10-K 1 d371918d10k.htm FORM 10-K Form 10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-K

 

 

 

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

For the fiscal year ended December 31, 2017

or

 

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

Commission File No. 001- 34280

 

 

 

LOGO

American National Insurance Company

(Exact name of registrant as specified in its charter)

 

 

 

Texas   74-0484030

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Moody Plaza

Galveston, Texas 77550-7999

(Address of principal executive offices) (Zip Code)

(409) 763-4661

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

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

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

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

The aggregate market value on June 30, 2017 (the last business day of the registrant’s most recently completed second fiscal quarter) of the voting stock held by non-affiliates of the registrant was approximately $857.2 million. For purposes of the determination of the above-stated amount, only directors, executive officers and 10% shareholders are presumed to be affiliates, but neither the registrant nor any such person concedes that they are affiliates of registrant.

As of February 16, 2018, there were 26,931,884 shares of the registrant’s voting common stock, $1.00 par value per share, outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Information called for in Part III of this Form 10-K is incorporated by reference to the registrant’s Definitive Proxy Statement to be filed within 120 days of the close of the registrant’s fiscal year in conjunction with the registrant’s annual meeting of shareholders.

 

 

 


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

TABLE OF CONTENTS

 

PART I

    

ITEM 1.

 

BUSINESS

     3  

ITEM 1A.

 

RISK FACTORS

     13  

ITEM 1B.

 

UNRESOLVED STAFF COMMENTS

     21  

ITEM 2.

 

PROPERTIES

     21  

ITEM 3.

 

LEGAL PROCEEDINGS

     21  

ITEM 4.

 

MINE SAFETY DISCLOSURES

     21  

PART II

    

ITEM 5.

 

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

     22  

ITEM 6.

 

SELECTED FINANCIAL DATA

     24  

ITEM 7.

 

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

     24  

ITEM 7A.

 

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     55  

ITEM 8.

 

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     58  

ITEM 9.

 

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

     118  

ITEM 9A.

 

CONTROLS AND PROCEDURES

     118  

ITEM 9B.

 

OTHER INFORMATION

     120  

PART III

    

ITEM 10.

 

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

     120  

ITEM 11.

 

EXECUTIVE COMPENSATION

     120  

ITEM 12.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

     120  

ITEM 13.

 

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

     120  

ITEM 14.

 

PRINCIPAL ACCOUNTANT FEES AND SERVICES

     120  

PART IV

    

ITEM 15.

 

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

     121  
 

    INDEX TO EXHIBITS

     121  

ITEM 16.

 

FORM 10-K SUMMARY

     122  

SIGNATURES

     123  

 

2


Table of Contents

PART I

 

ITEM 1. BUSINESS

Company Overview

American National Insurance Company was founded in 1905 and we have always maintained our corporate headquarters in Galveston, Texas. Our core businesses are life insurance, annuities and property and casualty insurance. We also offer limited health insurance. We provide personalized service to approximately six million policyholders throughout the United States, the District of Columbia, and Puerto Rico. In addition, we have over $100 billion of life insurance in force.

In this document, we refer to American National Insurance Company and its subsidiaries as the “Company,” “we,” “our,” and “us.”

Our vision is to be a leading provider of financial products and services for current and future generations. For more than a century, we have maintained a conservative business approach and corporate culture. We have an unwavering commitment to serve our policyholders, agents, and shareholders by providing excellent service and competitively priced and diversified products. We are committed to profitable growth, which enables us to remain financially strong. Acquisitions that are strategic and offer synergies may be considered, but they are not our primary source of growth. We invest regularly in our distribution channels and markets to fuel our capacity for profitable growth.

We are committed to excellence and maintaining high ethical standards in all our business dealings. Disciplined adherence to our values has allowed us to deliver consistently high levels of service through talented people, who are at the heart of our business. We define our values with the acronym FIRST which stands for financial strength, integrity, respect, service and teamwork.

Business Segments

Our family of companies includes five life insurance companies, eight property and casualty insurance companies, and numerous non-insurance subsidiaries. The business segments and the principal products they offer or manage follow.

Life Segment

Whole Life. Whole life products provide a guaranteed benefit upon the death of the insured in return for the periodic payment of a fixed premium over a predetermined period. Premium payments may be required for the entire life of the contract, to a specified age or a fixed number of years, and may be level or change in accordance with a predetermined schedule. Whole life insurance includes some policies that provide a participation feature in the form of dividends. Policyholders may receive dividends in cash or apply them to increase death benefits or cash values available upon surrender, or reduce the premiums required to maintain the contract in-force.

Term Life. Term life products provide a guaranteed benefit upon the death of the insured for a specified time period in return for the periodic payment of premiums. Coverage periods typically range from one to thirty years, but in no event longer than the period over which premiums are paid.

Universal Life. Universal life insurance products provide coverage through a contract that gives the policyholder flexibility in premium payments and coverage amounts. Universal life products may allow the policyholder, within certain limits, to increase or decrease the amount of death benefit coverage over the term of the contract and to adjust the frequency and amount of premium payments. Universal life products are interest rate sensitive, and we determine the interest crediting rates, subject to policy specific minimums.

Equity-indexed universal life products have the same features as the universal life products, but also provide an opportunity for policyholders to earn additional return through credited interest tied to the performance of a particular stock index, such as the S&P 500.

 

3


Table of Contents

Variable Universal Life. Variable universal life products provide insurance coverage on a similar basis as universal life, except that the policyholder bears the investment risk because the value of the policyholder’s account balance varies with the investment experience of the securities held in the separate account investment options selected by the policyholder.

Credit Life Insurance. Credit life insurance products are sold in connection with a loan or other credit account. Credit life insurance products are designed to pay to the lender the borrower’s remaining debt on a loan or credit account if the borrower dies during the coverage period.

Annuity Segment

Deferred Annuity. A deferred annuity is an asset accumulation product. Deposits are received as a single premium deferred annuity or in a series of payments for a flexible premium deferred annuity. Deposits are credited with interest at our determined rates subject to policy minimums. For certain limited periods of time, usually from one to ten years, interest rates are guaranteed not to change. Deferred annuities usually have surrender charges that begin at issue and reduce over time and may have market value adjustments that can increase or decrease any surrender value.

An equity-indexed deferred annuity is credited with interest using a return that is based on changes in an index, such as the S&P 500 Composite Stock Price Index, subject to a specified minimum.

Single Premium Immediate Annuity (“SPIA”). A SPIA is purchased with one premium payment, providing periodic (usually monthly or annual) payments to the annuitant for a specified period, such as for the remainder of the annuitant’s life. Return of the original deposit may or may not be guaranteed, depending on the terms of the annuity contract.

Variable Annuity. With a variable annuity the policyholder bears the investment risk because the value of the policyholder’s account balance varies with the investment experience of the separate account investment options selected by the policyholder. Our variable annuity products have no guaranteed minimum withdrawal benefits.

Health Segment

Medicare Supplement. Medicare Supplement insurance is a type of private health insurance designed to supplement or pay the costs of certain medical services not covered by Medicare.

Supplemental Insurance. Supplemental insurance is designed to provide supplemental coverage for specific events or illnesses such as cancer and accidental injury or death.

Stop-Loss. Stop-loss coverage is used by employers to limit their exposure under self-insured medical plans. Two coverages, which are usually offered concurrently, are available. Specific Stop-Loss provides coverage when claims for an individual reach a threshold; after the threshold is reached, the policy reimburses claims paid by the employer up to a coverage limit for each individual. Aggregate Stop-Loss reimburses the employer once the group’s total paid claims reach a threshold.

Credit Disability. Credit disability (also called credit accident and health) insurance pays a limited number of monthly payments on a loan or credit account if the borrower becomes disabled during the coverage period.

Medical Expense. Medical expense insurance covers most health expenses including hospitalization, surgery and outpatient services (excluding dental and vision costs). We no longer market these products and existing contracts are in run-off.

 

4


Table of Contents

Property and Casualty Segment

Personal Lines. Personal lines include insurance policies sold to individuals for auto, homeowners and other exposures. Auto insurance covers specific risks involved in owning and operating an automobile. Homeowner insurance provides coverage that protects the insured owner’s or renter’s property against loss from perils. Other personal insurance provides coverage for property such as boats, motorcycles and recreational vehicles.

Commercial Lines. The majority of our commercial lines is Agricultural business insurance. This includes property and casualty coverage tailored for a farm, ranch or other agricultural or agricultural-related business within rural and suburban markets. Commercial auto insurance is typically issued in conjunction with the sale of our Agricultural business insurance and covers specific risks involved in owning and operating vehicles. Other commercial insurance is also offered and encompasses property, liability and workers’ compensation coverages.

Credit-Related Property Insurance Products. We primarily offer the following credit insurance products:

Collateral or Creditor Protection Insurance (“CPI”). CPI provides insurance against loss, expense to recover, or damage to personal property pledged as collateral (typically automobiles and homes) resulting from fire, burglary, collision, or other loss occurrence that would either impair a creditor’s interest or adversely affect the value of the collateral. The coverage is purchased from us by the lender according to the terms of the credit obligation and charged to the borrower by the lender when the borrower fails to provide the required insurance.

Guaranteed Auto Protection or Guaranteed Asset Protection (“GAP”). GAP insures the excess outstanding indebtedness over the primary property insurance benefits that may occur when there is a total loss to or an unrecovered theft of the collateral. GAP can be written on a variety of assets that are used as collateral to secure credit; however, it is most commonly written on automobiles.

Mortgage Security Insurance (“MSI”). MSI program insures a lender’s interest in residential or commercial mortgaged property by providing coverage when the mortgagor fails to insure the property subject to the mortgage, or for property that has been foreclosed by the lender. The Named Insured, i.e. Lender, may choose to purchase this coverage in their entire portfolio or specific segments of their portfolio meeting eligibility criteria under this program. Optional liability coverage is also available for real estate owned property.

Corporate and Other Segment—Our Corporate and Other segment is primarily our invested assets not matched with our insurance activities. It also includes our non-insurance subsidiaries, such as our limited investment advisory services.

Marketing Channels

Product distribution is managed to satisfy specific markets and to minimize channel conflict across our marketing channels described below. When possible, products are cross-sold to maximize product offerings and return on investment in products and distribution.

Career Sales and Service Division’s (“CSSD”) —can be traced to the Company’s founding in 1905, and offers life insurance, annuities, and limited benefit health insurance products through exclusive employee agents primarily to the middle-income market. CSSD’s business model is structured to enable agents located throughout the United States to efficiently distribute new products as well as provide personalized service to the customer. CSSD has evolved its operations to offer a wider variety of products and electronic processing to meet the ever changing needs of the customer and the agents that serve them.

 

5


Table of Contents

Independent Marketing Group (“IMG”)—distributes life insurance and annuities through independent agents serving middle and affluent markets, as well as niche markets such as the small pension plan sponsor. IMG provides products and services to clients in need of wealth protection, accumulation, distribution, and transfer. Products are marketed through financial institutions, large marketing organizations, employee benefit firms, broker-dealers, and independent insurance agents and brokers.

IMG also markets to individuals who favor purchasing insurance directly from an insurance company. It offers life insurance to middle-income customers through channels including internet and call centers.

Multiple-line—offers life insurance, annuities, and property and casualty insurance primarily through dedicated agents. Our multiple-line distribution channel serves individuals, families, agricultural clients, and small business owners across the country at all income levels. Policyholders can generally do all their insurance business with a single agent, which has been identified as an important driver to client satisfaction.

Health Insurance Division—through independent agents and managing general underwriters (“MGU”), serves the needs of a variety of markets including middle-income seniors, self-insured employers, and the special needs of individuals through supplemental products. The Health Division offers an array of life and health insurance products for these growing segments of the population, including group life products, Supplemental health insurance products, and health reinsurance. It remains committed to traditional Medicare Supplement products. The Health Division also administers the health insurance products sold by other marketing channels.

Credit Insurance Division—offers products that provide protection to borrowers and the lenders that extend credit to them. Products offer coverage against unpaid indebtedness as a result of death, disability, involuntary unemployment or untimely loss to the collateral securing a personal or mortgage loan. Distribution includes general agents who market to financial institutions, automobile dealers, and furniture dealers.

Policyholder Liabilities

We record the amounts for policyholder liabilities in accordance with U.S. generally accepted accounting principles (“GAAP”) and the standards of practice of the American Academy of Actuaries. We carry liabilities for future policy benefits associated with base policies and riders, unearned mortality charges and future disability benefits, for other policyholder liabilities associated with unearned premiums and claims payable, and for unearned revenue and the unamortized portion of front-end fees. We also establish liabilities for unpaid claims and claim adjustment expenses, including those that have been incurred but not yet reported. In addition, we carry liabilities for secondary guarantees relating to certain life policies, and fair value reserves associated with embedded derivatives on equity indexed products.

Pursuant to state insurance laws, we establish statutory reserves, which are reported as liabilities, and which generally differ from future policy benefits determined using GAAP on our respective policies. These statutory reserves are established in amounts sufficient to meet policy and contract obligations, when taken together with expected future premiums and interest at assumed rates.

Additional information regarding our policyholder liabilities may be found in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations– Critical Accounting Estimates – Reserves section.

 

6


Table of Contents

Risk Management

A conservative operating philosophy was a founding principle for our Company and continues to be a guiding principle for us. We manage risks throughout the Company by employing controls throughout our business operations. These controls are designed to both place limits on activities and provide reporting information that helps shape adjustments to existing controls. The Company’s Board of Directors oversees a formal enterprise risk management program to coordinate risk management efforts and to provide reasonable assurance that risk taking activities are aligned with strategic objectives. The Board Audit Committee assists the Board in its risk management oversight. The risk management program includes a corporate risk officer who chairs a Management Risk Committee to ensure consistent application of the enterprise risk management process across all business segments. We also use several other senior management committees to support the discussion and enforcement of risk controls in the management of the Company.

Our insurance products are designed to balance features desired by the marketplace with provisions that mitigate our risk exposures across our insurance portfolio. We employ underwriting standards to ensure proper rates are charged to different classes of risks. In our life insurance and annuity products, we mitigate the risk of disintermediation through the use of surrender charges and market value adjustment features.

The process of linking the timing and the amount of paying obligations related to our insurance and annuity contracts and the cash flows and valuations of the invested assets supporting those obligations is commonly referred to as asset-liability management (“ALM”). Our ALM Committee regularly monitors the level of risk in the interaction of assets and liabilities and helps shape actions intended to attain our desired risk-return profile. Investment allocations and duration targets are also intended to manage the risk exposure in our annuity products by setting the credited rate within a range supported by these investments. Tools which help shape investment decisions include deterministic and stochastic interest rate scenario analyses using a licensed, third party economic scenario generator and detailed insurance ALM models. These models also use experience related to surrenders and death claims.

We also manage risk by purchasing reinsurance to limit exposure in our life, health, and property and casualty segments. In our life segment, we currently retain 100% of newly developed permanent and term products up to our retention limit and cede the excess. Consistent with our corporate risk management strategy, we periodically adjust our life reinsurance program and retention limits as market conditions warrant. In our health segment, we use reinsurance on an excess of loss basis for our medical expense business. In our property and casualty segment, our reinsurance program provides coverage for some individual risks with exposures above certain amounts as well as exposure to catastrophes including hurricanes, tornadoes, wind and hail events, earthquakes, fires following earthquakes, winter storms, and wildfires. In all segments, we purchase reinsurance from many providers and regularly review the financial strength ratings of our reinsurers. Reinsurance does not remove our liability to pay our policyholders, and we remain liable to our policyholders for the risks we insure.

In our Property and Casualty segment, the use of catastrophic event models is an important element of risk management. These models assist us in the measurement and management of exposure concentrations and the amount and structure of reinsurance purchases. In addition to reinsurance, we manage exposure to catastrophic risk by limiting property exposure in coastal areas and certain other sensitive areas, implementing hurricane, wind and hail deductible requirements where appropriate, and not renewing coverage in regions where exposure to risky events exceeds our risk appetite.

Pricing

We establish premium rates for life and health insurance products using assumptions as to future mortality, morbidity, persistency, and expenses, all of which are estimates generally based on our experience, industry data, projected investment earnings, competition, regulation and legislation. Premium rates for property and casualty insurance are influenced by many factors, including the estimated frequency and severity of claims, expenses, state regulation and legislation, and general business and economic conditions, including market interest rates and inflation. Profitability is affected to the extent actual experience deviates from our pricing assumptions.

 

7


Table of Contents

Payments we receive for certain annuity and life products are not recognized as revenues, but are deposits added to policyholder account balances. Revenues from these products are charges to the account balances for the cost of insurance risk and administrative fees and, in some cases surrender fees. Profits are earned to the extent these revenues exceed actual costs. Profits are also earned from investment income on assets invested from the deposits in excess of the amounts credited to policyholders.

Premiums for accident and health policies with medical expense components must take into account the rising utilization and cost of medical care. The annual rate of medical cost inflation has historically been higher than the general rate of inflation, requiring frequent rate increases, most of which are subject to approval by state regulatory agencies.

Credit Life and Health rates are set by each state. These rates are the maximum amounts that may be charged. We may charge a lower rate to reflect a variety of factors including better than expected experience, compensation adjustments, and competitive forces. In the event that an account experiences poor experience, we may request a rate increase from the applicable state.

Competition

We compete principally on the breadth of our product offerings, reputation, marketing expertise and support, the scope of our distribution systems, financial strength and ratings, product features and prices, customer service, claims handling, and in the case of producers, service as well as compensation. The market for insurance, retirement and investment products continues to be highly fragmented and competitive. We compete with a large number of domestic and foreign insurance companies, many of which offer one or more similar products. In addition, for products that include an asset accumulation component, our competition includes domestic and foreign securities firms, investment advisors, mutual funds, banks and other financial institutions.

Several competing insurance carriers are larger than we are, and have brands that are more commonly known and spend significantly more on advertising than we do. We remain competitive with these commonly known brands by managing costs, providing attractive coverage and service, maintaining positive relationships with our agents, and maintaining our financial strength ratings.

Ratings

Rating agencies provide independent opinions or ratings regarding the capacity of an insurance company to meet the contractual obligations of its insurance policies and contracts. These ratings are based on each rating agency’s quantitative and qualitative evaluation of a company and its management strategy. The rating agencies do not provide ratings as a recommendation to purchase insurance or annuities, nor as a guarantee of an insurer’s current or future ability to meet contractual obligations. Each agency’s rating should be evaluated independently of any other rating. Ratings may be changed, suspended, or withdrawn at any time.

Our current insurer financial strength rating from two of the most widely referenced rating organizations as of the date of this filing are as follows:

 

    A.M. Best Company: A (1)

 

    Standard & Poor’s (“S&P”): A (2)

 

(1) A.M. Best’s active company rating scale consists of thirteen ratings ranging from A++ (Superior) to D (poor).
(2) S&P’s active company ratings scale ‘AA’ to ‘CCC’ may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.

 

8


Table of Contents

Regulations Applicable to Our Business

Our insurance operations are subject to extensive regulation, primarily at the state level. Such regulation varies by state but generally has its source in statutes that establish requirements for the business of insurance and that grant broad regulatory authority to a state agency. Insurance regulation has a substantial effect on us and governs a wide variety of matters, such as insurance company licensing, agent and adjuster licensing, policy benefits, price setting, accounting practices, product suitability, the payment of dividends, the nature and amount of investments, underwriting practices, reserve requirements, marketing and advertising practices, privacy, information systems security, policy forms, reinsurance reserve requirements, risk and solvency assessments, mergers and acquisitions, capital adequacy, transactions with affiliates, participation in shared markets and guaranty associations, claims practices, the remittance of unclaimed property, and enterprise risk management requirements. The models for state laws and regulations often emanate from the National Association of Insurance Commissioners (“NAIC”).

State insurance departments monitor compliance with regulations through periodic reporting procedures and examinations. At any given time, financial, market conduct or other examinations of our insurance companies may be occurring.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) expanded the U.S. federal government presence in insurance oversight. Dodd-Frank’s requirements include streamlining the state-based regulation of reinsurance and non-admitted insurance. Dodd-Frank also established the Federal Insurance Office (“FIO”) within the U.S. Department of the Treasury, which is authorized to, among other things, gather data and information to monitor aspects of the insurance industry, identify certain issues in the regulation of insurers, and preempt state insurance measures under certain circumstances. There may be further federal incursion into the business of insurance in the future, which may add significant legal complexity and associated costs to our business.

Regulatory matters having the most significant effects on our insurance operations and financial reporting are described further below. In addition, Item 1A, Risk Factors, Litigation and Regulation Risk Factors, below discusses significant risks presented to our business by extensive regulation and describes certain other laws and regulations that are or may become applicable to us.

