.
Earnings
The increase in life earnings during the three and nine months ended September 30, 2019 is primarily attributable to improved mortality and persistency experience on traditional life products compared to the same time periods year over year.
Premiums and other revenues
Premiums increased during
the three and nine months ended September 30, 2019 compared to 2018 primarily due to continued growth in renewal premium on traditional life products.
Other policy revenues increased during the three and nine months ending September 30, 2019 primarily due to higher cost of insurance charges and earned policy services fees as the size of our interest sensitive block continues to grow, through increased sales and aging of the in-force.
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):
These
are weighted amounts representing 10% of single and excess premiums and 44% and 31% of Credit Life premiums for 2019 and 2018, respectively.
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 44% of Credit Life premiums. Life insurance sales measure activity associated with gaining new insurance business in the current period, and includes deposits received related to interest sensitive life and universal life-type products. Whereas GAAP premium revenues, on the other hand, are associated with policies sold in current and prior periods, and deposits received related to interest sensitive life and universal life-type products are recorded in a policyholder account which is reflected as a liability. Therefore, a reconciliation of premium revenues and insurance
sales is not meaningful.
Life insurance sales increased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to increased Indexed Universal Life and Universal Life sales, respectively.
Benefits, losses and expenses
Policyholder benefits decreased during the three months ended September 30, 2019 compared to 2018 due to an improvement in mortality experience on traditional life products. Policyholder benefits increased during the nine months ended September 30, 2019 compared to 2018 due to growth in reserves for benefits for our participating policies.
The
following table presents the components of the change in DAC (in thousands):
Total
life insurance in-force increased during the nine months ended September 30, 2019 compared to December 31, 2018 despite a reduction of policies in-force due to the increased sales of higher face amount policies.
Annuity
Annuity segment financial results for the periods indicated were as follows (in thousands):
Interest
credited to policyholders’ account balances
84,737
113,881
(29,144
)
314,142
252,846
61,296
Commissions
for acquiring and servicing policies
13,368
18,515
(5,147
)
63,373
78,874
(15,501
)
Other
operating expenses
12,264
11,350
914
38,087
34,522
3,565
Change
in deferred policy acquisition costs (1)
7,006
(1,376
)
8,382
(383
)
(19,060
)
18,677
Total
benefits, losses and expenses
177,074
206,523
(29,449
)
606,467
578,184
28,283
Income
before federal income taxes and other items
$
10,906
$
19,748
$
(8,842
)
$
33,511
$
56,992
$
(23,481
)
(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 amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.
Earnings
The decrease in earnings from our Annuity segment for the third quarter of 2019 compared to the same periods in 2018, was primarily attributable to a reduction in the margins on our fixed and indexed annuity products. The margins on our fixed annuity products were reduced primarily from spread compression resulting from a declining portfolio yield. Also, the margins on our indexed annuity products experienced reduced margins due to increases in mark-to-market reserves related
to interest rate decreases.
Sales
increased during the nine months ended September 30, 2019 compared to 2018 primarily due to an increase in fixed deferred products partially offset by a decline in equity-indexed products. Sales decreased primarily in fixed deferred and equity-indexed products for the three months ended September 30, 2019 compared to 2018. Deferred products are deposit type contracts and do not contribute to earned premiums. Earned premiums consist of single premium immediate annuity sales, which decreased during the three and nine months ended September 30, 2019 compared
to 2018.
Policyholder
benefits consist of annuity payments and reserve increases for SPIA contracts. Reserve increases are highly correlated to the sales volume of SPIA contracts, which explains the change in benefits for the three and nine months ended September 30, 2019 compared to 2018.
Commissions decreased during the three and nine months ended September 30, 2019 compared to 2018 driven by a decrease
in sales of equity-indexed products, which have a higher commission rate.
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):
The
change in DAC decreased during the three and nine months ended September 30, 2019 compared to 2018 due to lower commissions. DAC amortization is higher in 2019 due to higher surrenders and declining portfolio yield.