Limitations on Dividends by Insurance Subsidiaries. Dividends received from our insurance subsidiaries represent one source of cash for us. Our insurance subsidiaries’ ability to pay dividends is restricted by state law and impacted by federal income tax considerations.

Holding Company Regulation. We are an insurance holding company system under the insurance laws of the states where we do business. Our insurance companies are organized under the laws of Texas, Missouri, New York, Louisiana, and California. Insurance holding company system laws and regulations in such states generally require periodic reporting to state insurance regulators of various business, enterprise risk management and financial matters and advance notice to, or in some cases approval by, such regulators prior to certain transactions between insurers and their affiliates. These laws also generally require regulatory approval prior to the acquisition of a controlling interest in an insurance company. These requirements may deter or delay certain transactions considered desirable by management or our stockholders.

Rate Regulation. Nearly all states have laws requiring life, health, credit, and property and casualty insurers to file rate schedules and requiring most insurers to file policy or coverage forms and other information with the state’s regulatory authority. In many cases these must be approved prior to use. The objectives of rate laws vary, but generally a price cannot be excessive, inadequate or unfairly discriminatory. Prohibitions on discriminatory pricing apply in the context of certain products as well.

 

9


Table of Contents

Our ability to adjust prices is often dependent on the applicable pricing law and our ability to demonstrate to the particular regulator that current or proposed pricing complies with such law. In states that significantly restrict underwriting selectivity, we can manage our risk of loss by charging a price that reflects the cost and expense of providing insurance products. In states that significantly restrict price-setting ability, we can manage our risk of loss by being more selective in underwriting. When a state has significant underwriting and pricing restrictions, it becomes more difficult to manage our risk of loss, which can adversely impact our ability to market products profitably in such states.

Guaranty Associations and Involuntary Markets. State laws allow insurers to be assessed, subject to prescribed limits, insurance guaranty fund fees to pay certain obligations of insolvent insurance companies. In addition, to maintain our licenses to write property and casualty insurance in various states, we are required to participate in assigned risk plans, reinsurance facilities, and joint underwriting associations that provide various insurance coverages to purchasers that otherwise are unable to obtain coverage from private insurers. Underwriting results related to these arrangements, which tend to be adverse, have not been material to our results of operations.

Investment Regulation. Insurance company investment regulations require investment portfolio diversification and limit the amount of investment in certain asset categories. Failure to comply with these regulations leads to the treatment of non-conforming investments as non-admitted assets for measuring statutory surplus. In some instances, these rules require sale of non-conforming investments.

Exiting Geographic Markets, Canceling and Non-Renewing Policies. Most states regulate an insurer’s ability to exit a market by limiting the ability to cancel and non-renew policies. Some states prohibit an insurer from withdrawing one or more types of insurance business from the state, except pursuant to an approved plan. These regulations could restrict our ability to exit unprofitable markets.

Statutory Accounting. Financial reports to state insurance regulators utilize statutory accounting practices as defined in the Accounting Practices and Procedures Manual of the NAIC, which are different from GAAP. Statutory accounting practices, in keeping with the intent to assure the protection of policyholders, are generally based on a solvency concept, while GAAP is based on a going-concern concept. While not a substitute for GAAP performance measures, statutory information is used by industry analysts and reporting sources to compare the performance of insurance companies. Maintaining both GAAP and Statutory financial records increases our business costs.

Insurance Reserves. State insurance laws require life and property and casualty insurers to annually analyze the adequacy of statutory reserves. Our appointed actuaries must submit an opinion that policyholder and claim reserves are adequate.

Risk-Based Capital and Solvency Requirements. The NAIC has a formula for analyzing capital levels of insurance companies called risk-based capital (“RBC”). The RBC formula has minimum capital thresholds that vary with the size and mix of a company’s business and assets. It is designed to identify companies with capital levels that may require regulatory attention. At December 31, 2017, American National Insurance Company and each of its insurance subsidiaries was more than adequately capitalized and exceeded the minimum RBC requirements.

Securities Regulation. The sale and administration of variable life insurance and variable annuities are subject to extensive regulation at the federal and state level, including by the Securities and Exchange Commission (“SEC”) and the Financial Industry Regulatory Authority (“FINRA”). Our variable annuity contracts and variable life insurance policies are issued through separate accounts that are registered with the SEC as investment companies under the Investment Company Act of 1940. Each registered separate account is generally divided into sub-accounts, each of which invests in an underlying mutual fund that is itself a registered investment company under such act. In addition, the variable annuity contracts and variable life insurance policies issued by the separate accounts are registered with the SEC under the Securities Act of 1933. The U.S. federal and state regulatory authorities and FINRA from time to time make inquiries and conduct examinations regarding our compliance with securities and other laws and regulations.

In addition, our periodic reports and proxy statements to stockholders are subject to the requirements of the Securities Exchange Act of 1934 and corresponding rules of the SEC, and our corporate governance processes are subject to regulation by the SEC and the NASDAQ Stock Market. Our registered wholesale broker-dealer and registered investment adviser subsidiaries are subject to regulation and supervision by the SEC, FINRA and, in some cases, state securities administrators.

 

10


Table of Contents

Suitability. FINRA rules require broker-dealers selling variable insurance products to determine that transactions in such products are “suitable” to the circumstances of the particular customer. In addition, most states have enacted the NAIC’s Suitability in Annuity Transactions Model Regulation that, in adopting states, places suitability responsibilities on insurance companies in the sale of fixed and indexed annuities, including responsibilities for training agents.

Protection of Consumer Information. U.S. federal laws, such as the Gramm-Leach-Bliley Act, and the laws of some states regulate disclosures of certain customer information and require us to protect the security and confidentiality of such information. Such laws also require us to notify customers about our policies and practices relating to the collection, protection and disclosure of confidential customer information. State and federal laws, such as the federal Health Insurance Portability and Accountability Act regulate our use, protection and disclosure of certain personal health information. In addition, most states have laws or regulations that require us to notify regulators and affected customers in the event of a data breach.

In addition, the Fair Credit Reporting Act (the “FCRA”) is a federal law that governs the use and sharing of consumer credit information provided by a consumer reporting agency. Requirements under the FCRA apply to an insurer if such insurer obtains and uses consumer credit information to underwrite insurance. Such requirements may include obtaining the consumer’s consent and providing various notices to the consumer. While the use of consumer credit information in the underwriting process is expressly authorized by the FCRA, various states have issued regulations that limit or prohibit the use of consumer credit information by insurers, and some consumer groups continue to criticize the use of credit-based insurance scoring in underwriting and rating processes. Such criticism may gain momentum following the 2017 data breach of a major credit reporting agency. As a result, there may be additional efforts at the federal or state level to regulate the use of credit-based information by insurers. Any such regulation could force changes in our underwriting practices and impact our profitability.

Cybersecurity. In recent years, millions of consumers and businesses have been impacted by data breaches of companies in various industries, increasing the regulatory focus on cybersecurity. With the August 28, 2017 effectiveness of new regulations applicable to certain financial institutions, New York became the first state to adopt minimum cybersecurity standards. It is expected that other states will follow suit. The new regulation of the New York Department of Financial Services (“NYDFS”) requires financial institutions authorized to do business under New York banking, insurance or other financial services laws, including certain of our subsidiaries, to develop a cybersecurity program and policy based on an assessment of the institution’s cybersecurity risks, designate a Chief Information Security Officer, maintain written policies and procedures with respect to third party service providers, limit who has access to data or systems, use qualified cybersecurity personnel to manage cybersecurity risks, notify the NYDFS of a cybersecurity event within seventy-two hours, maintain a written incident response plan and provide the NYDFS with an annual certification of compliance.

In addition, the NAIC has adopted a Cybersecurity Bill of Rights, a set of directives aimed at protecting consumer data, and is working on a model data security law to establish standards for data security, which includes establishing standards for investigating a data breach and requiring certain notifications to regulators, producers and consumers. While it would not be mandatory for insurers to comply with an NAIC model law, nor for states to adopt the model law, state and federal legislators and regulators are likely to look to the model law, as well as the NYDFS regulation, for guidance in proposing new legislation and regulation. The NAIC model law could also become a standard to which insurance companies are held in decisions on whether to bring enforcement actions. The NAIC has also strengthened and enhanced the cybersecurity guidance included in its handbook for state insurance examiners. We expect a continuing focus at the state and federal levels on the privacy and security of personal information.

 

11


Table of Contents

Anti-Money Laundering. Federal law and regulation requires us to take certain steps to help prevent and detect money laundering activities. The USA PATRIOT Act of 2001 contains anti-money laundering and financial transparency requirements applicable to certain financial services companies, including insurance companies. The Bank Secrecy Act requires insurers to implement a risk-based compliance program to detect, deter and (in some cases) report financial or other illicit crimes including, but not limited to, money laundering and terrorist financing. The Office of Foreign Assets Control (“OFAC”), a division of the U.S. Treasury Department, administers and enforces economic and trade sanctions. For certain transactions, an insurer may be required to search policyholder, agent, vendor and employee databases for specially designated nationals or suspected terrorists, in order to comply with OFAC obligations.

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

Environmental Considerations. As an owner and operator of real property, we are subject to extensive federal, state and local environmental laws and regulations. Inherent in such ownership and operation is the risk that there may be potential environmental liabilities and costs in connection with any required remediation of such properties. We routinely have environmental assessments performed with respect to real estate being acquired for investment or through foreclosure, but we cannot provide assurance that unexpected environmental liabilities will not arise. In addition, we hold equity interests in companies that could potentially be subject to environmental liabilities. Based on information currently available to us, management believes that any costs associated with compliance with environmental laws and regulations or any required remediation will not have a material adverse effect on our business, results of operations or financial condition.

Other types of regulations that affect us include insurable interest laws, employee benefit plan laws, antitrust laws, employment and labor laws, and federal and state tax laws. Failure to comply with federal and state laws and regulations may result in censure; the issuance of cease-and-desist orders; suspension, termination or limitation of the activities of our operations and/or our employees and agents; or the obligation to pay fines, penalties, assessments, interest, or additional taxes and wages. In some cases, severe penalties may be imposed for breach of these laws. We cannot predict the impact of these actions on our business, results of operations or financial condition.

Employees

As of December 31, 2017, we had approximately 4,621 employees. We consider our employee relations to be good.

Available Information

We file periodic and current reports, proxy statements and other information with the SEC. Such reports, proxy statements and other information may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, N.E., Washington D.C. 20549 or by calling the SEC at 1-800-SEC-0330. The SEC maintains a website (www.sec.gov) that contains reports, proxy statements, and other information regarding issuers that file electronically with the SEC.

Our press releases, financial information and reports filed with the SEC (for example, Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those forms) are available online at www.americannational.com. The reference to our website does not constitute the incorporation by reference of information contained at such website into this, or any other, report. Copies of any documents on our website are available without charge, and reports filed with or furnished to the SEC will be available as soon as reasonably practicable after they are filed with or furnished to the SEC.

 

12


Table of Contents
ITEM 1A. RISK FACTORS

Our performance is dependent on our ability to manage complex operational, financial, legal, and regulatory risks and uncertainties throughout our operations. The most significant of these risks and uncertainties are described below. Any of these, individually or in the aggregate, could materially adversely impair our business, financial condition or results of operations, particularly if our actual experience differs from our estimates and assumptions. While our enterprise risk management framework contains various strategies, processes, policies and procedures to address these risks and uncertainties, we cannot be certain that these measures will be implemented successfully in all circumstances. In addition, we could experience risks that we failed to identify, or risks of a magnitude greater than expected.

Economic and Investment Market Risk Factors

Our results of operations are materially affected by economic and political conditions in the U.S. and elsewhere. The strength and sustainability of economic activity is inherently uncertain. Factors such as unemployment, declining workforce participation, consumer prices, geopolitical issues, energy prices, stagnant family incomes, consumer confidence and spending, and increased student and consumer debt can adversely affect the economy and demand for our products. For example, difficult credit conditions may adversely affect purchases of credit-related insurance products, or our policyholders may choose to defer or stop paying insurance premiums, resulting in higher lapses or surrenders of policies.

Interest rates have a significant impact on our business and on consumer demand for our products. Some of our products, principally interest-sensitive life insurance and fixed annuities, expose us to the risk that changes in interest rates may reduce our “spread,” or the difference between the amounts we earn on investment and the amount we must pay under our contracts. Persistently low (or lower) interest rates, compound this spread compression. When market interest rates decrease or remain at relatively low levels, prepayments and redemptions affecting our investment securities and mortgage loan investments may increase as issuers and borrowers seek to refinance at a lower rate. Proceeds from maturing, prepaid or sold bonds or mortgage loan investments may be reinvested at lower yields, reducing our spread. Our ability to decrease product crediting rates in response may be limited by market and competitive conditions and by regulatory or contractual minimum rate guarantees. Conversely, increases in market interest rates can also have negative effects. For example, increasing rates on other insurance or investment products offered to our customers by competitors can lead to higher surrenders at a time when fixed maturity investment asset values are lower. We may react to market conditions by increasing crediting rates, which narrows spreads. In addition, when interest rates rise, the value of our investment portfolio may decline due to decreases in the fair value of our securities. While we use ALM processes to mitigate the effect on our spreads of changes in interest rates, they may not be fully effective. See the Risk Management discussion in Item 1 above and the General Trends discussion in Part II, Item 7 below for further details about interest rates and our ALM processes.

Fluctuations in the markets for fixed maturity securities, equity securities, and commercial real estate could adversely affect our business. Investment returns are an important part of our profitability. Substantially all investments, including our fixed income, equity, real estate and mortgage loan investment portfolios, are subject to market and credit risks, including market volatility and deterioration in the credit or prospects of companies or governmental entities in which we invest. We could incur significant losses from such risks, particularly during extreme market events. The concentration of our investments in any particular industry, group of related industries or government issuers, or geographic area can compound these risks. Moreover, the Board of Governors of the Federal Reserve System has moved towards normalizing monetary policy from the programs of recent years that have fostered a historically low interest rate environment. In addition to resulting in higher interest rates, this move could generate volatility in debt and equity markets.

 

13


Table of Contents

In addition to negatively affecting investment returns, equity market downturns and volatility can have other adverse effects on us. First, equity market downturns and volatility may discourage new purchases of our products that have returns linked to the performance of the equity market and may cause some existing customers to withdraw cash values or reduce investments in such products, in turn reducing our fee revenues. Second, the guarantees provided under certain products may cost more than expected in volatile or declining equity market conditions, which could negatively affect our earnings. Third, our estimates of liabilities and expenses for pension and other postretirement benefits incorporate assumptions regarding the rate used to discount estimated future liabilities and the long-term rate of return on plan assets. Declines in the discount rate or the rate of return on plan assets, both of which are influenced by potential investment returns, could increase our required cash contributions or pension-related expenses in future periods.

Some of our investments are relatively illiquid. Investments in privately placed securities, mortgage loans, and real estate, including real estate joint ventures and other equity interests, are relatively illiquid. If we suddenly require significant amounts of cash in excess of ordinary cash requirements, it may be difficult or not possible to sell these investments in an orderly manner for a favorable price.

Operational Risk Factors

Our actual experience could differ from our estimates and assumptions. Our product pricing includes long-term assumptions such as investment returns, mortality, morbidity (the rate of incidence of illness), persistency (the rate at which policies remain in-force), and operating expenses. Our profitability substantially depends on actual experience being consistent with or better than these assumptions. If we fail to appropriately price our insured risks, or if claims experience is more severe than we assumed, our earnings and financial condition may be negatively affected. Conversely, significantly overpriced risks may negatively impact new business sales and retention of existing business.

Our loss reserves are estimates of amounts needed to pay and administer incurred claims and, as such, are inherently uncertain; they do not and cannot represent exact measures of liability. Inflationary events, especially events outside of historical norms, or regulatory changes that affect the assumptions underlying our estimates can cause variability. For example, increases in costs for auto parts and repair services, construction costs, and commodities result in higher losses for property damage claims. Accordingly, our loss reserves could prove to be inadequate to cover our actual losses and related expenses. See Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Estimates—Reserves for additional information.

With respect to our investments, the determination of estimates for allowances and impairments varies by investment type and is based upon our periodic evaluation of known and inherent risks associated with the respective asset class. Historical trends and assumed changes may not be indicative of future impairments or allowances. See Note 2, Summary of Significant Accounting Policies and Practices, of the Notes to the Consolidated Financial Statements for further description of our evaluation of impairments.

Assumptions regarding the future realization of deferred tax assets are dependent upon estimating the generation of sufficient future taxable income, including capital gains. If future events differ from our current forecasts and it is determined that deferred tax assets cannot be realized, a deferred tax valuation allowance must be established, with a charge to expenses.

Interest rate fluctuations and other events may require us to accelerate the amortization of deferred policy acquisition costs (DAC). When interest rates rise, life and annuity surrenders and withdrawals may increase as policyholders seek to buy products with higher or perceived higher returns, impacting estimates of future profits. Significantly lower future profits may cause us to accelerate DAC amortization, and such acceleration could adversely affect our results of operations to the extent such amortization exceeds any surrender or other charges earned as income upon surrender and withdrawal. See also Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Estimates, and Part II, Item 8, Financial Statements and Supplementary Data – Note 2, Summary of Significant Accounting Policies and Practices, and Note 10, Deferred Policy Acquisition Costs, of the Notes to the Consolidated Financial Statements for additional information.

 

14


Table of Contents

We may be unable to maintain the availability and performance of our systems and safeguard our data. We rely on the availability, reliability, and security of our information-processing infrastructure, system platforms, and business applications to store, process, retrieve, calculate and evaluate customer and company information. We have developed or evolved strategies and processes to maintain and enhance our existing internal technology and processing infrastructure and our information systems and to update or replace certain information systems to keep pace with advancing technology, changing customer preferences and expectations, and increasing industry and regulatory standards. In certain lines of our business, our information technology and telecommunication systems interface with and rely upon third-party services, over which we have no direct control. We are highly dependent on the ability to access these external services for necessary business functions, such as acquiring new business, managing existing business, paying claims, and ensuring timely and accurate financial reporting. However, system failures, extended unavailability or other outages, or damage or destruction to internal or external systems, whether caused by intentional or unintentional acts or events, as well as difficulties arising from the implementation of security-threat system patches, third -party system upgrades, and new systems and technologies, could compromise our ability to perform critical functions on a timely basis. If these systems were inaccessible or inoperable, or if they fail to function effectively or as designed, the resulting disruptions may impede or interrupt our business operations.

We receive and transmit legally protected information with and among customers, agents, financial institutions and selected third party vendors and service providers. We have invested significant time and resources towards preventing and mitigating risks through security vulnerability assessments and several layers of data intrusion and detection protection technologies, designs and authentication capabilities. Our efforts may not be effective against all security threats and breach attempts in light of increasingly complex and persistent threat techniques and the evolving sophistication of individual and state-sponsored cyber-attacks. A breach, whether from external or internal sources, could result in access, viewing, misappropriation, altering or deleting information in ours or a third party’s systems on which we rely, including customers’ and employees’ sensitive personal and financial information and our proprietary business information. Like other companies, we have experienced threats to our data and systems, including malware, seeking to gain unauthorized access to systems and data or to cause disruptions; however, to date, these have not been material to our operations. Any significant attacks, unauthorized access or disclosures, disruptions or other security breaches, whether affecting us or third parties, could result in substantial business disruption and consequences, including without limitation, costs of repairing or replacing systems, increased security costs, costs of customer notifications and credit monitoring services, lost revenues, litigation, regulatory action, fines and penalties, and reputational damage.

Employee and agent error and misconduct may be difficult to detect and prevent and may result in significant losses. The actions or inaction of our employees, agents, producers, managing general agents, managing general underwriters and third party administrators could result in losses arising from, among other things, fraud, errors, failure to properly document transactions, failure to obtain proper internal authorization, failure to maintain effective internal controls, or failure to comply with underwriting guidelines or regulatory requirements. It is not always possible to deter or prevent misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases.

Our business operations depend on our ability to appropriately distribute, execute and administer our policies and claims. Our primary business is writing and servicing life, annuity, property and casualty, and health insurance for individuals, families and business. Any problems or discrepancies that arise in our pricing, underwriting, billing, processing, claims handling or other practices, whether as a result of employee error, vendor error, or technological problems, could have a negative effect on operations and reputation, particularly if such problems or discrepancies are replicated through multiple policies.

 

15


Table of Contents

If we fail to maintain an effective system of internal controls, we may not be able to accurately report our financial results, which may adversely impact our Company.

It is necessary for us to maintain effective internal control over financial reporting to prevent fraud and errors and to maintain effective disclosure controls and procedures to provide timely and reliable financial and other information. In our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, management concluded that our disclosure controls were not effective as of such time because of material weaknesses in our internal controls over financial reporting related to deferred income taxes and collateral relating to our use of option derivatives. We have enhanced our internal controls with respect to these matters and concluded that our disclosure controls were effective to accomplish their objectives at the reasonable assurance level as of December 31, 2017. However, we cannot be certain that we will be able to prevent future material weaknesses or that there are no additional existing, but as yet undiscovered, weaknesses that we need to address. A failure to maintain adequate internal controls may adversely affect our ability to provide information that accurately reflects our financial condition on a timely basis. This could cause an adverse effect on our business, results of operations and the market price of our stock if investors, customers, rating agencies, regulators or others lose confidence in our reported financial and other information, if we become subject to SEC or other regulatory review and sanctions, or if we become subject to litigation that results in substantial fines, penalties or liabilities.

Catastrophic Event Risk Factors

We may incur significant losses resulting from catastrophic events. Our property and casualty operations are exposed to catastrophes caused by natural events, such as hurricanes, tornadoes, wildfires, droughts, earthquakes, snow, hail and windstorms, and manmade events, such as terrorism, riots, explosions, hazardous material releases, and utility outages. Our life and health insurance operations are exposed to the risk of catastrophic mortality or illness, such as a pandemic, an outbreak of an easily communicable disease, or another event that causes a large number of deaths or high morbidity. Our investment operations are exposed to catastrophes as a result of direct investments and mortgages related to real estate. Our operating results may vary significantly from one period to the next since the likelihood, timing, severity, number or type of catastrophe events cannot be accurately predicted. Our losses in connection with catastrophic events are primarily a function of the severity of the event and the amount of policyholder exposure in the affected area.

Some scientists believe climate change has added to the unpredictability, severity and frequency of extreme weather and loss events. To the extent climate change increases the frequency and severity of such events, we may face increased claims, and we may experience investment losses as a result of such events. Predicting the frequency and severity of extreme weather and loss events is inherently uncertain. Moreover, we cannot predict how legal, regulatory and social responses to concerns about global climate change will impact our business or the value of our investments.

The occurrence of events that are unanticipated in our business continuity and disaster recovery planning could impair our ability to conduct business effectively. Our corporate headquarters is located in Galveston, Texas, on the coast of the Gulf of Mexico and in the past has been impacted by hurricanes. Our League City, Texas offices are designed to support our operations and service our policyholders in the event of a hurricane or other natural disaster affecting Galveston. The primary offices of our property and casualty insurance companies are in Springfield, Missouri and Glenmont, New York, which helps to insulate these facilities and their operations from coastal catastrophes. However, the severity, timing, duration or extent of an event may be unanticipated by our business continuity planning, which could result in an adverse impact on our ability to conduct business. In the event a significant number of our employees or agents were unavailable following such a disaster, or if our computer-based data processing, transmission, storage and retrieval systems were affected, our ability to effectively conduct our business could be compromised.

 

16


Table of Contents

Marketplace Risk Factors

Our future results are dependent in part on successfully operating in the insurance and annuity industries that are highly competitive with regard to customers and producers. Strong competition for customers has led to increased marketing and advertising by our competitors, many of whom have well-established national reputations and greater financial and marketing resources, as well as the introduction of new insurance products and aggressive pricing. In particular, our Medicare Supplement business is subject to intense price competition, which could negatively impact future sales of these products and affect our ability to offer this product. In addition, product development and life-cycles have shortened in many product segments, leading to intense competition with respect to product features.

We compete for customers’ funds with a variety of investment products offered by financial services companies other than insurance companies, such as banks, investment advisors, mutual fund companies and other financial institutions. Moreover, customer expectations are evolving as technology advances and consumers become accustomed to enjoying tailored, easy to-use-services and products from various industries. This is reshaping and raising consumer expectations when dealing with insurance. We are addressing these changing consumer expectations by investing in technology with a particular focus on consumer-facing sales and service platforms, by internally promoting a strategically-focused innovative culture initiative, and by creating internal forums to drive next generation solutions based on consumer insights. However, if we cannot effectively respond to increased competition and such increased consumer expectations, we may not be able to grow our business or we may lose market share.

We compete with other insurers for producers primarily on the basis of our financial position, reputation, stable ownership, support services, compensation, product features and pricing. We may be unable to compete with insurers that adopt more aggressive pricing or compensation, that offer a broader array of products or packages of products, or that have extensive promotional and advertising campaigns.

Our supplemental health business could be negatively affected by alternative healthcare providers or changes in federal healthcare policy. Our Medicare Supplement business is impacted by market trends in the senior-aged healthcare industry that provide alternatives to traditional Medicare, such as health maintenance organizations and other managed care or private plans. The success of these alternative healthcare solutions for seniors could negatively affect the sales and premium growth of traditional Medicare Supplement insurance and could impact our ability to offer such products. In addition, Congress or the U.S. Department of Health and Human Services (“HHS”) could make changes in federal healthcare policy, including Medicare that could adversely impact our supplemental health business.

Litigation and Regulation Risk Factors

Litigation may result in significant financial losses and harm our reputation. Plaintiffs may bring lawsuits, including class actions, against us relating to, among other things, sales or underwriting practices, agent misconduct, product design, product disclosure, product administration, fees charged, denial or delay of benefits, product suitability, claims-handling practices (including the permitted use of aftermarket, non-original equipment manufacturer auto parts), loss valuation methodology, refund practices, employment matters, and breaches of duties to customers. Plaintiffs may seek very large or indeterminate amounts, including punitive and treble damages. The damages claimed and the amount of any probable and estimable liability, if any, may remain unknown for substantial periods of time. Even when successful in the defense of such actions, we could incur significant attorneys’ fees, direct litigation costs and substantial amounts of management time that otherwise would be devoted to our business, and our reputation could be harmed.

 

17


Table of Contents

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

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

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

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

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

 

18


Table of Contents

There have been federal efforts to change the standards of care applicable to broker-dealers and investment advisers. In April 2016, the U.S. Department of Labor (“DOL”) issued a regulation that will significantly expand the range of activities considered to be fiduciary investment advice under the Employee Retirement and Income Security Act of 1974 and the Internal Revenue Code of 1986. This regulation impacts individuals and entities that offer investment advice to purchasers of qualified retirement products, such as IRA’s and qualified retirement plans. It applies ERISA’s fiduciary standard to many insurance agents, broker-dealers, advisers and others not currently subject to the standard, when they sell annuities to IRA’s and qualified retirement plans. Further, it prohibits such individuals from receiving commission-based compensation from such sales unless they comply with a prohibited transaction exemption under the rule. Certain parts of the rule relating to the definition of “investment advice fiduciary” and new and revised prohibited transaction exemptions went into effect on June 9, 2017, while additional conditions applicable to certain prohibited transaction exemptions were delayed until July 1, 2019. In addition, the DOL has asked for additional public comment regarding the rule and is further studying the potential impact of the rule. Given these developments, as well as current pending litigation challenging the rule, there is still some uncertainty about the form and timing of the rule’s final implementation. Compliance with the rule may result in decreased premium on certain life and annuity products as a result of more limited sales opportunities through our current distribution arrangements. We may also experience a loss of some in-force business, as well as increased regulatory burdens and litigation risk. In addition, following a study required by Dodd-Frank, the staff of the SEC recommended a uniform fiduciary duty standard applicable to both broker-dealers and investment advisers when providing personalized investment advice to retail customers. It is not clear at the present time whether or when the SEC will ultimately implement this change. However, if implemented, it would apply a different standard of care than is currently applicable to broker-dealers and would affect how our variable insurance products are designed and sold.

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

For further discussions of the kinds of regulation applicable to us, see Item 1, Business, Regulation Applicable to Our Business section.

Changes in tax laws could adversely affect our business. Under current U.S. federal and state income tax laws, certain products we offer, primarily life insurance and annuities, receive tax treatment designed to encourage consumers to purchase these products. This treatment may encourage some consumers to select our products over non-insurance products. The U.S. Congress from time to time may consider legislation that would change the taxation of insurance products and/or reduce the taxation of competing products. Such legislation, if adopted, could materially change consumer behavior, which may harm our ability to sell such products and result in the surrender of some existing contracts and policies. In addition, changes in the U.S. federal and state estate tax laws could negatively affect the demand for the types of life insurance used in estate planning. Uncertainty regarding the tax structure in the future may also cause some current or future purchasers to delay or indefinitely postpone the purchase of products we offer.

On December 22, 2017, the federal government enacted the Tax Cuts and Jobs Act (“Tax Reform”). Tax Reform makes broad and complex changes to federal corporate tax law that we expect will have a significant impact on our provision for taxes. The effects of Tax Reform are not yet entirely clear and will depend on, among other things, additional regulatory and administrative guidance, as well as any statutory technical corrections that are subsequently enacted. Tax Reform, or any related, similar or amended legislation or other changes in federal income tax laws, could adversely affect the federal income taxation of our ongoing operations and have a material adverse impact on our business and results of operations.

New accounting rules or changes to existing accounting rules could negatively impact our business. We are required to comply with GAAP. A number of organizations are instrumental in the development and interpretation of GAAP, such as the SEC, the Financial Accounting Standards Board (“FASB”), and the American Institute of Certified Public Accountants. GAAP is subject to review by these organizations and others and is, therefore, subject to change in ways that could change the current accounting treatments we apply.

 

19


Table of Contents

We also must comply with statutory accounting principles (“SAP”) in our insurance operations. SAP and various components of SAP (such as actuarial reserving methodology) are subject to review by the NAIC and its taskforces and committees, as well as state insurance departments.

Future changes to GAAP or SAP could impact our product profitability, reserve and capital requirements, financial condition or results of operations. See Note 3, Recently Issued Accounting Pronouncements, of the Notes to Consolidated Financial Statements for a detailed discussion regarding the impact of the recently issued accounting pronouncements and the future adoption of new accounting standards on the Company.

Reinsurance and Counterparty Risk Factors

Reinsurance may not be available, affordable, adequate or collectible to protect us against losses. As part of our risk management strategy, we purchase reinsurance for certain risks that we underwrite. Market conditions and geo-political events beyond our control, including the continued threat of terrorism, influence the availability and cost of reinsurance for new business. In certain circumstances, the price of existing reinsurance contracts may also increase. Reinsurance does not relieve us of our direct liability to our policyholders, even when the reinsurer is liable to us. Our reinsurers may not pay the reinsurance recoverables owed to us or they may not pay these balances on a timely basis.

The counterparties to derivative instruments we use to hedge our business risks could default or fail to perform. We enter into derivative contracts, such as options, with a number of counterparties to hedge various business risks. If our counterparties fail or refuse to honor their obligations, our economic hedges of the related risks will be ineffective. Such counterparty failures could have a material adverse effect on us. See Note 7, Derivative Instruments, of the Notes to the Consolidated Financial Statements for additional details.

Other Risk Factors

Our financial strength ratings could be downgraded. Various Nationally Recognized Statistical Rating Organizations (“NRSROs”) publish financial strength ratings as their opinion of an insurance company’s creditworthiness and ability to meet policyholder and contractholder obligations. As with other rated companies, our ratings could be downgraded at any time and without any notices by any NRSRO. A downgrade or an announced potential downgrade of our financial strength ratings could have multiple adverse effects on us including:

 

    reducing new sales of insurance and annuity products or increasing the number or amount of surrenders and withdrawals;

 

    affecting our relationships with our sales force, independent sales intermediaries and credit counterparties;

 

    requiring us to offer higher crediting rates or greater policyholder guarantees on our insurance products in order to remain competitive; and

 

    affecting our ability to obtain reinsurance at reasonable prices.

It is likely that the NRSROs will continue to apply a high level of scrutiny to financial institutions, including us and our competitors, and may adjust the capital, risk management and other requirements employed in the NRSRO models for maintenance of certain ratings levels.

 

20


Table of Contents

We are controlled by a small number of stockholders. As of December 31, 2017, the Moody Foundation, a charitable trust, beneficially owned approximately 22.7% of our common stock. In addition, Moody National Bank, in its capacity as trustee or agent of various accounts, had the power to vote approximately 49.1% of our common stock as of such date. As a result, subject to applicable legal and regulatory requirements, these stockholders have the ability to exercise a controlling influence over matters submitted for stockholder approval, including the composition of our Board of Directors, and through the Board of Directors any determination with respect to our business direction and policies. This concentration of voting power could deter a change of control or other business combination that might be beneficial or preferable to other stockholders. It may also adversely affect the trading price of our common stock if controlling stockholders sell a significant number of shares or if investors perceive disadvantages in owning stock in a company controlled by a small number of stockholders.

See also Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for additional details regarding certain risks that we face.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None

 

ITEM 2. PROPERTIES

We own and occupy our corporate headquarters in Galveston, Texas. We also own and occupy the following properties that are materially important to our operations:

 

    Three buildings in League City, Texas which are used by our Life, Health, and Corporate and Other business segments.

 

    Three buildings, two in Springfield, Missouri and the other in Glenmont, New York, which are used by our Property and Casualty segment.

We believe our properties are adequate and suitable for our business as currently conducted and are adequately maintained. The above does not include properties we own only for investment purposes.

 

ITEM 3. LEGAL PROCEEDINGS

Information required for Item 3 is incorporated by reference to the discussion under the heading “Litigation” in Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements.

 

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable

 

21


Table of Contents

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Stockholder Information

Our common stock is traded on the NASDAQ Global Select Market under the symbol “ANAT.” The following table presents the high and low prices for our common stock and the quarterly dividends declared per share.

 

     Stock Price Per Share      Dividend
Per Share
 
     High      Low     

2017

        

Fourth quarter

   $ 134.03      $ 116.95      $ 0.82  

Third quarter

     126.89        110.43        0.82  

Second quarter

     120.49        111.51        0.82  

First quarter

     126.40        112.81        0.82  
        

 

 

 
         $ 3.28  
        

 

 

 

2016

        

Fourth quarter

   $ 131.99      $ 111.98      $ 0.82  

Third quarter

     122.95        108.88        0.82  

Second quarter

     120.67        107.44        0.82  

First quarter

     118.50        91.20        0.80  
        

 

 

 
         $ 3.26  
        

 

 

 

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. The payment of dividends is subject to restrictions described in Note 16, Stockholders’ Equity and Noncontrolling Interests, of the Notes to the Consolidated Financial Statements and as discussed in Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources.

On December 29, 2017, our year-end closing stock price was $128.25 per share, and there were 681 holders of record of our issued and outstanding shares of common stock.

Securities Authorized for Issuance under Equity Compensation Plans

The following table provides information regarding our common stock that is authorized for issuance under American National’s 1999 Stock and Incentive Plan as of December 31, 2017:

 

    Equity Compensation Plan Information  
    Number of securities to be issued
upon exercise of outstanding
options, warrants  and rights
    Weighted-average exercise price
outstanding options, warrants
and  rights
    Number of securities remaining
available for future issuance under
equity compensation  plans
(excluding securities reflected in
column (a))
 
    (a)     (b)     (c)  

Plan category

     

Equity compensation plans

     

Approved by security holders

    —       $ 110.19       2,291,039  

Not approved by security holders

    —         —         —    
 

 

 

   

 

 

   

 

 

 

Total

    —       $ 110.19       2,291,039  
 

 

 

   

 

 

   

 

 

 

 

22


Table of Contents

Performance Graph

The following graph compares the cumulative stockholder return for our common stock for the last five years with the performance of the NASDAQ Stock Market and a NASDAQ Insurance Stock index using NASDAQ OMX Global Indexes. It shows the cumulative changes in value of an initial $100 investment on December 31, 2012, with all dividends reinvested.

 

LOGO

Value at each year-end of a $100 initial investment made on December 31, 2012:

 

     December 31,  
     2012      2013      2014      2015      2016      2017  

American National

   $ 100.00      $ 172.72      $ 179.13      $ 168.65      $ 208.97      $ 222.20  

NASDAQ Total OMX

     100.00        133.48        150.12        150.84        170.46        206.91  

NASDAQ Insurance OMX

     100.00        141.64        160.85        159.67        192.30        224.89  

This performance graph shall not be deemed to be incorporated by reference into our SEC filings or to constitute soliciting material or otherwise be considered filed under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended.

 

23


Table of Contents
ITEM 6. SELECTED FINANCIAL DATA

American National Insurance Company

(and its subsidiaries)

 

     Years ended December 31,  

(dollar amounts in millions, except per share amounts)

   2017      2016      2015      2014      2013  

Total premiums and other revenues

   $ 3,411      $ 3,228      $ 3,017      $ 3,051      $ 3,119  

Income from continuing operations, net of tax*

     496        183        242        247        270  

Net income*

     496        183        242        247        270  

Net income attributable to American National *

     494        181        243        245        266  

Per common share

              

Income from continuing operations, net of tax*

              

Basic

     18.43        6.79        9.02        9.21        10.09  

Diluted

     18.38        6.77        8.99        9.17        10.05  

Net income attributable to American National *

              

Basic

     18.35        6.73        9.04        9.15        9.95  

Diluted

     18.31        6.71        9.02        9.11        9.90  

Cash dividends per share

     3.28        3.26        3.14        3.08        3.08  
     December 31,  
     2017      2016      2015      2014      2013  

Total assets

   $ 26,387      $ 24,533      $ 23,766      $ 23,566      $ 23,330  

Total American National stockholders’ equity

     5,247        4,652        4,452        4,428        4,188  

Total equity

     5,256        4,661        4,462        4,440        4,200  

 

* This includes the Company’s provisional impact of the recent U.S. Tax Cut and Jobs Act (“Tax Reform”) of $206.4 million, which may be adjusted for the current and future periods, possibly materially, due to, among other things, further refinement of the Company’s calculations, changes in interpretations and assumptions the Company has made, tax guidance that may be issued and actions the Company may take as a result of Tax Reform. Excluding the impact of Tax Reform, the Company’s 2017 net income would have been $287.3 million and net earnings per basic and diluted share of $10.68 and $10.65, respectively. For a discussion of the impact of the recently adopted legislation, see Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements, Note 14, Income Taxes.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward-Looking Statements

Certain statements made in this report include forward-looking statements within the meaning of the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995. 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. These forward-looking statements are subject to changes and uncertainties which are, in many instances, beyond our control and have been made based upon our assumptions, expectations and beliefs concerning future developments and their potential effect upon us. There can be no assurance that future developments will be in accordance with our expectations, or that the effect of future developments on us will be as anticipated. It is not a matter of corporate policy for us to make specific projections relating to future earnings, and we do not endorse any projections regarding future performance made by others. Additionally, we do not publicly update or revise forward-looking statements based on the outcome of various foreseeable or unforeseeable events. Forward-looking statements are not guarantees of future performance and involve various risks and uncertainties. There are certain important factors that could cause actual results to differ, possibly materially, from expectations or estimates reflected in such forward-looking statements, including without limitations risks, uncertainties and other factors discussed in Item 1A, Risk Factors and elsewhere in this report. Management’s discussion and analysis (“MD&A”) of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included in Item 8, Financial Statements and Supplementary Data.

 

24


Table of Contents

Overview

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

Our business has been and will continue to be influenced by a number of industry-wide, segment or product-specific trends and conditions. In our discussion below, we first outline the broad macro-economic or industry trends (General Trends) that we expect to impact our overall business. Second, we discuss certain segment-specific trends we believe may impact individual segments or specific products within these segments.

Segments

The insurance segments do not directly own assets. Rather, assets are allocated to support the liabilities and capital allocated to each segment. The mix of assets allocated to each of the insurance segments is intended to support the characteristics of the insurance liabilities within each segment including expected cash flows and pricing assumptions, and is intended to be sufficient to support each segment’s business activities. We have utilized this methodology consistently over all periods presented.

The Corporate and Other business segment acts as the owner of all of the invested assets of the Company. The investment income from the invested assets is allocated to the insurance segments in accordance with the assets allocated to each insurance segment. Earnings of the Corporate and Other business segment are derived from income related to invested assets not allocated to the insurance segments and from our non-insurance businesses. All realized investment gains and losses, which includes other-than-temporary impairments (“OTTI”), are recorded in this segment.

General Trends

Our business, financial condition and results of operations are materially affected by economic and financial market conditions. The U.S. and global economies, as well as the capital markets, continue to show mixed signals, and uncertainties continue to be significant factors in the markets in which we operate. Factors such as consumer spending, business investment, the volatility of the capital markets, the level of interest rates, unemployment, the level of participation in the workforce and the risk of inflation or deflation will affect the business and economic environment and, in turn, impact the demand for the type of financial and insurance products we offer. Adverse changes in the economy could have a material adverse effect on us. However, we believe those risks are somewhat mitigated by our financial strength, active enterprise risk management and disciplined underwriting for our products. Our diverse product mix and distribution channels across insurance segments is a strength that we expect will help us adapt to the volatile economic environment and give us the ability to serve the changing needs of our customers. Additionally, through our long-term business approach, we believe we are financially strong, and we are committed to providing a steady and reliable source of financial protection for policyholders.