Interest Margin
Fixed annuity margins compressed as a result of declining portfolio yield, and this emerged gradually over the year. Indexed margins experienced unfavorable mark-to-market reserve increases related to interest rate decreases. The following table summarizes the interest margin due to the impact of the investment performance, interest credited to policyholder’s account balances, and the end of period assets measured by account balance (in thousands):
Income
before federal income taxes and other items
$
2,344
$
4,456
$
(2,112
)
$
8,559
$
13,290
$
(4,731
)
(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 amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.
Earnings
Earnings decreased during the three and nine months ended September 30, 2019 compared to 2018, primarily due to higher claims in our Medicare Supplement line of business and a reduction in premium.
Premiums and other revenues
Health
earned premiums for the periods indicated were as follows (in thousands, except percentages):
Earned
premiums decreased during the three and nine months ended September 30, 2019 compared to 2018. The termination of two MGU programs led to the decrease in MGU premium. Supplemental insurance premiums decreased during the three and nine months ended September 30, 2019 primarily due to a decrease in sales for short-term medical and limited benefit products.
Claims incurred decreased during the three and nine months ended September 30, 2019 compared to 2018 largely driven by lower MGU claims correlated with the decrease in premiums, partially offset by an increase in claims as a percentage of premiums in our Medicare Supplement product.
Commissions decreased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to lower MGU premiums.
Change in Deferred Policy Acquisition
Costs
The following table presents the components of the change in DAC (in thousands):
Income
before federal income taxes and other items
$
6,215
$
6,999
$
(784
)
$
42,526
$
6,396
$
36,130
Loss
ratio
73.3
%
72.8
%
0.5
%
70.2
%
73.2
%
(3.0
)%
Underwriting
expense ratio
30.1
30.4
(0.3
)
31.0
31.2
(0.2
)
Combined
ratio
103.4
%
103.2
%
0.2
%
101.2
%
104.4
%
(3.2
)%
Impact
of catastrophe events on combined ratio
9.6
9.1
0.5
7.2
8.1
(0.9
)
Combined
ratio without impact of catastrophe events
93.8
%
94.1
%
(0.3
)%
94.0
%
96.3
%
(2.3
)%
Gross
catastrophe losses
$
36,634
$
34,112
$
2,522
$
80,456
$
89,000
$
(8,544
)
Net
catastrophe losses
$
36,796
$
34,514
$
2,282
$
81,005
$
91,300
$
(10,295
)
(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 amount of net change indicates less expense was deferred than amortized and represents an increase to expenses in the period indicated.
Earnings
Property and Casualty earnings decreased slightly during the three months ended September 30, 2019 compared to 2018. The largest decrease was in the commercial agricultural business line, primarily due to an increase in non-catastrophe losses during the three months ended September 30, 2019. Earnings increased during the nine months ended September 30, 2019 compared to 2018 with
the largest increases in the personal lines of business, primarily due to improved results in the personal automobile line of business.
Premiums and other revenues
Net premiums written and earned increased for all major personal and commercial lines of business during the three and nine months ended September 30, 2019 compared to 2018. The largest increase in net earned premiums for the three and nine month periods was in the personal lines of business.
Benefits, losses and expenses
Claims incurred increased during the three months ended September 30, 2019 compared to 2018 in total dollars and as a percentage of net premiums earned. These increases were primarily attributable to an increase in
non-catastrophe losses in commercial agricultural business. Claims incurred decreased during the nine months ended September 30, 2019 compared to 2018 in total dollars and as a percentage of net premiums earned. These decreases were due to decreases in catastrophe losses, particularly in the commercial agricultural business and personal automobile lines of business.
Commissions decreased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to a decrease in the Collateral Protection Insurance (“CPI”) business.
Operating expenses increased during the three and nine months ended September 30, 2019 compared to 2018 correlated to the increase in premiums.
Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 59% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 34% of net premiums written; and (iii) Credit-related property insurance products, marketed to and through financial institutions and retailers, representing 7% of net premiums written.