Interest Rates: The low-interest rate environment is a challenge for life insurers as the spreads on deposit-type contracts remain narrow, especially as interest rates have approached minimum crediting rates. Low market interest rates reduce the spreads between the amounts we credit to fixed annuity and individual life policyholders and the amounts we earn on the investments that support these obligations. Our ALM Committee actively manages the profitability of our in-force blocks. In previous years, we reduced the guaranteed minimum crediting rates on new fixed annuity contracts, which has afforded us the flexibility to respond to the unusually low-interest rate environment. In previous years, we also reduced crediting rates on in-force contracts, where permitted to do so. These actions help mitigate the adverse impact of low interest rates on the profitability of these products, although sales volume may be negatively impacted as a result. We also maintain assets with various maturities to support product liabilities and ensure liquidity. A gradual increase in longer-term interest rates relative to short-term rates generally will have a favorable effect on the profitability of our products. Rapidly rising interest rates could result in reduced persistency of our spread-based products, if contract holders shift assets into higher yielding investments. We believe our ability to react quickly to the changing marketplace will help us manage this risk.

 

25


Table of Contents

The interest rate environment affects estimated future profit projections, which could impact the amortization of our DAC assets and the estimates of policyholder liabilities. Significantly lower future estimated profits may cause us to accelerate the amortization of DAC or require us to establish additional policyholder liabilities, thereby reducing earnings. We periodically review assumptions with respect to future earnings to make sure that they remain appropriate considering the current interest rate environment.

Low interest rates are also challenging for property and casualty insurers. Investment income is an important element in earning an acceptable return on capital. Lower interest rates resulting in lower investment income require us to achieve better underwriting results. We have adjusted policy prices to help mitigate the adverse impact of low interest rates on our property and casualty business.

Changing Regulatory Environment: The insurance industry is primarily regulated at the state level, although some life and annuity products and services are also subject to U.S. federal regulation. We are regularly subjected to additional or changing regulation that requires us to update systems, change product structure, increase the amount of reporting or adopt changes to distribution. These changes may increase the capital requirements for us and the industry, increase operating costs, change our operating practices and change our ability to provide products with pricing attractive to the marketplace.

Importance of Operating Efficiencies: The volatile economic environment and costs associated with greater regulation create a further need for operating efficiencies. We manage our cost base while maintaining our commitment to provide superior customer service to policyholders and agents. Investments in technology are coordinated through a disciplined project management process. We anticipate continually improving our use of technology to enhance our policyholders’ and agents’ experience and increase efficiency of our employees.

Increased Role of Advanced Technology: The use of mobile technology has changed the way consumers want to conduct their business, including real-time access to information. Many customers expect to complete transactions in a digital format instead of traditional methods that require a phone call or submission of paper forms. Social media and other customer-facing technologies also reshape the way companies communicate and collaborate with key stakeholders, and new tools exist to better collect and analyze information for potential business opportunities and better manage risks. For example, American National has mobile-enabled all of its Internet-based access and leverages social media channels to reach out to potential customers to promote awareness of the company, including the products and services offered. We expect that technology will continue to evolve, offering new and more effective ways to reach and service our customers and shareholders. We evaluate available and evolving technologies and incorporate those that we believe offer appropriate benefits to the company and its customers.

Increased Challenges of Talent Attraction and Retention: Attracting qualified individuals and retaining existing employees is a challenge for all employers. Businesses have become extremely competitive in the talent marketplace, and with the increasing impact of social media (particularly sites like LinkedIn) it is easier than ever for companies to find individuals with needed job skills and lure them away from their current positions. As a result, the ability to distinguish American National as the employer of choice grows increasingly important. Providing the right mix of benefits and opportunities is the best approach to attracting and retaining employees. Expanding our use of technology and social media will enhance our employer brand and educate candidates on why they want to work for us. Evolving acquisition strategies to target the diversity of today’s workforce will continue to grow our candidate base. Succession planning and the identification/development of high potential employees creates career paths designed to retain our best and brightest. Increasing our talent development efforts ensures the growth of skill sets and the ability to promote from within.

 

26


Table of Contents

Life and Annuity

Life insurance and annuity are mainstay segments, as they have been during our long history. We believe that the combination of predictable and decreasing mortality rates, positive cash flow generation for many years after policy issue and favorable persistency characteristics suggest a viable and profitable future for these lines of business.

Effective management of invested assets and associated liabilities using crediting rates and, where applicable, financial hedging instruments (which we use as economic hedges of equity-indexed life and annuity products), is important to the success of our life and annuity segments. Asset “disintermediation”, the risk of large outflows of cash at times when it is disadvantageous to us to dispose of invested assets, is a risk associated with these segments.

Demographics: We believe a key driver shaping the actions of the life insurance industry is the rising income protection, wealth accumulation and insurance needs of retiring Baby Boomers (those born between 1946 and 1964). As a result of increasing longevity and uncertainty regarding the Social Security System and an ongoing transition from defined benefit pension plans to 401(k) type retirement plans, retirees will need to accumulate sufficient savings to support retirement income requirements.

We believe we are well positioned to address the Baby Boomers’ increasing need for savings tools and income protection. We believe that our overall financial strength and broad distribution channels position us to respond with a variety of products for individuals approaching retirement age, who seek information to plan for and manage their retirement needs. We believe our products that offer guaranteed income flows for life, including single premium immediate annuities, are well positioned to serve this market.

Competitive Pressures: In recent years, the competitive landscape of the U.S. life insurance industry has shifted. Established insurers are competing against each other and also against new market entrants that are developing products to attract the interest of the growing number of retirees. Competition exists in terms of retaining and acquiring consumers’ business and also in terms of access to producers and distributors. Consolidation among distributors coupled with the aging sales force remains a challenge among insurers. In addition, the increased technological sophistication of consumers necessitates that insurers and distributors invest significant resources in technology to adapt to consumer expectations. We believe we possess sufficient scale, financial strength, resources and flexibility to compete effectively.

The annuity market is also highly competitive. In addition to aggressive interest crediting rates and new product features on annuities, there is competition from other financial service firms. Insurers continue to evaluate their distribution channels and the way they deliver products to consumers.

We believe we will continue to be competitive in the life and annuity markets through our broad line of products, diverse distribution channels, and consistent high level of customer service. We modify our products to meet customer needs and to expand our reach where we believe we can obtain profitable growth.

Health

Most of the major provisions of the Patient Protection and Affordable Care Act, and a reconciliation measure, the Health Care and Education Reconciliation Act of 2010 (collectively, “the Healthcare Acts”), phased in effective January 1, 2014. The Healthcare Acts mandated broad changes in the delivery of health care benefits that have impacted our business model including our relationships with current and future customers, producers, and health care providers, as well as our products, services and processes. As a result, the Healthcare Acts generated new opportunities in the limited benefit and supplemental product markets. In recent years, we built a portfolio of such products to be sold in the worksite market as well as to individuals. We had some success with the individual products in 2015 and 2016 although these products were restricted somewhat in 2016 and 2017 due to regulatory changes. We are now expanding our presence in the worksite market to generate new opportunities in the broker market, as well as developing and implementing a captive sales force. The future of the Healthcare Acts remains questionable and subject to change. We continue to monitor possible changes and maintain a wait and see attitude, allowing us to be opportunistic to new markets.

 

27


Table of Contents

We expect our Managing General Underwriter (“MGU”) business to remain stable during 2017. We generally retain only 10% of the MGU premium and risk. The majority of the revenue generated from this business is fee income included in “Other income” of the Health segment’s operating results.

Property and Casualty

We offer our personal and commercial property and casualty lines of business primarily through captive agents. We favor a balanced, focused and collaborative approach to both growth and profitability through the development of successful agencies.

To acquire and retain profitable business, we use sophisticated pricing models and risk segmentation, along with a focused distribution force. We believe this approach allows us to make product enhancements and offer programs that are tailored to our target markets while charging an appropriate premium for the risk.

Demand for property and casualty credit-related insurance products continues to increase. We continue to update credit-related insurance product offerings and pricing to meet changing market needs, as well as adding new agents to expand market share in the credit-related insurance market. We are reviewing and implementing procedures to enhance customer service while, at the same time, looking for efficiencies to reduce administrative costs.

Competition: The property and casualty insurance industry remains highly competitive. Despite the competitive environment, we expect to identify profitable opportunities through our strong distribution channels, expanding geographic coverage, marketing efforts, new product development and pricing sophistication.

Critical Accounting Estimates

The preparation of financial statements in accordance with GAAP requires estimates and assumptions that often involve a significant degree of judgment. These estimates and judgments include expectations of current and future mortality, morbidity, persistency, claims and claim adjustment expenses, recoverability of receivables, investment returns and interest rates which extend well into the future. In developing these estimates, there is inherent uncertainty and material changes to facts and circumstances may develop. Although variability is inherent in these estimates, we believe the amounts as reported are appropriate, based upon the facts available upon compilation of the consolidated financial statements.

On an ongoing basis, management reviews the estimates and assumptions used in preparing the financial statements. If current facts and circumstances warrant modifications in estimates and assumptions, our financial position and results of operations as reported in the consolidated financial statements could change significantly.

A description of these critical accounting estimates is presented below. Also, see the Notes to the Consolidated Financial Statements for additional information.

 

28


Table of Contents

Reserves

Life and Annuity Reserves

Life Reserving—Principal assumptions used in the determination of the reserves for future policy benefits are mortality, policy lapse rates, investment return, inflation, expenses and other contingent events as appropriate to the respective product type. Reserves for incurred but not reported (“IBNR”) claims on life policies are calculated using historical claims information. Reserves for interest-sensitive and variable universal life insurance policies are equal to the current account value calculated for the policyholder. Some of our universal life policies contain secondary guarantees, for which additional reserves are recorded based on the term of the policy.

Annuity Reserving—Reserves for payout annuities with more than insignificant amounts of mortality risk are calculated in accordance with the applicable accounting guidance for limited pay insurance contracts. Benefit and maintenance expense reserves are calculated by using assumptions reflecting our expectations of future costs, including an appropriate margin for adverse deviation. These assumptions are locked-in at issue and generally reflect pricing assumptions from that period. If the resulting reserve would otherwise cause profits to be recognized at the issue date, additional reserves are recorded. The resulting recognition of profits would be gradual over the expected life of the contract.

Reserves for fixed deferred annuities are established equivalent to the account value held on behalf of the policyholder. Reserves for indexed annuities are calculated in accordance with derivative accounting guidance which defines a host liability for return of principal and guaranteed interest, and an embedded derivative liability for funded benefits in excess of the host guarantee. Additional reserves for benefits that can exceed contract fund value, such as lifetime income riders, are determined as needed in accordance with the applicable accounting guidance. The profit recognition on deferred annuity contracts is gradual over the expected life of the contract. No immediate profit is recognized on the sale of the contract.

Key Assumptions—The following assumptions reflect our best estimates and may impact our life and annuity reserves:

 

    Future lapse rates will remain reasonably consistent with our current expectations;

 

    Mortality rates will remain reasonably consistent within standard industry mortality table ranges; and

 

    Future interest spreads will remain reasonably consistent with our current expectations.

Recoverability—At least annually, we test the adequacy of the net benefit reserves (policy benefit reserves less DAC) recorded for life insurance and annuity products. To perform the tests, we use our current best-estimate assumptions as to policyholder mortality, persistency, maintenance expenses and invested asset returns.

For interest-sensitive business, best-estimate assumptions are updated to reflect observed changes based on experience studies and current economic conditions. We reflect the effect of such assumption changes in DAC and reserve balances accordingly. Due to the long-term nature of many of the liabilities, small changes in certain assumptions may cause large changes in profitability. In particular, changes in estimates of the future invested asset return have a large effect on the degree of reserve adequacy and DAC recoverability.

For traditional business, a “lock-in” principle applies, whereby the assumptions used to calculate the benefit reserves and DAC are set when a policy is issued and do not change with changes in actual experience. These include margins for adverse deviation in the event that actual experience differs from the original assumptions.

 

29


Table of Contents

Health Reserves

Health reserves are established using the following methods:

Completion Factor Approach—This method assumes that the historical claim patterns will be an accurate representation of unpaid claim liabilities. An estimate of the unpaid claims is calculated by subtracting period-to-date paid claims from an estimate of the ultimate “complete” payment for all incurred claims in the period. Completion factors are calculated which “complete” the current period-to-date payment totals for each incurred month to estimate the ultimate expected payout.

Tabular Claims Reserves—This method is used to calculate the reserves for disability income blocks of business. These reserves rely on published valuation continuance tables created using industry experience regarding assumptions of continued morbidity and subsequent recovery. Reserves are calculated by applying these continuance tables, along with appropriate company experience adjustments, to the stream of contractual benefit payments. These expected benefit payments are discounted at the required interest rate.

Future Policy Benefits—Reserves are equal to the aggregate of the present value of expected future benefit payments, less the present value of expected future premiums. Morbidity and termination assumptions are based on our experience or published valuation tables when available and appropriate.

Premium Deficiency Reserves—Deficiency reserves are established when the expected future claim payments and expenses for a classification of policies are in excess of the expected premiums for these policies. The determination of a deficiency reserve takes into consideration the likelihood of premium rate increases, the timing of these increases, and the expected benefit utilization patterns. We have established premium deficiency reserves for portions of the major medical business and the long-term care business that are in run-off. The assumptions and methods used to determine the deficiency reserves are reviewed periodically for reasonableness, and the reserve amount is monitored against emerging losses.

Property and Casualty Reserves

Reserves for Claims and Claim Adjustment Expense (“CAE”)Property and casualty reserves are established to provide for the estimated cost of settling and paying both reported (“case”) as well as incurred but not reported (“IBNR”) claims. The two major categories of CAE are defense and cost containment expense, and adjusting and other expense. The details of property and casualty reserves are shown below (in thousands):

 

     December 31, 2017      December 31, 2016  
     Gross      Ceded      Net      Gross      Ceded      Net  

Case

   $ 544,256      $ 62,629      $ 481,627      $ 501,222      $ 59,442      $ 441,780  

IBNR

     409,137        26,657        382,480        402,961        20,052        382,909  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 953,393      $ 89,286      $ 864,107      $ 904,183      $ 79,494      $ 824,689  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Case Reserves—Reserves for reported losses are determined on either a judgment or a formula basis, depending on the timing and type of the loss. The formula reserve is a fixed amount for each claim of a given type based on historical paid loss data for similar claims with a provision for claim inflation. Judgment reserve amounts replace initial formula reserves and are set for each loss based on facts and circumstances of each case and the expectation of damages. We regularly monitor the adequacy of reserves on a case-by-case basis and change the amount of such reserves as necessary.

IBNRIBNR reserves are estimated based on many variables including: historical statistical information, inflation, legal environment, economic conditions, trends in claim severity and frequency as well as other factors affecting the adequacy of claim reserves. Loss and premium data is aggregated by exposure class and by accident year. IBNR reserves are estimated by projecting ultimate losses on each class of business and subtracting paid losses and case reserves. Our overall reserve practice provides for ongoing claims evaluation and adjustment based on the development of related data and other relevant information pertaining to claims. Adjustments in aggregate reserves, if any, are included in the results of operations of the period during which such adjustments are made.

We believe we conservatively reflect the potential uncertainty generated by volatility in our loss development profiles when selecting loss development factor patterns for each line of business. See Note 12, Liability for Unpaid Claims and Claim Adjustment Expenses, of the Notes to the Consolidated Financial Statements for additional information.

 

30


Table of Contents

The evaluation process to determine reserves involves the collaboration of underwriting, claims and actuarial departments. The process also includes consultation with independent actuarial firms as part of our process of gaining reassurance that claims and CAE reserves estimate sufficiently, all obligations arising from all losses incurred as of year-end. The independent actuarial firm completes the Statements of Actuarial Opinion required by individual state insurance regulations at each year-end, opining that the recorded statutory claims and CAE reserves are reasonable.

Premium Deficiency Reserve—Deficiency reserves are recorded when the expected claims payments and policy maintenance costs for a product line exceed the expected premiums for that product line. The estimation of a deficiency reserve considers the current profitability of a product line using anticipated claims, CAE, and policy maintenance costs. The assumptions and methods used to determine the need for deficiency reserves are reviewed periodically for reasonableness. There were no reserves of this type at December 31, 2017 and December 31, 2016, respectively.

Property and Casualty Reserving Methodology—The following methods are utilized:

 

    Initial Expected Loss Ratio—This method calculates an estimate of ultimate losses by applying an estimated loss ratio to actual earned premium for each calendar/accident year. This method is appropriate for classes of business where the actual paid or reported loss experience is not yet mature enough to influence initial expectations of the ultimate loss ratios.

 

    Bornhuetter-Ferguson—This method uses as a starting point an assumed initial expected loss ratio method and blends in the loss ratio implied by the claims experience to date by using loss development patterns based on our historical experience. This method is generally appropriate where there are few reported claims and an unstable pattern of reported losses.

 

    Loss or Expense Development (Chain Ladder)—This method uses actual loss or defense and cost containment expense data and the historical development profiles on older accident periods to project more recent, less developed periods to their ultimate total. This method is appropriate when there is a relatively stable pattern of loss and expense emergence and a relatively large number of reported claims.

 

    Ratio of Paid Defense and Cost Containment Expense to Paid Loss Development—This method uses the ratio of paid defense and cost containment expense to paid loss data and the historical development profiles on older accident periods to project more recent, less developed periods to their ultimate total. In this method, an ultimate ratio of paid defense and cost containment expense to paid loss is selected for each accident period. The selected paid defense and cost containment expense to paid loss ratio is then applied to the selected ultimate loss for each accident period to estimate the ultimate defense and cost containment expense. Paid defense and cost containment expense is then subtracted from the ultimate defense and cost containment expense to calculate the unpaid defense and cost containment expense for that accident period.

 

    Calendar Year Paid Adjusting and Other Expense to Paid Loss—This method uses a selected prior calendar years’ paid expense to paid loss ratio to project ultimate loss adjustment expenses for adjusting and other expense. A percentage of the selected ratio is applied to the case reserves (depending on the line of insurance) and 100% to the indicated IBNR reserves. These ratios assume that a percentage of the expense is incurred when a claim is opened and the remaining percentage is paid throughout the claim’s life.

The basis of our selected single point best estimate on a particular line of business is often a blended result from two or more methods (e.g. weighted averages). Our estimate is highly dependent on actuarial and management judgment as to which method(s) is most appropriate for a particular accident year and class of business. Our methodology changes over time, as new information emerges regarding underlying loss activity and other factors.

 

31


Table of Contents

Key Assumptions— The following assumptions may impact our property and casualty reserves:

 

    Stability of future inflation rates and consistency with historical inflation norms;

 

    The expected loss development patterns;

 

    Consistent claims handling, reserving and payment processes;

 

    No unusual growth patterns or unexpected changes in the mix of business; and

 

    No significant prospective changes in laws that would significantly affect future payouts.

The loss ratio selections and development profiles are developed primarily using our historical claims and loss experience. These development patterns reflect prior inflation rates, and could be impacted by future changes in inflation rates, particularly those relating to medical care costs, automobile repair parts and building or home material costs. These assumptions have not been modified from the preceding periods and are consistent with historical loss reserve development patterns.

For non-credit lines of business, future inflation rates could vary from our assumption of relatively stable rates. Unexpected changes in future inflation rates could impact our financial position and liquidity, and we measure the sensitivity of our reserve levels to unexpected changes in inflation. The impacts of future inflation for a 1.0% decrease and 3.0% increase over the implied inflation rate in the December 31, 2017 gross loss reserve balance are as follows (amounts in thousands):

 

Cumulative Increase (Decrease) in Reserves

   1.0% Decrease      3.0% Increase  

Personal

     

Automobile

   $ (5,247    $ 16,623  

Homeowner

     (1,531      4,478  

Commercial

     

Agricultural Business

     (8,584      29,018  

Automobile

     (2,408      6,183  

The analysis of our credit insurance lines of business quantifies the estimated impact on gross loss reserves of a reasonably likely scenario of varying the ratio applied to the earned premium to determine the IBNR reserves at December 31, 2017. IBNR reserving methodology for this line of business focuses primarily on the use of a ratio applied to the unearned premium for each credit insurance product. The selected ratios are based on historical loss and claim data. In our analysis, we varied this ratio by +/- 5% across all credit insurance products combined. The results of our analysis show an increase or decrease in gross reserves across all accident years combined of approximately $12.1 million.

It is not appropriate to aggregate the impacts shown in our sensitivity analysis, as our lines of business are not directly correlated. The variations are not meant to be a “best-case” or “worst-case” scenario, and it is possible that future variations will be more or less than the amounts in the sensitivity analysis. While these are possible scenarios based on the information available to us at this time, we do not believe the reader should consider our sensitivity analysis an actual reserve range.

Management believes our reserves at December 31, 2017 are adequate. New information, regulation, events or circumstances unknown at the original valuation date, however, may result in future development resulting in ultimate losses being significantly greater or less than the recorded reserves at December 31, 2017.

 

32


Table of Contents

Deferred Policy Acquisition Costs

We had a DAC asset of approximately $1.37 billion and $1.29 billion at December 31, 2017 and 2016, respectively. See Note 10, Deferred Policy Acquisition Costs, of the Notes to the Consolidated Financial Statements for additional details.

We believe the estimates used in our DAC calculations provide an example of how variations in assumptions and estimates would affect our business. The following table displays the sensitivity of reasonably likely changes in assumptions in the DAC amortization for our long-tail business at December 31, 2017 (in thousands):

 

     Increase (Decrease)
in DAC
 

Increase in future investment margins of 25 basis points

   $ 37,818  

Decrease in future investment margins of 25 basis points

     (40,889

Decrease in future life mortality by 1%

     1,923  

Increase in future life mortality by 1%

     (1,931

Reinsurance

We manage our insurance underwriting risk exposures by purchasing reinsurance. We manage counterparty risk by entering into agreements with reinsurers we consider creditworthy, generally measured by the individual entity or entities’ financial strength rating. However, we do not require a specified minimum rating. We monitor the concentrations of the reinsurers and reduce the participation percentage of lower-rated and unrated companies when appropriate in our judgment. While we believe we currently have no significant credit risk related to reinsurance counterparties, we continue to monitor their financial condition.

Some of our reinsurance contracts contain clauses that allow us to terminate the participation with reinsurers whose ratings are downgraded. Information used in our risk assessment is comprised of industry ratings, recent news and reports, and a limited review of financial statements. We also may require reinsurers not licensed in our state of domicile or with whom we have limited experience, to provide letters of credit, trust agreements, or cash advances to fund their share of reserves.

Other-Than-Temporary Impairment

A decline in the fair value of investment securities below their cost basis is evaluated on an ongoing basis to determine if the decline is other-than-temporary. A number of assumptions and estimates inherent in evaluating impairments are used to determine if they are other-than-temporary, which include 1) our ability and intent to hold the investment securities for a period of time sufficient to allow for an anticipated recovery in value; 2) the expected recoverability of principal and interest; 3) the length of time and extent to which the fair value has been less than cost basis; 4) the financial condition, near-term and long-term prospects of the issue or issuer, including relevant industry conditions and trends and implications of rating agency actions and offering prices; and 5) the specific reasons that a security is in a significant unrealized loss position, including market conditions, which could affect liquidity.

 

33


Table of Contents

Valuation of Financial Instruments

The fair value of available-for-sale securities (equity and fixed maturity securities) is determined by management using one of the three primary sources of information: the quoted prices in active markets; third-party pricing services; or independent broker quotations. Estimated fair value of securities based on quoted prices in active markets is readily and regularly available; therefore, valuation of these securities generally does not involve management judgment. For securities without quoted prices, fair value measurement is determined using third-party pricing services’ proprietary pricing applications. Typical inputs used by the models are relevant market information, benchmark curves, benchmark pricing of like securities, sector groupings and matrix pricing. Any securities remaining unpriced after utilizing the first two pricing methods are submitted to independent brokers for prices. We have analyzed the third-party pricing services and independent brokers’ valuation methodologies and related inputs, and have evaluated the various types of securities in our investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Management completes certain tests throughout the year and at year-end to determine that prices provided by our pricing services are reasonable.

We utilize over-the-counter equity options to hedge our exposure to equity-indexed universal life and equity-indexed deferred annuity benefits, and the fair values for these options are sourced from broker quotations. Accounting guidance requires a fair value calculation as part of equity-indexed policy reserves. This is called the value of embedded derivative (or VED) and the other part of the indexed policy reserve is called the host reserve. The embedded derivative represents future benefit cash flows in excess of minimum guarantee cash flows. The host covers the minimum guarantee cash flows. Both the VED and the host reserve are calculated by a vendor-sourced reserve valuation system. The VED calculation model incorporates assumptions related to current option pricing (such as implied volatility and LIBOR/swap curve), future policyholder behavior (such as surrenders and withdrawals), and factors affecting the value of future indexed interest periods (such as option budgets).

Pension and Postretirement Benefit Plans

The Company has frozen each of its defined benefit pension plans. Our pension and postretirement benefit obligations and related costs covering our employees are estimated using actuarial concepts in accordance with the relevant accounting guidance. The discount rate and the expected return on plan assets are important elements of expense and/or liability measurements. Each year, these key assumptions are reevaluated to determine whether they reflect the best estimates for the current period. Changes in the methodology used to determine the best estimates are made when facts or circumstances change. Other assumptions involve demographic factors such as retirement age, mortality and turnover. The expected long-term rate of return on plan assets is determined using the building-block method which is described further in Item 8, Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 2, Summary of Significant Accounting Policies and Practices, Pension and Postretirement Benefit Plans. In 2017, the Company commenced a one-time window offering to terminated, vested participants of our qualified defined benefit pension plans. The offer allowed participants to take a lump sum or annuity payout which was funded from pension plan assets. See Item 8, Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements, Note 18, Pension and Postretirement Benefits for additional details.

Litigation Contingencies

Based on information currently available, we believe that amounts ultimately paid, if any, arising from existing and currently potential litigation would not have a material effect on our results of operations and financial condition. However, it should be noted that the frequency of large damage awards, which bear little or no relation to the economic damages incurred by plaintiffs, continues to create the potential for an unpredictable judgment in any given lawsuit. It is possible that, if the defenses in these lawsuits are not successful, and the judgments are greater than we anticipate, the resulting liability could have a material impact on the consolidated financial statements.

 

34


Table of Contents

Federal Income Taxes

Our effective tax rate is based on income, non-taxable and non-deductible items, statutory tax rates and tax credits. Also, management’s best estimate of future events and their impact is included in our accounting estimates. Certain changes or future events, such as changes in tax legislation, and completion of tax audits could have an impact on our estimates and effective tax rate. Audit periods remain open for review until the statute of limitations has passed.

GAAP requires us to evaluate the recoverability of our deferred tax assets and establish a valuation allowance, if necessary, to reduce our deferred tax asset to an amount that is more-likely-than-not to be realized. Considerable judgment is required in determining whether a valuation allowance is necessary, and if so, the amount of such valuation allowance. Although realization is not assured, management believes it is more-likely-than-not that the deferred tax assets will be realized and that no valuation allowance is necessary at his time.

The federal government enacted the Tax Cuts and Jobs Act (“Tax Reform”) on December 22, 2017. Tax Reform makes broad and complex changes to federal corporate tax law that we expect will have a significant impact on our provision for taxes. Most notably, Tax Reform reduced the corporate income tax rate from 35% to 21%. Other provisions affecting corporations include, but are not limited to, changes to the deductibility of interest expense, limitations on certain deductions for executive compensation and the repeal of the corporate Alternative Minimum Tax. In addition, there are several changes that are specific to insurance companies, namely changes to the proration formula used to determine the amount of dividends eligible for the dividends-received deduction, changes to the calculation of tax reserves associated with policyholder liabilities and modified discounting rules for tax reserves of our property and casualty companies. In its entirety, Tax Reform will result in changes to our overall tax obligations following the effective date of the legislation which is January 1, 2018.

Subsequent to enactment, the Securities Exchange Commission introduced Staff Accounting Bulletin No. 118 (“SAB 118”) to provide guidance on accounting for the effects of Tax Reform. SAB 118 provides guidance on accounting for the effects of the U.S. Tax Reform where our determinations are incomplete but we are able to determine a reasonable estimate. A final determination is required to be made within a measurement period not to extend beyond one year from the enactment of Tax Reform. We have recorded a provisional benefit of $206.4 million in our 2017 financial statements in accordance with the guidance in SAB 118. As a result of Tax Reform, we have remeasured our existing deferred tax balances at the new 21% corporate income tax rate. Additionally, we have made a reasonable estimate to evaluate the impact of Tax Reform on our 2017 financial statements, including evaluating the impact of changes in calculating income tax reserves for both our life and property and casualty insurance products. These provisional amounts may be adjusted for current and future periods, possibly materially, due to among other things, further refinement of our calculations, changes in our interpretations and assumptions, tax guidance that may be issued and action we may take as a result of Tax Reform.

Aside from the above, the income tax effects of Tax Reform in its entirety are currently being analyzed. We will continue to evaluate Tax Reform and adjust our provisional amounts as needed. We expect to complete our detailed analysis no later than the fourth quarter of 2018. Additionally, we expect that we will record the effect of additional aspects of Tax Reform in 2018 as those aspects become effective.

 

35


Table of Contents

Consolidated Results of Operations

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

 

     Years ended December 31,     Change over prior year  
     2017     2016      2015     2017     2016  

Premiums and other revenues

           

Premiums

   $ 2,067,202     $ 1,996,648      $ 1,838,519     $ 70,554     $ 158,129  

Other policy revenues

     248,526       306,880        250,265       (58,354     56,615  

Net investment income

     966,077       860,235        834,831       105,842       25,404  

Realized investments gains (losses) net

     91,209       28,940        59,443       62,269       (30,503

Other income

     37,986       35,248        34,397       2,738       851  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     3,411,000       3,227,951        3,017,455       183,049       210,496  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

           

Policyholder benefits

     664,811       711,384        617,006       (46,573     94,378  

Claims incurred

     1,037,156       1,015,047        923,367       22,109       91,680  

Interest credited to policyholders’ account balances

     415,190       331,770        293,464       83,420       38,306  

Commissions for acquiring and servicing policies

     545,399       465,962        425,338       79,437       40,624  

Other operating expenses

     520,671       503,459        501,377       17,212       2,082  

Change in deferred policy acquisition costs (1)

     (81,484     1,152        (11,785     (82,636     12,937  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     3,101,743       3,028,774        2,748,767       72,969       280,007  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 309,257     $ 199,177      $ 268,688     $ 110,080     $ (69,511
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(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

Consolidated earnings increased during 2017 compared to 2016 primarily due to an increase in net investment income and realized investment gains. The increase in net investment income is attributable to higher realized investment earnings and increased investment income on mortgage loans. The increase in realized investment gains is attributable to an increase in the sale of bonds, equity securities, and certain real estate holdings. Consolidated earnings decreased during 2016 compared to 2015 primarily due to a decrease in property and casualty earnings and lower realized capital gains.

Life

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

 

     Years ended December 31,     Change over prior year  
     2017     2016      2015     2017     2016  

Premiums and other revenues

           

Premiums

   $ 328,570     $ 318,953      $ 305,350     $ 9,617     $ 13,603  

Other policy revenues

     234,979       295,289        237,797       (60,310     57,492  

Net investment income

     245,835       227,923        226,076       17,912       1,847  

Other income

     2,256       2,067        1,709       189       358  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     811,640       844,232        770,932       (32,592     73,300  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

           

Policyholder benefits

     396,997       416,467        386,785       (19,470     29,682  

Interest credited to policyholders’ account balances

     73,965       63,565        59,148       10,400       4,417  

Commissions for acquiring and servicing policies

     147,176       132,428        121,482       14,748       10,946  

Other operating expenses

     199,320       199,769        201,112       (449     (1,343

Change in deferred policy acquisition costs (1)

     (49,786     3,887        (31,048     (53,673     34,935  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     767,672       816,116        737,479       (48,444     78,637  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 43,968     $ 28,116      $ 33,453     $ 15,852     $ (5,337
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

 

(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.

 

36


Table of Contents

Items affecting the comparability of life results

The company converted the valuation of its universal life business from a home grown valuation system to a more robust vendor based system in 2016 resulting in a change in estimate. This change in estimate affected the other policy revenues, policyholder benefits, and change in deferred policy acquisition costs. The impact of this change in estimate on 2016 net income was not material.

Earnings

Earnings increased during 2017 compared to 2016 primarily due to higher realized investment earnings and a decrease in policyholder benefits. Earnings decreased during 2016 compared to 2015 reflecting the net impact of the change in estimate which resulted in a net decrease in earnings of $3.7 million.

Premiums and other revenues

Premiums increased during 2017 compared to 2016 and 2016 compared to 2015 primarily due to continued growth in renewal premium on traditional life products.

Other policy revenues include mortality charges, earned policy service fees and surrender charges on interest-sensitive life insurance policies. The decrease in other policy revenue during 2017 compared to 2016 and the increase during 2016 compared to 2015 is due to the change in estimate.

Life insurance sales

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

 

     Years ended December 31,      Change over prior year  
     2017      2016      2015      2017     2016  

Traditional Life

   $ 58,703      $ 52,596      $ 55,280      $ 6,107     $ (2,684

Universal Life

     23,765        19,519        14,355        4,246       5,164  

Indexed UL

     29,110        24,606        22,888        4,504       1,718  

Variable UL

     30        24        25        6       (1
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total Recurring

   $ 111,608      $ 96,745      $ 92,548      $ 14,863     $ 4,197  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Single and excess

   $ 3,026      $ 1,932      $ 2,163      $ 1,094     $ (231

Credit life

     4,197        4,372        3,984        (175     388  

Life insurance sales are based on the total yearly premium that insurance companies would expect to receive if all recurring premium policies would remain in force, plus 10% of single and excess premiums and 15% of credit life premium. Life insurance sales measure activity associated with gaining new insurance business in the current period, and includes deposits received related to interest sensitive life and universal life-type products. Whereas GAAP premium revenues are associated with policies sold in current and prior periods, and deposits received related to interest sensitive life and universal life-type products are recorded in a policyholder account which is reflected as a liability. Therefore, a reconciliation of premium revenues and insurance sales is not meaningful.

Life insurance sales increased for all major lines during 2017 compared to 2016. Life insurance sales increased during 2016 compared to 2015 primarily driven by an increase in universal life policy sales.

Benefits, losses and expenses

Policyholder benefits decreased during 2017 compared to 2016 and increased during 2016 compared to 2015 primarily due to the change in estimate.

Commissions increased during 2017 compared to 2016 which was commensurate with the increase in all life sales. Commissions increased during 2016 compared to 2015 primarily due to an increase in universal life policy sales.

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

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017      2016  

Acquisition cost capitalized

   $ 123,854     $ 108,825     $ 108,615     $ 15,029      $ 210  

Amortization of DAC

     (74,068     (112,712     (77,567     38,644        (35,145
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

Change in DAC

   $ 49,786     $ (3,887   $ 31,048     $ 53,673      $ (34,935
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

 

The increase in DAC during 2017 compared to 2016 and the decrease during 2016 compared to 2015 was primarily due to the change in estimate.

 

37


Table of Contents

Policy in-force information

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

 

     December 31,      Change over prior year  
     2017      2016      2015      2017      2016  

Life insurance in-force

              

Traditional life

   $ 73,452,519      $ 67,649,433      $ 63,336,601      $ 5,803,086      $ 4,312,832  

Interest-sensitive life

     29,648,405        27,971,646        26,858,051        1,676,759        1,113,595  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total life insurance in-force

   $ 103,100,924      $ 95,621,079      $ 90,194,652      $ 7,479,845      $ 5,426,427  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     December 31,      Change over prior year  
     2017      2016      2015      2017     2016  

Number of policies in-force

             

Traditional life

     1,800,425        1,841,359        1,890,600        (40,934     (49,241

Interest-sensitive life

     232,251        222,845        212,851        9,406       9,994  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total number of policies

     2,032,676        2,064,204        2,103,451        (31,528     (39,247
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total life insurance in-force increased during 2017 compared to 2016 and 2016 compared to 2015, due to increased sales, despite a reduction of policies in-force. The reduction in policies in-force reflects termination of lower face amount policies.

Reinsurance

The table below summarizes reinsurance reserves and premium amounts assumed and ceded (in thousands):

 

     Reserves     Premiums  
     Years ended December 31,     Years ended December 31,  
     2017     2016     2015     2017     2016     2015  

Reinsurance assumed

   $ 2,337     $ 1,716     $ 48     $ 1,290     $ 2,188     $ (20

Reinsurance ceded

     (249,988     (219,375     (219,272     (104,599     (104,128     (101,636
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (247,651   $ (217,659   $ (219,224   $ (103,309   $ (101,940   $ (101,656
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We use reinsurance to mitigate risk to the Life segment. During 2017, our retention limits were $1.5 million for issue ages 65 and under, and $700,000 for issue ages 66 and older for traditional and universal life. In our life segment, we currently retain 100% of newly developed permanent and term products up to our retention limit and cede the excess. We also engage in facultative reinsurance through several reinsurers. Accidental death and premium waiver benefits are mostly retained on new business. Increases in reserves and premium amounts ceded primarily reflect increased use of reinsurance in conjunction with treaties related to universal life products.

Reinsurance is used in the credit life business primarily to provide producers of credit-related insurance products the opportunity to participate in the underwriting risk through producer-owned captive reinsurance companies often domiciled outside of the United States. A majority of the treaties entered into by our Credit Insurance Division are written on a 100% coinsurance basis with benefit limits of $100,000 on credit life. We have entered into funds withheld reinsurance treaties, which provide for cessions to the reinsurer on a written basis.

 

38


Table of Contents

For 2017, the companies to whom we have ceded reinsurance for the Life segment are shown below (in thousands, except percentages):

 

Reinsurer

   A.M. Best
Rating(1)
   Ceded
Premium
     Percentage of
Gross Premium
 

Swiss Re Life & Health of America Inc.

   A+    $ 27,471        5.5

SCOR Global Life Reinsurance Company of Delaware

   A        22,119        4.4  

Munich American Reassurance Company

   A+      15,861        3.2  

Reinsurance Group Of America

   A+      9,494        1.9  

Other Reinsurers with no single company greater than 5% of the total ceded premium

        29,654        5.9  
     

 

 

    

 

 

 

Total life reinsurance ceded

      $ 104,599        20.9
     

 

 

    

 

 

 

 

(1) A.M. Best rating as of the most current information available February 06, 2018.

Annuity

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

 

    Years ended December 31,     Change over prior year  
    2017     2016     2015     2017     2016  

Premiums and other revenues

         

Premiums

  $ 222,207     $ 248,714     $ 183,125     $ (26,507   $ 65,589  

Other policy revenues

    13,547       11,591       12,468       1,956       (877

Net investment income

    573,789       500,726       459,458       73,063       41,268  

Other income

    2,832       3,161       3,464       (329     (303
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

    812,375       764,192       658,515       48,183       105,677  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

         

Policyholder benefits

    267,814       294,917       230,221       (27,103     64,696  

Interest credited to policyholders’ account balances

    341,225       268,205       234,316       73,020       33,889  

Commissions for acquiring and servicing policies

    105,389       78,177       62,917       27,212       15,260  

Other operating expenses

    46,425       53,054       54,037       (6,629     (983

Change in deferred policy acquisition costs (1)

    (30,022     (5,780     17,069       (24,242     (22,849
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

    730,831       688,573       598,560       42,258       90,013  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

  $ 81,544     $ 75,619     $ 59,955     $ 5,925     $ 15,664  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

Items affecting the comparability of annuity results

The company converted the valuation of its single premium immediate annuity business from a mainframe valuation system to a more robust vendor based system in 2017 resulting in a change in estimate affecting policyholder benefits.

Earnings

Earnings increased during 2017 compared to 2016 primarily due to this change in estimate combined with a decrease in operating expenses. Earnings increased during 2016 compared to 2015 primarily due to increased assets, as measured by account value and reserves, leading to an increase in margins earned on net investment income and a favorable decrease in DAC related to lower surrenders.

 

39


Table of Contents

Premiums and other revenues

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

 

     Years ended December 31,      Change over prior year  
     2017      2016      2015      2017     2016  

Fixed deferred annuity

   $ 741,184      $ 508,894      $ 528,623      $ 232,290     $ (19,729

Single premium immediate annuity

     261,809        281,521        213,341        (19,712     68,180  

Equity-indexed deferred annuity

     893,032        572,473        432,517        320,559       139,956  

Variable deferred annuity

     76,470        76,012        93,898        458       (17,886
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total premium and deposits

     1,972,495        1,438,900        1,268,379        533,595       170,521  

Less: Policy deposits

     1,750,288        1,190,186        1,085,254        560,102       104,932  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total earned premiums

   $ 222,207      $ 248,714      $ 183,125      $ (26,507   $ 65,589  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Sales strengthened during 2017 compared to 2016 led by the fixed deferred and equity indexed products. These are deposit type contracts and do not contribute to earned premiums. Earned premiums are reflective of single premium immediate annuity sales which decreased during the year ended December 31, 2017 compared to 2016.