Personal Products
Personal Products results for the periods indicated were as follows (in thousands, except percentages):
Automobile:
Net premiums written and earned increased in our personal automobile line during the three and nine months ended September 30, 2019 compared to 2018 due primarily to an increase in rates charged for these policies and to a lesser extent an increase in policies sold. The loss and combined ratios decreased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to decreased claim activity and increased premium.
Homeowners: Net premiums written and earned increased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to increased sales to renters, as well as an increase in rates charged for these policies and due to an increase in the number
of policies sold. The loss and combined ratio increased during the three months ended September 30, 2019 compared to 2018 primarily due to increased catastrophe claim activity and decreased during the nine months ended September 30, 2019 compared to 2018 due to increased premium outpacing incurred claims.
Other Personal: These products include coverages for individuals seeking to protect their personal property and liability not covered within their home and auto policies, such as coverages for watercraft, personal umbrella, and rental owners. The loss and combined ratio decreased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to a decrease in claim activity and an
increase in premium.
Commercial
Business: Commercial business products primarily relate to workers compensation and business owners lines of business. Net premiums written and earned increased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to the addition of our Investor Property Protection line of business as well as increased sales of business owners insurance. The loss and combined ratios for the three months and nine months ended September 30, 2019 were in line with 2018.
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 and ranch 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, 2019 compared to 2018 due to an increase in policies in force. The loss and combined ratios increased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to an increase in the average severity of non-catastrophe losses.
Commercial Automobile: Net premiums written and earned increased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to an increase in policies in force and rate increases. The loss and combined ratios improved during the three and nine months ended September
30, 2019 compared to 2018 primarily due to the increase in premiums outpacing incurred claims.
Credit-related property products are offered on automobiles, furniture and appliances in connection with the financing of those items. These policies pay an amount if the insured property is lost or damaged and the amount paid is not directly related to an event affecting the consumer’s ability to pay the debt.
Net written and earned premiums decreased during the three and nine months ended September 30, 2019 compared to 2018 primarily due to a decrease in Collateral Protection Insurance ("CPI") business. The combined ratio increased for the three months due to a higher loss ratio on CPI product and the combined ratio decreased for the nine months ended September
30, 2019 compared to 2018 primarily due to lower commission expense relating to the decrease in CPI business.
Corporate and Other
Corporate and Other segment financial results for the periods indicated were as follows (in thousands):
Income
before federal income taxes and other items
$
56,487
$
147,436
$
(90,949
)
$
342,405
$
200,143
$
142,262
Earnings
Earnings
increased during the nine months ended September 30, 2019 compared to 2018 primarily due to an increase in net gains on equity securities resulting from favorable market conditions reflected in the S&P 500 index. Earnings decreased during the three months ended September 30, 2019 compared to 2018 reflecting the impact of less favorable market conditions on equity securities partially offset by higher net realized investment gains from sales of investments in real estate related joint ventures.
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 in support of our products and capital. Our investment operations are regulated primarily by the state insurance departments where our insurance companies are domiciled. Investment activities, including setting investment policies and defining acceptable risk levels, are subject to oversight by our Board of Directors, which is assisted by our Finance Committee and Management Risk Committee.
Our insurance and annuity products are generally supported by investment-grade bonds and commercial mortgage loans. We also invest in equity options as a hedge for our indexed products. We purchase fixed maturity securities and designate them
as either held-to-maturity or available-for-sale considering our estimated future cash flow needs. We also monitor the composition of our fixed maturity securities classified as held-to-maturity and available-for-sale and adjust the mix within the portfolio as investments mature or new investments are purchased.
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):
Fixed
maturity, bond held-to-maturity, at amortized cost
$
8,715,569
37.0
%
$
8,211,449
36.8
%
Fixed
maturity, bond available-for-sale, at fair value
6,826,245
29.0
6,215,563
27.9
Equity securities,
at fair value
1,678,657
7.1
1,530,228
6.9
Mortgage loans on real estate, net of allowance
4,936,605
21.0
5,124,707
23.0
Policy
loans
380,018
1.6
376,254
1.7
Investment real estate, net of accumulated depreciation
556,503
2.3
587,516
2.6
Short-term
investments
398,948
1.7
206,760
0.9
Other invested assets
63,034
0.3
50,087
0.2
Total
investments
$
23,555,579
100.0
%
$
22,302,564
100.0
%
The
increase in our total investments at September 30, 2019 compared to year-end 2018 was primarily the result of an increase in short-term investments and bonds available-for-sale. These increases were somewhat offset by a reduction in mortgage loans.