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

 

     Years ended December 31,  
     2017      2016      2015  

Fixed deferred and equity-indexed annuity

 

     

Account value, beginning of period

   $ 9,118,350      $ 8,880,448      $ 8,873,397  

Net inflows

     1,332,751        766,895        686,312  

Surrenders

     (745,118      (784,666      (893,986

Fees

     (6,608      (5,821      (6,301

Interest credited

     333,977        261,494        221,026  
  

 

 

    

 

 

    

 

 

 

Account value, end of period

     10,033,352        9,118,350        8,880,448  
  

 

 

    

 

 

    

 

 

 

Single premium immediate annuity

 

     

Reserve, beginning of period

     1,566,440        1,398,481        1,274,664  

Net inflows

     78,637        117,840        68,355  

Interest and mortality

     46,425        50,119        55,462  
  

 

 

    

 

 

    

 

 

 

Reserve, end of period

     1,691,502        1,566,440        1,398,481  
  

 

 

    

 

 

    

 

 

 

Variable deferred annuity

 

     

Account value, beginning of period

     392,345        417,821        494,516  

Net inflows

     73,891        71,982        91,276  

Surrenders

     (140,686      (114,543      (163,677

Fees

     (4,481      (4,745      (5,507

Change in market value and other

     60,833        21,830        1,213  
  

 

 

    

 

 

    

 

 

 

Account value, end of period

     381,902        392,345        417,821  
  

 

 

    

 

 

    

 

 

 

Total account value, end of period

   $ 12,106,756      $ 11,077,135      $ 10,696,750  
  

 

 

    

 

 

    

 

 

 

Benefits, losses and expenses

Policyholder benefits consist of annuity payments and reserve increases for SPIA contracts. Reserve increases are highly correlated to the sales volume of SPIA contracts which explains the change in benefits over the past three years.

Commissions increased during 2017 compared to 2016 driven by an increase in sales of deferred annuity and equity-indexed products. Commissions increased during 2016 compared to 2015 primarily as a result of an increase in sales of higher commissionable products, such as equity-indexed and single premium immediate annuities.

Other operating expenses decreased during 2017 compared to 2016 due to the impact of higher expenses incurred relating to premium tax in the third quarter of 2016 which did not impact 2017 to the same extent. Other operating expenses were relatively flat during 2016 compared to 2015 despite the increase in annuity volume.

 

40


Table of Contents

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):

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017     2016  

Acquisition cost capitalized

   $ 104,772     $ 77,161     $ 64,724     $ 27,611     $ 12,437  

Amortization of DAC

     (74,750     (71,381     (81,793     (3,369     10,412  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC

   $ 30,022     $ 5,780     $ (17,069   $ 24,242     $ 22,849  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The change in DAC increased during 2017 compared to 2016, and 2016 compared to 2015, due to an increase in the capitalization of acquisition costs which is primarily driven by an increase in sales which generated an increase in commissions.

The amortization of DAC as a percentage of gross profits is an important ratio for the Annuity segment. Changes in this ratio reflect the impact of emerging experience. The ratios for the years ended December 31, 2017, 2016 and 2015 were 36.8%, 35.5% and 42.2%, respectively. A higher ratio is less favorable due to a higher proportion of the margin used to amortize DAC.

Interest Margin

The interest margin earned on fixed deferred annuities interest decreased by $3.3 million for 2017 compared to 2016 due to a decrease in fixed investment yields, and decreased $21.3 million for 2016 compared to 2015 due to a decrease in assets, as measured by account value.

The S&P 500 Index increased by approximately 19.4% and 9.5% in 2017 and 2016, respectively. This change in index performance led to an increase in option return of $54.3 million during 2017 compared to 2016, and $33.5 million during 2016 compared to 2015 in the related equity-indexed annuities. Interest margin is highly correlated with asset base as large changes in interest credited are offset by option return. The increase in asset base in 2017 compared to 2016 was offset by a decrease in fixed investment yields causing a decrease in interest spread.

Single premium immediate annuities margin on interest and mortality increased $8.9 million in 2017 compared to 2016 primarily due to a methodology change in accounting for these contracts. 2016 experienced a more favorable mortality experience when compared to 2015.

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):

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017     2016  

Fixed deferred annuities

          

Fixed investment income

   $ 336,135     $ 347,197     $ 362,337     $ (11,062   $ (15,140

Interest credited

     (200,800     (208,547     (202,352     7,747       (6,195
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest spread

     135,335       138,650       159,985       (3,315     (21,335
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Account balance, end of period

     7,108,252       7,068,119       7,289,884       40,133       (221,765
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Equity indexed annuities

          

Fixed investment income

     91,010       66,347       48,205       24,663       18,142  

Option return

     80,399       26,099       (7,401     54,300       33,500  

Interest credited

     (133,177     (52,947     (18,674     (80,230     (34,273
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest spread

     38,232       39,499       22,130       (1,267     17,369  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Account balance, end of period

     2,925,100       2,050,231       1,590,564       874,869       459,667  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Single premium immediate annuities

          

Fixed investment income

     66,245       61,083       56,317       5,162       4,766  

Interest and mortality

     (46,425     (50,119     (55,462     3,694       5,343  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Interest and mortality margin

     19,820       10,964       855       8,856       10,109  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Reserve, end of period

     1,691,502       1,566,440       1,398,481       125,062       167,959  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total interest and mortality margin

   $ 193,387     $ 189,113     $ 182,970     $ 4,274     $ 6,143  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total account balance and reserve, end of period

   $ 11,724,854     $ 10,684,790     $ 10,278,929     $ 1,040,064     $ 405,861  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

41


Table of Contents

Health

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

 

     Years ended December 31,      Change over prior year  
     2017      2016      2015      2017     2016  

Premiums and other revenues

             

Premiums

   $ 156,436      $ 175,589      $ 196,777      $ (19,153   $ (21,188

Net investment income

     9,538        9,942        10,135        (404     (193

Other income

     19,284        17,488        17,714        1,796       (226
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total premiums and other revenues

     185,258        203,019        224,626        (17,761     (21,607
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Benefits, losses and expenses

             

Claims incurred

     103,112        131,828        146,805        (28,716     (14,977

Commissions for acquiring and servicing policies

     27,400        22,846        27,455        4,554       (4,609

Other operating expenses

     38,376        43,263        45,047        (4,887     (1,784

Change in deferred policy acquisition costs (1)

     3,814        3,770        3,394        44       376  
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total benefits and expenses

     172,702        201,707        222,701        (29,005     (20,994
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 12,556      $ 1,312      $ 1,925      $ 11,244     $ (613
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 increased during 2017 compared to 2016, primarily due to a change in estimate which decreased the amount of ceded MGU claim reserves during the third quarter of 2016. Earnings also increased due to the absence of a group health plan that was not renewed effective January 1, 2017 and an improvement in results for the closed medical expense block. Earnings remained relatively constant during 2016 compared to 2015.

Premiums and other revenues

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

 

     Years ended December 31,  
     2017     2016     2015  

Medicare Supplement

   $ 66,550        42.4   $ 68,376        38.9   $ 76,090        38.6

Credit accident and health

     18,217        11.6       15,124        8.6       13,106        6.7  

MGU

     26,574        17.0       17,611        10.0       23,798        12.1  

Supplemental insurance

     25,321        16.2       23,876        13.6       26,546        13.5  

Medical expense

     12,891        8.2       14,021        8.0       16,910        8.6  

Group health

     2,239        1.4       30,974        17.6       34,361        17.5  

All other

     4,644        3.2       5,607        3.3       5,966        3.0  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 156,436        100.0   $ 175,589        100.0   $ 196,777        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Earned premiums decreased during 2017 compared to 2016 primarily due to the non-renewal of the above referenced group health plan partially offset by an increase in MGU and credit accident and health premiums. MGU premiums increased due to the onboarding of new performing groups by several MGUs. Credit accident and health premiums increased primarily due to the addition of new producers writing credit monthly pay business. Earned premiums decreased during 2016 compared to 2015, primarily due to a decline in Medicare Supplement and MGU premiums. Medicare Supplement earned premiums decreased due to lapses that were greater than new sales, compounded by the continuing shift in sales from comprehensive higher premium plans to the lower premium high deductible plan. MGU premiums decreased due to the removal of lesser performing groups by several MGUs. Since the MGU policy counts include 100% reinsured certificates, the increase does not always translate into corresponding increases in premiums.

 

42


Table of Contents

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

 

     December 31,  
     2017     2016     2015  

Medicare Supplement

     35,446        6.8     33,815        6.3     35,586        6.8

Credit accident and health

     179,158        34.4       194,194        36.1       204,080        39.0  

MGU

     210,293        40.4       195,936        36.4       164,626        31.4  

Supplemental insurance

     55,214        10.6       60,261        11.2       62,384        11.9  

Medical expense

     1,879        0.4       2,228        0.4       2,717        0.5  

Group health

     10,582        2.0       17,485        3.3       16,988        3.2  

All other

     27,616        5.4       33,820        6.3       37,335        7.2  
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total

     520,188        100.0     537,739        100.0     523,716        100.0
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total in-force policies decreased during 2017 compared to 2016 in all blocks of business except for Medicare Supplement and MGU. Although credit accident and health premiums increased, policy counts, which do not include monthly pay business, decreased due to a decrease in the traditional single premium business. Although supplemental insurance sales increased during 2017 compared to 2016, the termination of two large groups with low coverage amounts produced a net decrease in supplemental insurance policy counts. Group health in-force policies decreased during 2017 compared to 2016, primarily due to the exclusion of certain AD&D coverages. All other in-force policies decreased during 2017 compared to 2016 due to the lapsation of older policies. During 2016 compared to 2015 in-force policies decreased in all blocks of health business, except for group and MGU. Since the MGU policy counts include 100% reinsured certificates, the increase does not always translate into corresponding increases in premiums.

Benefits, losses and expenses

Claims incurred decreased during 2017 compared to 2016 due to the non-renewal of a group health plan, the change in estimate during third quarter of 2016 decreasing the ceded MGU claim reserves, and the continued shrinkage of the closed medical expense block.

Commissions increased during 2017 compared to 2016 due to the correlated sales in credit accident and health and the MGU line of business. Commissions decreased during 2016 compared to 2015 primarily due to the decrease in premiums.

Other operating expenses decreased during 2017 compared to 2016 in correlation to the absence of a non-renewed group health plan.

Change in Deferred Policy Acquisition Costs

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

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017     2016  

Acquisition cost capitalized

   $ 11,413     $ 11,203     $ 20,249     $ 210     $ (9,046

Amortization of DAC

     (15,227     (14,973     (23,643     (254     8,670  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Change in DAC

   $ (3,814   $ (3,770   $ (3,394   $ (44   $ (376
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

43


Table of Contents

Reinsurance

For the medical expense business, we use reinsurance on an excess of loss basis. We purchase coverage for $1.5 million in excess of $500,000. We cede or retrocede the majority of the premium and risk associated with our stop loss and other MGU programs. We maintain reinsurance on a quota share basis for our long-term care and disability income business.

Reinsurance is also used in the credit accident and health business. In certain cases, particularly in the auto retail market, we may also reinsure the policy written through non-U.S. producer-owned captive reinsurers to allow the dealer to participate in the performance of these credit accident and health contracts. A majority of the treaties entered into by our Credit Insurance Division are written on a 100% coinsurance basis with benefit limits of $1,000 per month.

For 2017, the companies to which we have ceded reinsurance for the Health segment are shown below (in thousands, except percentages):

 

Reinsurer

   A.M. Best
Rating(1)
   Ceded
Premium
     Percentage of
Gross Premium
 

Maiden Reinsurance North America, Inc.

   A      $ 31,761        7.8

Navigator Insurance Company

   A        29,714        7.3  

QBE Reinsurance Corporation

   A        19,911        4.9  

Axis Insurance Company

   A+      19,384        4.7  

Other reinsurers with no single company greater than 5.0% of the total ceded premium

        152,341        37.2  
     

 

 

    

 

 

 

Total health reinsurance ceded

      $ 253,111        61.9
     

 

 

    

 

 

 

 

(1) A.M. Best rating as of the most current information available February 09, 2018.

Property and Casualty

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

 

     Years ended December 31,     Change over prior years  
     2017     2016     2015     2017     2016  

Premiums and other revenues

          

Net premiums written

   $ 1,414,024     $ 1,282,876     $ 1,187,980     $ 131,148     $ 94,896  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

   $ 1,359,989     $ 1,253,392     $ 1,153,267     $ 106,597     $ 100,125  

Net investment income

     61,688       57,091       55,620       4,597       1,471  

Other income

     8,372       4,588       5,534       3,784       (946
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     1,430,049       1,315,071       1,214,421       114,978       100,650  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

          

Claims incurred

     934,044       883,219       776,562       50,825       106,657  

Commissions for acquiring and servicing policies

     265,440       232,514       213,486       32,926       19,028  

Other operating expenses

     177,507       165,509       156,583       11,998       8,926  

Change in deferred policy acquisition costs (1)

     (5,490     (725     (1,200     (4,765     475  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits and expenses

     1,371,501       1,280,517       1,145,431       90,984       135,086  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 58,548     $ 34,554     $ 68,990     $ 23,994     $ (34,436
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss ratio

     68.7     70.5     67.3     (1.8 )%      3.2

Underwriting expense ratio

     32.1       31.7       32.0       0.4       (0.3
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio

     100.8     102.2     99.3     (1.4 )%      2.9
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Impact of catastrophe events on combined ratio

     8.1       6.8       5.7       1.3       1.1  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Combined ratio without impact of catastrophe events

     92.7     95.4     93.6     (2.7 )%      1.8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross catastrophe losses

   $ 111,455     $ 85,252     $ 65,413     $ 26,203     $ 19,839  

Net catastrophe losses

   $ 105,880     $ 84,989     $ 62,717     $ 20,891     $ 22,272  

 

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

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

Earnings

Property and Casualty earnings increased during 2017 compared to 2016, primarily due to increased net premiums earned coupled with an improvement in the loss ratio. Property and Casualty earnings decreased during 2016 compared to 2015, as continued premium growth and the favorable results in our commercial lines were outpaced by the increase in losses attributable to personal auto claims and higher catastrophe losses.

 

44


Table of Contents

Premiums and other revenues

Net premiums written and earned increased for all major lines of business during 2017 compared to 2016. The largest increases were in the personal automobile and other commercial lines of business. Net premiums written and earned increased during 2016 compared to 2015 for all major lines of business.

Benefits, losses and expenses

Claims incurred increased during 2017 compared to 2016, as a result of increases in catastrophe losses and premium growth. Claims incurred increased during 2016 compared to 2015 as a result of increases in catastrophe losses as well as an increase in frequency and severity of claims related to the personal automobile line of business.

Commissions for acquiring and servicing policies increased during 2017 compared to 2016, primarily as a result of the premium growth as well as the mix of products. Commissions for acquiring and servicing policies increased during 2016 compared to 2015, primarily as a result of the growth of the collateral protection (CPI) and mortgage security insurance lines of business.

Operating expenses increased during 2017 compared to 2016, and 2016 compared to 2015 as a result of costs related to growth initiatives.

Products

Our Property and Casualty segment consists of: (i) Personal products, marketed primarily to individuals, representing 57.4% of net premiums written; (ii) Commercial products, focused primarily on agricultural and other business related markets, representing 31.3% of net premiums written; and (iii) Credit-related property insurance products, marketed to and through financial institutions and retailers, representing 11.3% of net premiums written.

Personal Products

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

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017     2016  

Net premiums written

          

Automobile

   $ 506,110     $ 445,860     $ 412,686     $ 60,250     $ 33,174  

Homeowner

     259,319       238,967       226,272       20,352       12,695  

Other Personal

     46,026       42,484       41,658       3,542       826  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums written

   $ 811,455     $ 727,311     $ 680,616     $ 84,144     $ 46,695  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

          

Automobile

   $ 482,851     $ 431,580     $ 405,891     $ 51,271     $ 25,689  

Homeowner

     247,575       230,565       222,338       17,010       8,227  

Other Personal

     44,306       42,122       40,966       2,184       1,156  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 774,732     $ 704,267     $ 669,195     $ 70,465     $ 35,072  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss ratio

          

Automobile

     80.3     85.7     77.6     (5.4 )%      8.1

Homeowner

     74.7       71.8       64.5       2.9       7.3  

Other Personal

     68.3       55.3       62.8       13.0       (7.5

Personal line loss ratio

     77.9     79.3     72.4     (1.4 )%      6.9

Combined Ratio

          

Automobile

     103.5     110.9     102.8     (7.4 )%      8.1

Homeowner

     108.4       100.0       91.7       8.4       8.3  

Other Personal

     99.4       79.1       87.0       20.3       (7.9

Personal line combined ratio

     104.8     105.5     98.2     (0.7 )%      7.3

Automobile: Net premiums written and earned increased in our personal automobile line during 2017 compared to 2016 due to rate increases and an increase in policies in force. The loss and combined ratios decreased during 2017 compared to 2016 primarily due to an improvement in rate adequacy somewhat offset by an increase in catastrophe losses. Net premiums written and earned increased during 2016 compared to 2015, due to an increase of policies in force and rate increases. The loss and combined ratio increased during 2016 compared to 2015, primarily due to an increase in the frequency and severity of claims and catastrophe losses compared to the prior year.

 

45


Table of Contents

Homeowners: Net premiums written and earned increased during 2017 compared to 2016 and 2016 compared to 2015 primarily due to increased sales to renters. The loss and combined ratios increased during 2017 compared to 2016 and 2016 compared to 2015 due to an increase in catastrophe losses.

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, recreational vehicles, motorcycle and personal umbrella. The loss and combined ratios increased during 2017 compared to 2016 due to increased claims for rental-owners along with several large umbrella claims. The loss ratio decreased during 2016 compared to 2015 primarily due to certain personal umbrella claim re-designations from personal lines to commercial lines.

Commercial Products

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

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017     2016  

Net premiums written

          

Other Commercial

   $ 197,772     $ 172,667     $ 159,834     $ 25,105     $ 12,833  

Agricultural Business

     142,241       137,182       123,548       5,059       13,634  

Automobile

     103,048       96,939       88,767       6,109       8,172  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums written

   $ 443,061     $ 406,788     $ 372,149     $ 36,273     $ 34,639  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net premiums earned

          

Other Commercial

   $ 188,077     $ 165,828     $ 154,114     $ 22,249     $ 11,714  

Agricultural Business

     139,573       133,436       121,031       6,137       12,405  

Automobile

     100,196       94,423       87,450       5,773       6,973  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total net premiums earned

   $ 427,846     $ 393,687     $ 362,595     $ 34,159     $ 31,092  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loss ratio

          

Other Commercial

     50.5     63.1     65.3     (12.6 )%      (2.2 )% 

Agricultural Business

     57.2       58.1       66.0       (0.9     (7.9

Automobile

     62.2       70.8       74.4       (8.6     (3.6

Commercial line loss ratio

     55.4     63.2     67.7     (7.8 )%      (4.5 )% 

Combined ratio

          

Other Commercial

     83.5     94.7     93.3     (11.2 )%      1.4

Agricultural Business

     95.4       95.4       106.6       —         (11.2

Automobile

     86.1       95.6       98.5       (9.5     (2.9

Commercial line combined ratio

     88.0     95.1     99.0     (7.1 )%      (3.9 )% 

Other Commercial: Net premiums written and earned increased during 2017 compared to 2016 primarily due to increased sales of mortgage fire insurance and workers’ compensation. The decrease in the loss and combined ratios for 2017 compared to 2016 is primarily due to decreased claim activity on business owners’ lines of business and lower than anticipated prior year claim emergence on workers’ compensation. Net premiums written and earned increased during 2016 compared to 2015 primarily due to increased sales of mortgage security insurance. This increase was partially offset by an increase in reinsurance premium ceded for the workers compensation and commercial umbrella lines of business.

Agricultural Business: Our agricultural business product allows policyholders to customize and cover their agriculture exposure using a package policy, which includes coverage for residences and household contents, farm buildings and building contents, personal and commercial liability and personal property. Net premiums written and earned increased during 2017 compared to 2016 primarily as a result of an increase in policies in force. The loss and combined ratios were relatively constant during 2017 compared to 2016. Net premiums written and earned increased during 2016 compared to 2015, primarily as a result of improved rate adequacy. The loss ratio decreased during 2016 compared to 2015 primarily due to a decrease in catastrophe losses.

 

46


Table of Contents

Commercial Automobile: Net premiums written and earned increased during 2017 compared to 2016, primarily due to increased sales as well as improved rate adequacy. The loss and combined ratios decreased during 2017 compared to 2016 primarily due to a decrease in the average severity of losses. Net premiums written and earned increased during 2016 compared to 2015, due to an increase in direct written premiums coupled with a decrease in ceded premiums. The loss ratio decreased during 2016 compared to 2015, primarily due to a decrease in average severity of losses.

Credit Products

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

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017     2016  

Net premiums written

   $ 159,508     $ 148,777     $ 135,215     $ 10,731     $ 13,562  

Net premiums earned

     157,411       155,437       121,477       1,974       33,960  

Loss ratio

     59.6     48.7     38.4     10.9     10.3

Combined ratio

     116.2     107.2     107.9     9.0     (0.7 )% 

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

Net written and earned premiums increased during 2017 compared to 2016 primarily due to an increase in debt cancellation business. The loss and combined ratios increased during 2017 compared to 2016 primarily due to an increase in claims in the Guaranteed Auto Protection (GAP) business, partially resulting from catastrophes that caused flooding to automobiles. Net written and earned premiums increased during 2016 compared to 2015, primarily due to increases in our collateral protection business. The loss ratio increased during 2016 compared to 2015 primarily due to an increase in claims in our GAP business.

Reinsurance

We reinsure a portion of the risks that we underwrite to manage our loss exposure. In return for ceded premiums, reinsurers assume a portion of the claims incurred. In addition to our reinsurance coverage, we are partially protected by the Terrorism Risk Insurance Program Reauthorization Act of 2015 and its predecessors. We participate in the National Flood Insurance Program administered by the Federal Emergency Management Agency.

We retain the first $500,000 for workers’ compensation risks and the first $1.5 million of loss per risk for non-workers’ compensation risks. Workers’ compensation reinsurance coverage for losses between $500,000 and $1 million follows satisfaction of a $2 million annual aggregate deductible. Our catastrophe reinsurance retention covering property and casualty companies in total is $17.5 million for non-earthquake losses and $10 million for earthquake losses.

The following table summarizes the Company’s catastrophe reinsurance coverage effective during 2018.

 

Layer of Loss

  

Catastrophe Reinsurance Coverage In Force

Less than $10.0 million

   100% of loss retained except for certain losses covered by the Catastrophe Aggregate and Stretch & Aggregate coverage described below

$10.0 million - $17.5 million  

   100% of earthquake losses countrywide

$17.5 million - $500 million  

   100% of multiple peril losses covered by Corporate Program(1) (all perils)

 

(1) The Corporate Program covers all non-credit property and casualty business, subject to certain limits, and is not specific to the Company or any of its subsidiaries, or any state or region. The program does cover the Mortgage Security Insurance (MSI) and Guaranteed Auto Protection (GAP) business written by the Credit Insurance Division.

 

47


Table of Contents

Each per-event coverage above includes one automatic reinstatement except for a 12.5% portion of the Corporate Program (12.5% of $35 million to $500 million). The automatic reinstatement requires us to pay additional reinsurance premium for any losses into each reinsurance layer. The reinstatement premium is prorated by the percentage of actual loss to the coverage, with the exception of losses from $35 million to $100 million, which reflect a 50% reduction on the prorated amount, and the losses from $17.5 million to $35 million, in which a 70% portion is free for the first limit and reflects a 50% reduction on the second limit. The 12.5% placement of non-reinstateable coverage reduces the amount of reinstatement premium we are obligated to pay. We purchase a Catastrophe Aggregate reinsurance coverage that provides for $30 million of limit excess of $90 million of aggregated catastrophe losses. Qualifying losses include amounts of retained losses below $10 million on Property Claims Services (PCS) declared catastrophe events and internally declared catastrophe events exceeding $5 million. The Catastrophe Aggregate reinsurance coverage has been placed at 100.0% for 2018 and does not include a reinstatement.

A Stretch & Aggregate cover is purchased which consists of a $35 million annual limit available either wholly or in part across two layers. The first layer is 8.75% of $400 million excess of $100 million on an occurrence basis. The second layer provides aggregate protection where subject loss is $35 million excess of $5 million of each catastrophe. Recoveries follow satisfaction of a $45 million annual aggregate deductible. This cover was placed on July 1, 2017, and remains in place until June 30, 2018. American National expects to place the cover again on July 1, 2018.

We use multiple reinsurers with each reinsurer absorbing part of the overall risk ceded. The primary reinsurers in the 2017 programs and the coverage each provides are shown in the following table:

 

    A.M. Best
Rating(1)
    Percent of Risk Covered  

Reinsurer

    Non–Catastrophe     Catastrophe  

Lloyd’s Syndicates

    A           41.9     43.8

Swiss Re

    A+         12.1       6.3  

Safety National Casualty Corporation

    A+         18.2       —    

Hannover Ruckversicherung-Aktiengesellschaft, Germany

    A+         9.2       —    

Tokio Millennium Re Ltd.

    A++       —         6.9  

Other Reinsurers with no single company with greater than a 5% share

      18.6       43.0  
   

 

 

   

 

 

 

Total Reinsurance Coverage

      100.0     100.0
   

 

 

   

 

 

 

 

(1) A.M. Best rating as of the most current information available January 22, 2018

Reserve Development

While we believe that our claims reserves at December 31, 2017 are adequate, new information, events or circumstances, unknown at the original valuation date, may lead to future developments in ultimate losses in amounts significantly greater or less than the reserves currently recorded. The actual final cost of settling both claims outstanding at December 31, 2017 and claims expected to arise from unexpired periods of risk is uncertain. There are many other possible changes that would cause losses to increase or decrease, which include but are not limited to: claim severity; the expected level of reported claims; judicial action changing the scope or liability of coverage; the regulatory, social and economic environment; and unexpected changes in loss inflation. For additional information regarding prior year development of our claims and CAE reserves, refer to Note 12, Liability for Unpaid Claims and Claim Adjustment Expenses, of the Notes to the Consolidated Financial Statements.

 

48


Table of Contents

Corporate and Other

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

 

     Years ended December 31,     Change over prior year  
     2017     2016     2015     2017     2016  

Other revenues

          

Net investment income

   $ 75,227     $ 64,553     $ 83,542     $ 10,674     $ (18,989

Realized investment gains, net

     91,209       28,940       59,443       62,269       (30,503

Other Income

     5,242       7,944       5,976       (2,702     1,968  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other revenues

     171,678       101,437       148,961       70,241       (47,524
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Benefits, losses and expenses

          

Commissions

     (6     (3     (2     (3     (1

Other operating expenses

     59,043       41,864       44,598       17,179       (2,734
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     59,037       41,861       44,596       17,176       (2,735
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before other items and federal income taxes

   $ 112,641     $ 59,576     $ 104,365     $ 53,065     $ (44,789
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Earnings

Earnings increased during 2017 compared to 2016 primarily due to an increase in realized investment gains. The increase in realized investment gains is primarily attributable to an increase in the sale of equity securities and certain real estate holdings. These increases were partially offset during 2017 by an increase in other operating expenses which included a pension cost of $12.5 million relating to the completion of the one-time pension payment window that occurred in 2017. Earnings decreased during 2016 compared to 2015 primarily due to a decrease in realized investment gains. The decrease in realized investment gains is primarily attributable to a decrease in the sale of certain real estate holdings compared to 2015.

Investments

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

Our insurance and annuity products are 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.

 

49


Table of Contents

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

 

     December 31, 2017     December 31, 2016  

Bonds held-to-maturity, at amortized cost

   $ 7,552,959        34.5   $ 7,251,385        35.8

Bonds available-for-sale, at fair value

     6,145,308        28.1       5,803,276        28.7  

Equity securities, at fair value

     1,784,226        8.2       1,541,676        7.6  

Mortgage loans, net of allowance

     4,749,999        21.7       4,348,046        21.5  

Policy loans

     377,103        1.7       384,376        1.9  

Investment real estate, net of accumulated depreciation

     532,346        2.4       593,417        2.9  

Short-term investments

     658,765        3.0       192,226        1.0  

Other invested assets

     80,165        0.4       113,550        0.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total investments

   $ 21,880,871        100.0   $ 20,227,952        100.0
  

 

 

    

 

 

   

 

 

    

 

 

 

The increase in our total investments at December 31, 2017 compared to 2016 was primarily a result of an increase in bonds, mortgage loans, short-term investments, and equity securities.

Bonds—We allocate most of our fixed maturity securities to support our insurance business. At December 31, 2017, our fixed maturity securities had an estimated fair value of $13.9 billion, which was $0.4 billion, or 3.0%, above amortized cost. At December 31, 2016, our fixed maturity securities had an estimated fair value of $13.3 billion, which was $0.4 billion, or 2.9%, above amortized cost. The estimated fair value for securities due in one year or less decreased from $0.7 billion as of December 31, 2016 to $0.5 billion as of December 31, 2017. For additional information regarding total bonds by credit quality rating refer to Note 4, Investments in Securities, of the Notes to the 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 Consolidated Financial Statements for the cost, gross unrealized gains and losses, and fair value of the equity securities.

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

Policy Loans—For certain life insurance products, policyholders may borrow funds using the policy’s cash value as collateral. The maximum amount of the policy loan depends upon the policy’s surrender value. As of December 31, 2017, we had $377.1 million in policy loans with a loan to surrender value of 62.8%, and at December 31, 2016, we had $384.4 million in policy loans with a loan to surrender value of 64.6%. Interest rates on policy loans primarily range from 3.0% to 12.0% per annum. Policy loans may be repaid at any time by the policyholder and have priority to any claims on the policy. If the policyholder fails to repay the policy loan, funds are withdrawn from the policy’s benefits.

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

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.

 

50


Table of Contents

Net Investment Income and Net Realized Gains (Losses)

Net investment income increased $105.8 million during 2017 compared to 2016 primarily due to an increase in realized and unrealized gains of equity-indexed options as a result of increases in the S&P 500 and an increase in mortgage loan income. Equity-indexed options are recorded at fair value with changes in fair value recorded as investment income.

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

Net realized gains increased $58.0 million during 2017 compared to 2016 primarily due to an increase in the sale of bonds, equity securities and certain real estate holdings. Other-than-temporary impairment on investment securities decreased $4.3 million during 2017 compared to 2016.

Net Unrealized Gains and Losses

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

 

     December 31, 2017      December 31, 2016      Change  

Held-to-Maturity

        

Gains

   $ 240,713      $ 285,315      $ (44,602

Losses

     (19,319      (40,008      20,689  
  

 

 

    

 

 

    

 

 

 

Net Gain

     221,394        245,307        (23,913 ) 
  

 

 

    

 

 

    

 

 

 

Available-for-Sale (1)

        

Gains

     1,238,612        986,635        251,977  

Losses

     (24,562      (43,100      18,538  
  

 

 

    

 

 

    

 

 

 

Net Gain

     1,214,050        943,535        270,515  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,435,533      $ 1,188,842      $ 246,691  
  

 

 

    

 

 

    

 

 

 

 

(1) Includes bonds and equity securities

The net change in the unrealized gains on fixed maturity securities between December 31, 2017 and December 31, 2016 is primarily attributable to the decrease in benchmark ten-year interest rates which were 2.41% and 2.45% respectively. The Company does not currently intend to sell nor does it expect to be required to sell any of the securities in an unrealized loss position.

The net unrealized gains of our equity securities were $1.0 billion and $809.2 million at December 31, 2017 and 2016, respectively. The increase is attributable to favorable market conditions.

Liquidity

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

 

51


Table of Contents

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

Funds received as premium payments and deposits, 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.

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

Our cash and cash equivalents and short-term investment position increased from $481.6 million at December 31, 2016 to $1.0 billion at December 31, 2017. The increase primarily relates to an increase in commercial paper to fund additional investments.

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

Further information regarding additional sources or uses of cash is described in Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements.

Capital Resources

Our capital resources are summarized below (in thousands):

 

     December 31,  
     2017      2016      2015  

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

   $ 4,604,543      $ 4,196,279      $ 4,099,662  

AOCI

     642,216        455,899        352,620  
  

 

 

    

 

 

    

 

 

 

Total American National stockholders’ equity

   $ 5,246,759      $ 4,652,178      $ 4,452,282  
  

 

 

    

 

 

    

 

 

 

We have notes payable relating to borrowings by real estate joint ventures that we consolidate into our financial statements that are not part of our capital resources. The lenders for the notes payable have no recourse against us in the event of default by the joint ventures. Therefore, the liability we have for these notes payable is limited to our investment in the respective ventures, which totaled $28.4 million and $31.8 million at December 31, 2017 and 2016, respectively.

 

52


Table of Contents

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

 

     December 31,  
     2017     2016  
     Capital and
Retained
Earnings
    AOCI      Total     Capital and
Retained
Earnings
    AOCI      Total  

Net income attributable to American National

   $ 493,651     $ —        $ 493,651     $ 181,003     $ —        $ 181,003  

Dividends to shareholders

     (88,335     —          (88,335     (87,741     —          (87,741

Change in net unrealized gains on securities

     —         169,740        169,740       —         93,704        93,704  

Defined benefit pension plan adjustment

     —         15,831        15,831       —         9,286        9,286  

Foreign currency transaction and translation adjustment

     —         746        746       —         289        289  

Other

     2,948       —          2,948       3,355       —          3,355  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Total

   $ 408,264     $ 186,317      $ 594,581     $ 96,617     $ 103,279      $ 199,896  
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

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 December 31, 2017 and December 31, 2016, American National Insurance Company’s statutory capital and surplus was $3,293,474,000 and $2,985,909,000, respectively. American National Insurance Company and each of its insurance subsidiaries had statutory capital and surplus at December 31, 2017 and December 31, 2016, substantially above 200% of the authorized control level.

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

Contractual Obligations

The following summarizes our contractual obligations as of December 31, 2017 (in thousands):

 

     Payments Due by Period  
     Total      Less than
1 year
    1-3 years      3-5 years      More than
5 years
 

Life insurance obligations(1)

   $ 5,462,091      $ (4,192   $ 79,983      $ 270,761      $ 5,115,539  

Annuity obligations(1)

     14,387,449        1,273,833       3,626,211        2,864,371        6,623,034  

Property and casualty insurance obligations(2)

     895,390        368,165       284,529        100,368        142,328  

Accident and health insurance obligations(3)

     241,296        135,077       31,243        15,090        59,886  

Purchase obligations

             

Commitments to purchase and fund investments

     122,757        66,946       31,160        14,853        9,798  

Mortgage loan commitments

     729,858        572,804       157,054        —          —    

Operating leases

     4,877        1,605       1,964        1,072        236  

Defined benefit pension plans(4)

     93,663        11,558       22,909        18,343        40,853  

Notes payable(5)

     137,458        —         9,702        40,124        87,632  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 22,074,839      $ 2,425,796     $ 4,244,755      $ 3,324,982      $ 12,079,306  
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

 

53


Table of Contents
(1) Life and annuity obligations include undiscounted estimated claim, benefit, surrender and commission obligations offset by expected future premiums and deposits on in-force insurance policies and annuity contracts. All amounts are gross of any reinsurance recoverable. Estimated claim, benefit and surrender obligations are based on mortality and lapse assumptions comparable with historical experience. Estimated payments on interest-sensitive life and annuity obligations include interest credited to those products. The interest crediting rates are derived by deducting current product spreads from a constant investment yield. As a result, the estimated obligations for insurance liabilities included in the table exceed the liabilities recorded in the liability for future policy benefits and policy and contract claims. Due to the significance of the assumptions used, the amounts presented could materially differ from actual payments. Separate account obligations have not been included in the table since those obligations are not part of the general account obligations and will be funded by cash flows from separate account assets. The general account obligations for insurance liabilities will be funded by cash flows from general account assets and future premiums and deposits. Participating policyholder dividends payable consists of liabilities related to dividends payable in the following calendar year and are presented in the less than one-year category. All estimated cash payments are net of estimated future premiums on policies currently in-force net of future policyholder dividends payable. The participating policyholders’ share obligation included in other policyholder funds and the timing and amount of the ultimate participating policyholder obligation is subject to significant uncertainty and the amount of the participating policyholder obligation is based upon a long-term projection of the performance of the participating policy block.
(2) Includes undiscounted case reserves for reported claims and reserves for IBNR with the timing of future payments based on our historical payment patterns. The timing of these payments may vary significantly from the pattern shown in the preceding table. The ultimate losses may vary materially from the recorded amounts, which are our best estimates.
(3) Reflects estimated future claim payments for claims incurred based on mortality and morbidity assumptions that are consistent with historical claims experience. These are not discounted with interest and will exceed the liabilities recorded in reserves for future claim payment, which are discounted with interest. Due to the significance of the assumptions used, the amounts presented could materially differ from actual payments.
(4) Estimated payments through continuing operations for benefit obligations of the non-qualified defined benefit pension plan. A liability has been established for the full amount of benefits accrued.
(5) The estimated payments due by period for notes payable reflect the contractual maturities of principal for amounts borrowed by real estate joint ventures and collateralized by real-estate owned by the respective entity. American National’s liability is limited to its investment in the respective joint venture. See Note 6, Real Estate and Other Investments, of the Notes to the Consolidated Financial Statements for additional details.

Off-Balance Sheet Arrangements

We have off-balance sheet arrangements relating to third-party marketing operation bank loans as discussed in Note 19, Commitments and Contingencies, of the Notes to the Consolidated Financial Statements. We could be exposed to a liability for these loans, which are supported by the cash value of the underlying insurance contracts. The cash value of the life insurance policies is designed to always equal or exceed the balance of the loans. Accordingly, management does not foresee any loss related to these arrangements.

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 20, Related Party Transactions, of the Notes to the Consolidated Financial Statements.

 

54


Table of Contents
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Our investments and some of our products are subject to market risks associated with changes in interest rates, credit spreads, issuer defaults and equity prices or market indices. Adverse changes due to these market risks may occur due to changes in market liquidity or to changes in market perceptions of credit worthiness or risk tolerance among other factors.

We emphasize prudent risk management throughout all our operations. Our enterprise risk management procedures help us to identify, prioritize and manage various risks including market risk. Under the leadership of our Board of Directors and Corporate Risk Officer, we have instituted a framework based on the principles of enterprise risk management to provide reasonable assurance regarding the achievement of our strategic objectives. Related activities include:

 

    Identifying evolving and potential risks and events that may affect us;

 

    managing risks within our risk profile;

 

    appropriate escalation of risks and disclosure of any risk limit breaches within the enterprise, along with the correction method if appropriate;

 

    tracking actual risk levels against predetermined thresholds; and

 

    monitoring of capital adequacy.

We expect ongoing enterprise risk management efforts will expand the management tools used to ensure an efficient allocation of capital and enhance the measurement of possible diversification benefits across business segments and risk classes.

A key component of our risk management program is our ALM Committee. The ALM Committee monitors the level of our risk exposure in managing our assets and liabilities to attain the desired risk-return profile for our diverse mix of assets and liabilities and their resultant cash flows. This process includes maintaining adequate reserves, monitoring claims and surrender experience, managing interest rate spreads, evaluation of alternate investment strategies and protecting against disintermediation risk for life insurance and annuity products.

As a part of the ALM process, we have asset portfolios for each major line of business, which represent the investment strategies used to fund liabilities within acceptable levels of risk. We monitor these strategies through regular review of portfolio metrics, such as effective duration, yield curve sensitivity, convexity and liquidity. In executing these ALM strategies, we regularly reevaluate the estimates used in determining the approximate amounts and timing of payments to or on behalf of policyholders for insurance liabilities. Many of these estimates are inherently subjective and could impact our ability to achieve our ALM goals and objectives. Our Finance Committee also reviews the risks associated with evaluation of alternate investment strategies and the specific investments made to support our business and for consistency with our overall investment strategy.

Interest Rate Risk

Interest rate risk is the risk that the value of our interest sensitive assets or liabilities will change with changes in market interest rates. The fair market value of fixed maturity securities is inversely related to changes in market interest rates. As interest rates fall, the cash flow from the interest coupon and dividend streams of existing fixed rate investments become more valuable and thus, market values of fixed maturity securities rise. As interest rates rise, the reverse occurs and the market value of fixed maturity securities falls.

 

55


Table of Contents

The carrying values of our investment in fixed maturity securities, which comprise 62.6% of our portfolio, are summarized below (in thousands):

 

     December 31,  
     2017     2016  
     Amount      Percent     Amount      Percent  

Bonds held-to-maturity

   $ 7,552,959        55.1   $ 7,251,385        55.5

Bonds available-for-sale

     6,145,308        44.9       5,803,276        44.5  

Net unrealized gains on available-for-sale bonds

     187,407        3.1       134,292        2.3  

The increase in the unrealized gains on available-for-sale bonds was primarily the result of a decrease in unrealized losses on corporate debt securities. Information regarding our unrealized gains or losses is disclosed in Note 4, Investments in Securities, of the Notes to the Consolidated Financial Statements. Our exposure to cash flow changes is discussed further in the Liquidity and Capital Resources section of the MD&A.