Bonds—We allocate most of our fixed maturity securities to support our insurance business. At September 30, 2019, our fixed maturity securities had an estimated fair value of $15.9 billion, which was $0.6 billion, or 4.1%, above amortized cost. At December 31, 2018, our fixed maturity
securities had an estimated fair value of $14.3 billion, which was $0.1 billion, or 0.9%, below amortized cost. The estimated fair value for securities due in one year or less was $1.0 billion as of September 30, 2019 and $0.5 billion as of December 31, 2018. For additional information regarding total bonds by credit quality rating refer to Note 4, Investments in Securities, of the Notes to the Unaudited Consolidated Financial Statements.
Equity Securities—We invest in companies publicly traded on national U.S. stock exchanges. See
Note 4, Investments in Securities, of the Notes to the Unaudited Consolidated Financial Statements for the cost, gross unrealized gains and losses, and fair value of the equity securities.
Mortgage Loans— We invest in commercial mortgage loans that are diversified by property-type and geography. Generally, mortgage loans are secured by first liens on income-producing real estate with a loan-to-value ratio of up to 75%. Mortgage loans are generally 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 4.9% at September 30, 2019 and December 31,
2018, respectively. For additional information regarding mortgage loans refer to Note 5, Mortgage Loans, of the Notes to the Unaudited Consolidated Financial Statements.
Policy Loans—For certain life insurance products, policyholders may borrow funds using the policy’s cash value as collateral. The maximum amount of the policy loan depends upon the policy’s surrender value. As of September 30, 2019, we had $380.0 million in policy loans with a loan to surrender value of 56%, and
at December 31, 2018, we had $376.3 million in policy loans with a loan to surrender value of approximately 60%. Interest rates on policy loans primarily range from 3.0% to 12.0% per annum. Policy loans may be repaid at any time by the policyholder and have priority to any claims on the policy. If the policyholder fails to repay the policy loan, funds are withdrawn from the policy’s benefits.
Investment Real Estate—We invest in commercial real estate where positive cash flows and/or appreciation in value is expected. Real estate may be owned directly by our insurance companies or non-insurance affiliates or indirectly in joint ventures with real estate developers or investors
we determine share our perspective regarding risk and return relationships. The carrying value of real estate is stated at cost, less accumulated depreciation and impairments, 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 & Poor’s and Moody’s, respectively. The amount fluctuates depending on our view of the desirability of investing in the available long-term investment opportunities and our liquidity needs, including mortgage investment-funding commitments.
Net Investment Income and Net Realized Gains (Losses)
Net investment income increased $55.8 million during the nine months ended September 30,
2019 compared to 2018 primarily due to gains on options from an improvement in the S&P 500 Index.
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 investment gains increased $20.2 million during the nine months ended September 30,
2019 compared to 2018. The increase in net realized investment gains in 2019 was primarily attributable to the sale of real estate.
Net Unrealized Gains and Losses
The unrealized gains and losses of our fixed maturity securities investment portfolio are shown below (in thousands):
The
net change in the unrealized gains on fixed maturity securities between September 30, 2019 and December 31, 2018 is primarily attributable to the decrease in benchmark ten-year interest rates, which were 1.7% and 2.7% respectively. The Company does not expect to be required to sell any of the securities in an unrealized loss position.
Our liquidity requirements have been and are expected to continue to be met by funds from operations, comprised of premiums received from our customers, collateral for derivative transactions, and investment income and maturities. 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 flows from operations.