Our mortgage loans also have interest rate risk. As of December 31, 2017, these mortgage loans have fixed rates ranging from 4.0% to 10.0%. Most of the mortgage loan contracts require periodic payments of both principal and interest, and have amortization periods of three to 30 years. Many of our mortgage loans contain prepayment restrictions or fees or both that reduce the risk of payment before maturity or compensate us for all or a portion of the investment income lost through early payment of the loan principal.

Rising interest rates can cause increases in policy loans associated with life insurance policies and surrenders relating to life insurance or annuities. Policyholders may move their assets into new products offering higher rates if there were sudden or significant changes in interest rates. We may have to sell assets earlier than anticipated to pay for these withdrawals. Our life insurance and annuity product designs reduce the financial impact of early surrenders through the use of restriction on withdrawal, surrender charges and market value adjustment features. ALM guidelines, including duration targets and asset allocation tolerances, help ensure this risk is managed within the constraints of established criteria. Consistent monitoring of and periodic changes to our product pricing help us to better match the duration of assets and liabilities.

Falling interest rates can have an adverse impact on our asset accumulation investment products, such as our fixed deferred annuity business. We aim to manage interest margins, which are the differences between yields on investments supporting our liabilities and amounts credited to policyholder account balances. As investment portfolio yields decline, we can reduce crediting rates on products, to a limit defined by contractual minimum guarantees. Due to these contractual minimums, declines in interest rates can ultimately impact the profitability of this business.

The profitability of some of our products could be adversely affected by low interest rates. Assuming a 100 basis point drop in interest rates, we project a $22 million decrease in earnings over the next three years. In projecting this impact, we modeled projected crediting rates, considering interest spread targets and crediting rate floors.

Interest Rate sensitivity analysis: The table below shows the estimated change in pre-tax market values of our investments in fixed maturity securities caused by instantaneous, one time parallel shifts in the corresponding year-end U.S. Treasury yield curves of +/- 100bps and +/- 50bps (in thousands):

 

     Increase (Decrease) in Market Value Given an Interest Rate
Increase (Decrease) of X Basis Points
 
     (100)      (50)      50      100  

December 31, 2017

   $ 647,685      $ 320,670      $ (317,212    $ (637,882

December 31, 2016

   $ 610,421      $ 301,819      $ (297,039    $ (587,945

 

56


Table of Contents

These calculations hold all other variables influencing the values of fixed maturity securities constant and would not fully reflect any prepayment to the portfolio, changes in corporate spreads or non-parallel changes in interest rates for different maturities or credit quality. Actual results may differ materially from these amounts due to the assumptions and estimates used in calculating the scenarios.

Credit Risk

We are exposed to credit risk, which is the uncertainty of whether a counterparty will honor its obligation under the terms of a security, loan or contract including reinsurance agreements. To help manage credit risk, we have an Investment Plan approved by our Board of Directors. This plan provides issuer and geographic concentration limits, investment size limits and other applicable parameters such as mortgage loan-to-value guidelines. Investment activity, including the setting of investment policies and defining acceptable risk levels, is subject to review by our Finance Committee and Management Risk Committee.

We are also exposed to the risk created by changes in market prices and cash flows associated with fluctuations in the credit spread or the market’s perception of the relative risk and reward to hold fixed maturity securities of borrowers with different credit characteristics or credit ratings. Credit spread widening will reduce the fair value of our existing investment portfolio and will increase investment income on new purchases. Credit spread tightening would have the opposite effect. Information regarding the credit quality of our fixed maturity securities can be found in the Investments section of the MD&A.

We are subject to credit risk associated with our reinsurance agreements. While we believe our reinsurers are reputable and have the financial strength to meet their obligations to us, reinsurance does not eliminate our liability to pay our policyholders, and we remain primarily liable to our policyholders for the risks we insure. We regularly monitor the financial strength of our reinsurers and the levels of concentration to individual reinsurers to verify they meet established thresholds.

The Company’s use of derivative instruments exposes it to credit risk in the event of non-performance by counterparties. The Company has adopted a policy of only dealing with counterparties we believe are credit worthy and obtaining sufficient collateral where appropriate, as a means of mitigating the financial loss from defaults. The non-performance risk is the net counterparty exposure based on the fair value of the open contracts, less collateral held. For additional information regarding counterparties used and collateral received, see Note 7, Derivative Instruments, of the Notes to the Consolidated Financial Statements.

Equity Risk

Equity risk is the risk that we will incur realized or unrealized losses due to changes in the overall equity investment markets or specific investments within our portfolio. At December 31, 2017, we held approximately $1.8 billion of equity investments, which are subject to equity risk. Our exposure to the equity markets is managed by sector and individual security and is intended to track the Standard & Poor’s 500 Index (“S&P 500”) with minor variations. We mitigate our equity risk by diversification of the investment portfolio.

We also have equity risk associated with the equity-indexed life and annuity products we market. We have entered into derivative transactions, primarily over-the-counter equity call options, to hedge our exposure to equity-index changes.

Changes in Accounting Principles

Refer to Note 3, Recently Issued Accounting Pronouncements, of the Notes to the Consolidated Financial Statements for a discussion of recently issued accounting pronouncements not yet adopted.

 

57


Table of Contents
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Annual Consolidated Financial Statements

 

Report of Independent Registered Public Accounting Firm

     59  

Report of Independent Registered Public Accounting Firm on Internal Control

     60  

Consolidated Statements of Financial Position as of December  31, 2017 and 2016

     61  

Consolidated Statements of Operations for the years ended December  31, 2017, 2016, and 2015

     62  

Consolidated Statements of Comprehensive Income for the years ended December 31, 2017, 2016, and 2015

     63  

Consolidated Statements of Changes in Equity for the years ended December 31, 2017, 2016, and 2015

     63  

Consolidated Statements of Cash Flows for the years ended December  31, 2017, 2016, and 2015

     64  

Notes to the Consolidated Financial Statements

     65  

 

58


Table of Contents

Report of Independent Registered Public Accounting Firm

To the stockholders and board of directors

American National Insurance Company:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated statements of financial position of American National Insurance Company and subsidiaries (the “Company”) as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedules I to V (collectively, the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated February 28, 2018 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ KPMG LLP

We have served as the Company’s auditor since 2000.

Houston, Texas

February 28, 2018

 

59


Table of Contents

Report of Independent Registered Public Accounting Firm

To the stockholders and board of directors

American National Insurance Company:

Opinion on Internal Control Over Financial Reporting

We have audited American National Insurance Company and subsidiaries’ (the “Company”) internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated statements of financial position of the Company as of December 31, 2017 and 2016, the related consolidated statements of operations, comprehensive income, changes in equity, and cash flows for each of the years in the three-year period ended December 31, 2017, and the related notes and financial statement schedules I to V (collectively, the consolidated financial statements), and our report dated February 28, 2018 expressed an unqualified opinion on those consolidated financial statements.

Basis for Opinion

The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

Definition and Limitations of Internal Control Over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ KPMG LLP

Houston, Texas

February 28, 2018

 

60


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

(In thousands, except share data)

 

    December 31,  
    2017     2016  

ASSETS

   

Fixed maturity, bonds held-to-maturity, at amortized cost
(Fair value $7,774,353 and $7,496,692)

  $ 7,552,959     $ 7,251,385  

Fixed maturity, bonds available-for-sale, at fair value
(Amortized cost $5,957,901 and $5,668,984)

    6,145,308       5,803,276  

Equity securities, at fair value
(Cost $757,583 and $732,433)

    1,784,226       1,541,676  

Mortgage loans on real estate, net of allowance

    4,749,999       4,348,046  

Policy loans

    377,103       384,376  

Investment real estate, net of accumulated depreciation of $260,904 and $259,578

    532,346       593,417  

Short-term investments

    658,765       192,226  

Other invested assets

    80,165       113,550  
 

 

 

   

 

 

 

Total investments

    21,880,871       20,227,952  
 

 

 

   

 

 

 

Cash and cash equivalents

    375,837       289,338  

Investments in unconsolidated affiliates

    484,207       490,476  

Accrued investment income

    187,670       180,323  

Reinsurance recoverables

    418,589       401,709  

Prepaid reinsurance premiums

    63,625       63,026  

Premiums due and other receivables

    314,345       296,930  

Deferred policy acquisition costs

    1,373,844       1,294,443  

Property and equipment, net of accumulated depreciation of $217,076 and $201,863

    115,818       116,028  

Current tax receivable

    44,170       61,423  

Other assets

    158,024       169,962  

Separate account assets

    969,764       941,612  
 

 

 

   

 

 

 

Total assets

  $ 26,386,764     $ 24,533,222  
 

 

 

   

 

 

 

LIABILITIES

   

Future policy benefits

   

Life

  $ 2,997,353     $ 2,939,308  

Annuity

    1,400,150       1,277,220  

Accident and health

    57,104       60,308  

Policyholders’ account balances

    12,060,045       11,068,775  

Policy and contract claims

    1,390,561       1,303,925  

Unearned premium reserve

    875,294       823,938  

Other policyholder funds

    334,501       318,620  

Liability for retirement benefits

    114,538       152,496  

Notes payable

    137,458       136,080  

Deferred tax liabilities, net

    316,370       367,487  

Other liabilities

    477,855       481,958  

Separate account liabilities

    969,764       941,612  
 

 

 

   

 

 

 

Total liabilities

    21,130,993       19,871,727  
 

 

 

   

 

 

 

EQUITY

   

American National stockholders’ equity:

   

Common stock, $1.00 par value, - Authorized 50,000,000, Issued 30,832,449 and 30,832,449 Outstanding 26,931,884 and 26,914,516 shares

    30,832       30,832  

Additional paid-in capital

    19,193       16,406  

Accumulated other comprehensive income

    642,216       455,899  

Retained earnings

    4,656,134       4,250,818  

Treasury stock, at cost

    (101,616     (101,777
 

 

 

   

 

 

 

Total American National stockholders’ equity

    5,246,759       4,652,178  

Noncontrolling interest

    9,012       9,317  
 

 

 

   

 

 

 

Total equity

    5,255,771       4,661,495  
 

 

 

   

 

 

 

Total liabilities and equity

  $ 26,386,764     $ 24,533,222  
 

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

61


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

 

     Years ended December 31,  
     2017     2016     2015  

PREMIUMS AND OTHER REVENUE

      

Premiums

      

Life

   $ 328,570     $ 318,953     $ 305,350  

Annuity

     222,207       248,714       183,125  

Accident and health

     156,436       175,589       196,777  

Property and casualty

     1,359,989       1,253,392       1,153,267  

Other policy revenues

     248,526       306,880       250,265  

Net investment income

     966,077       860,235       834,831  

Net realized investment gains

     104,595       46,607       87,385  

Other-than-temporary impairments

     (13,386     (17,667     (27,942

Other income

     37,986       35,248       34,397  
  

 

 

   

 

 

   

 

 

 

Total premiums and other revenues

     3,411,000       3,227,951       3,017,455  
  

 

 

   

 

 

   

 

 

 

BENEFITS, LOSSES AND EXPENSES

      

Policyholder benefits

      

Life

     396,997       416,467       386,785  

Annuity

     267,814       294,917       230,221  

Claims incurred

      

Accident and health

     103,112       131,828       146,805  

Property and casualty

     934,044       883,219       776,562  

Interest credited to policyholders’ account balances

     415,190       331,770       293,464  

Commissions for acquiring and servicing policies

     545,399       465,962       425,338  

Other operating expenses

     520,671       503,459       501,377  

Change in deferred policy acquisition costs

     (81,484     1,152       (11,785
  

 

 

   

 

 

   

 

 

 

Total benefits, losses and expenses

     3,101,743       3,028,774       2,748,767  
  

 

 

   

 

 

   

 

 

 

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

     309,257       199,177       268,688  
  

 

 

   

 

 

   

 

 

 

Less: Provision (benefit) for federal income taxes

      

Current

     49,101       (15,376     93,979  

Deferred

     (148,777     89,086       9,741  
  

 

 

   

 

 

   

 

 

 

Total provision (benefit) for federal income taxes

     (99,676     73,710       103,720  

Equity in earnings of unconsolidated affiliates

     86,674       57,200       77,408  
  

 

 

   

 

 

   

 

 

 

Net income

     495,607       182,667       242,376  

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

     1,956       1,664       (612
  

 

 

   

 

 

   

 

 

 

Net income attributable to American National

   $ 493,651     $ 181,003     $ 242,988  
  

 

 

   

 

 

   

 

 

 

Amounts available to American National common stockholders

      

Earnings per share

      

Basic

   $ 18.35     $ 6.73     $ 9.04  

Diluted

     18.31       6.71       9.02  

Cash dividends to common stockholders

     3.28       3.26       3.14  

Weighted average common shares outstanding

     26,896,926       26,908,570       26,876,522  

Weighted average common shares outstanding and dilutive potential common shares

     26,960,695       26,967,072       26,950,066  

See accompanying notes to the consolidated financial statements.

 

62


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

 

     Years ended December 31,  
     2017      2016      2015  

Net income

   $ 495,607      $ 182,667      $ 242,376  
  

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

        

Change in net unrealized gains (losses) on securities

     169,740        93,704        (114,717

Foreign currency transaction and translation adjustments

     746        289        (1,630

Defined benefit pension plan adjustment

     15,831        9,286        (21,815
  

 

 

    

 

 

    

 

 

 

Other comprehensive income (loss), net of tax

     186,317        103,279        (138,162
  

 

 

    

 

 

    

 

 

 

Total comprehensive income

     681,924        285,946        104,214  

Less: Comprehensive income (loss) attributable to noncontrolling interest

     1,956        1,664        (612
  

 

 

    

 

 

    

 

 

 

Total comprehensive income attributable to American National

   $ 679,968      $ 284,282      $ 104,826  
  

 

 

    

 

 

    

 

 

 

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

(In thousands)

 

     Years ended December 31,  
     2017     2016     2015  

Common Stock

      

Balance at beginning and end of the period

   $ 30,832     $ 30,832     $ 30,832  
  

 

 

   

 

 

   

 

 

 

Additional Paid-In Capital

      

Balance as of January 1,

     16,406       13,689       9,248  

Reissuance of treasury shares

     1,964       1,825       2,129  

Income tax effect from restricted stock arrangement

     —         49       1,165  

Amortization of restricted stock

     823       843       1,147  
  

 

 

   

 

 

   

 

 

 

Balance at end of the period

     19,193       16,406       13,689  
  

 

 

   

 

 

   

 

 

 

Accumulated Other Comprehensive Income

      

Balance as of January 1,

     455,899       352,620       490,782  

Other comprehensive income (loss)

     186,317       103,279       (138,162
  

 

 

   

 

 

   

 

 

 

Balance at end of the period

     642,216       455,899       352,620  
  

 

 

   

 

 

   

 

 

 

Retained Earnings

      

Balance as of January 1,

     4,250,818       4,157,184       3,998,642  

Net income attributable to American National

     493,651       181,003       242,988  

Cash dividends to common stockholders

     (88,335     (87,741     (84,446

Cumulative effect of accounting change

     —         372       —    
  

 

 

   

 

 

   

 

 

 

Balance at end of the period

     4,656,134       4,250,818       4,157,184  
  

 

 

   

 

 

   

 

 

 

Treasury Stock

      

Balance as of January 1,

     (101,777     (102,043     (101,941

Reissuance (purchase) of treasury shares

     161       266       (102
  

 

 

   

 

 

   

 

 

 

Balance at end of the period

     (101,616     (101,777     (102,043
  

 

 

   

 

 

   

 

 

 

Noncontrolling Interest

      

Balance as of January 1,

     9,317       10,189       12,384  

Contributions

     26       —         1,859  

Distributions

     (2,287     (2,536     (3,442

Net income (loss) attributable to noncontrolling interest

     1,956       1,664       (612
  

 

 

   

 

 

   

 

 

 

Balance at end of the period

     9,012       9,317       10,189  
  

 

 

   

 

 

   

 

 

 

Total Equity

   $ 5,255,771     $ 4,661,495     $ 4,462,471  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

63


Table of Contents

AMERICAN NATIONAL INSURANCE COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     Years ended December 31,  
     2017     2016     2015  

OPERATING ACTIVITIES

      

Net income

   $ 495,607     $ 182,667     $ 242,376  

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

      

Net realized investment gains

     (104,595     (46,607     (87,385

Other-than-temporary impairments

     13,386       17,667       27,942  

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

     (2,008     (2,926     2,701  

Net capitalized interest on policy loans and mortgage loans

     (32,551     (32,813     (31,360

Depreciation

     53,937       45,278       40,573  

Interest credited to policyholders’ account balances

     415,190       331,770       293,464  

Charges to policyholders’ account balances

     (248,526     (306,880     (250,265

Deferred federal income tax expense (benefit)

     (148,777     89,086       9,741  

Equity in earnings of unconsolidated affiliates

     (86,674     (57,200     (77,408

Distributions from equity method investments

     21,541       1,096       819  

Changes in

      

Policyholder liabilities

     320,743       282,159       259,645  

Deferred policy acquisition costs

     (81,484     1,152       (11,785

Reinsurance recoverables

     (16,880     12,172       14,773  

Premiums due and other receivables

     (19,445     (11,691     (5,512

Prepaid reinsurance premiums

     (599     14,881       (21,887

Accrued investment income

     (7,347     (2,849     8,470  

Current tax receivable/payable

     17,252       (57,332     4,578  

Liability for retirement benefits

     (14,127     (53,979     (31,435

Change in fair value of option securities

     (90,357     (28,401     13,834  

Other, net

     11,639       24,327       (22,421
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     495,925       401,577       379,458  
  

 

 

   

 

 

   

 

 

 

INVESTING ACTIVITIES

      

Proceeds from sale/maturity/prepayment of

      

Held-to-maturity securities

     893,977       491,478       1,150,650  

Available-for-sale securities

     627,682       459,511       574,391  

Investment real estate

     67,227       12,833       19,788  

Mortgage loans

     811,049       587,355       836,443  

Policy loans

     42,580       59,920       56,773  

Other invested assets

     80,901       30,743       71,564  

Disposals of property and equipment

     554       16,240       4,681  

Distributions from unconsolidated affiliates

     102,000       55,311       130,742  

Payment for the purchase/origination of

      

Held-to-maturity securities

     (1,215,311     (156,453     (525,950

Available-for-sale securities

     (845,705     (683,128     (1,343,795

Investment real estate

     (33,844     (45,631     (106,255

Mortgage loans

     (1,194,672     (1,428,471     (962,267

Policy loans

     (23,325     (25,480     (26,459

Other invested assets

     (47,134     (67,571     (38,101

Additions to property and equipment

     (24,395     (47,301     (32,596

Contributions to unconsolidated affiliates

     (27,869     (135,208     (132,004

Change in short-term investments

     (466,539     268,386       (29,612

Change in collateral held for derivatives

     89,981       24,349       (65,160

Other, net

     18,030       27,869       12,702  
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (1,144,813     (555,248     (404,465
  

 

 

   

 

 

   

 

 

 

FINANCING ACTIVITIES

      

Policyholders’ account deposits

     2,095,734       1,528,107       1,405,350  

Policyholders’ account withdrawals

     (1,271,128     (1,313,394     (1,400,661

Change in notes payable

     1,377       7,643       20,259  

Dividends to stockholders

     (88,335     (87,741     (84,446

Payments to noncontrolling interest

     (2,261     (2,536     (1,583
  

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     735,387       132,079       (61,081
  

 

 

   

 

 

   

 

 

 

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS

     86,499       (21,592     (86,088

Beginning of the period

     289,338       310,930       397,018  
  

 

 

   

 

 

   

 

 

 

End of the period

   $ 375,837     $ 289,338     $ 310,930  
  

 

 

   

 

 

   

 

 

 

See accompanying notes to the consolidated financial statements.

 

64


Table of Contents

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

Note 1 – Nature of Operations

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

Note 2 – Summary of Significant Accounting Policies and Practices

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

The 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.

Investments

Investment securities – Bonds classified as held-to-maturity are carried at amortized cost. Bonds classified as available-for-sale are carried at fair value. Equity securities are classified as available-for-sale and carried at fair value. After-tax net unrealized gains or losses on available-for-sale securities are reflected in equity as a component of “Accumulated Other Comprehensive Income” (“AOCI”).

Mortgage loans on real estate are stated at unpaid principal balance, adjusted for any unamortized discount, deferred expenses, and allowances. Accretion of discounts is recorded using the effective yield method. Interest income, prepayment fees and ac