Our defined benefit plans
are frozen and currently adequately funded; however, low interest rates, increased longevity of participants, and rising Pension Benefit Guaranty Corporation (“PBGC”) premiums may cause us to increase our funding of the plans. Additionally, due to changes in the tax law, there was an opportunity to realize tax savings on contributions made before September 15, 2018. Consequently, a $60 million contribution was made before the aforementioned deadline. This contribution did not significantly impact cash flow and resulted in an overfunded status on our qualified pension plan. No unusually large capital expenditures are expected in the next 12-24 months. We have paid dividends to stockholders for over 110 consecutive years and expect to continue this trend.
Funds received as premium
payments and deposits that are not used for liquidity requirements 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. Deposits of certain securities under the Company’s membership with the Federal Home Loan Bank of Dallas (“FHLB”) provided approximately $366 million of borrowing capacity as of September 30, 2019 should we require additional liquidity resources.
The
Company holds collateral of $223.4 million at September 30, 2019 to offset exposure from its derivative counterparties. Cash flows associated with collateral received from counterparties change as the market value of the underlying derivative contract changes.
Our cash and cash equivalents and short-term investment position increased from $474.9 million at December 31, 2018 to $835.3 million at September 30, 2019. The increase primarily relates to an increase in commercial paper to fund additional
investments and other operating requirements.
A downgrade or a potential downgrade in our financial strength ratings could result in a loss of business and could adversely affect our cash flows 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):
American National stockholders’ equity, excluding accumulated other comprehensive income, net of tax (“AOCI”)
$
5,741,137
$
5,356,986
Accumulated
other comprehensive income (loss)
85,444
(99,738
)
Total American National stockholders’ equity
$
5,826,581
$
5,257,248
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 $6.1 million and $26.6 million at September 30, 2019 and December 31, 2018, respectively.
Change
in net unrealized gains (losses) on debt securities
—
181,305
181,305
—
(136,261
)
(136,261
)
Foreign
currency transaction and translation adjustment
—
297
297
—
(900
)
(900
)
Defined
benefit pension plan adjustment
—
4,365
4,365
—
22,326
22,326
Cumulative
effect of accounting change
785
(785
)
—
687,051
(627,119
)
59,932
Other
320
—
320
(5,375
)
—
(5,375
)
Total
$
384,151
$
185,182
$
569,333
$
752,443
$
(741,954
)
$
10,489
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, 2019 and December 31, 2018, American National
Insurance Company’s statutory capital and surplus was $3,552,712,000 and $3,162,808,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at September 30, 2019 and December 31, 2018 substantially above 200% of the authorized control level.
The achievement of long-term growth will require growth in American National Insurance Company’s and our insurance subsidiaries’ statutory capital and surplus.
Our subsidiaries may obtain additional statutory capital through various sources, such as retained statutory earnings or equity contributions from us.
Contractual Obligations
Our future cash payments associated with claims and claims adjustment expenses, life, annuity and disability obligations, contractual obligations pursuant to operating leases for office space and equipment, and notes payable have not materially changed since December 31, 2018. 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 material loss related to these arrangements.
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 risk has not changed materially from those disclosed in our 2018 Annual Report on form 10-K filed with the SEC on February 28, 2019.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures (as that term is defined in Rules 13a-15(e) and 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to provide reasonable assurance that information required to be disclosed in the Company’s reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
The Company’s management, with the participation of the
Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of September 30, 2019. Based upon that evaluation and subject to the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2019, the design and operation of the Company’s disclosure controls and procedures were effective to accomplish their objectives at the reasonable assurance level.
Changes
in Internal Control Over Financial Reporting
Management has monitored the internal controls over financial reporting, including any material changes to the internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the nine months ended September 30, 2019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Information required for Item 1 is incorporated by reference to the discussion under the heading “Litigation” in Note 16, Commitments and Contingencies, of the Notes to the Unaudited Consolidated Financial Statements.
ITEM 1A. RISK FACTORS
There have been no material changes with respect to the risk factors as
previously disclosed in our 2018 Annual Report on Form 10-K filed with the SEC on February 28, 2019.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.